Crackers and Infrastructure Kohlberg Kravis Roberts Is Hoping to Create a New Paradigm for Investing in Infrastructure

marc lipschultz and raj agrawal, kohlberg kravis roberts insider Crackers and infrastructure Kohlberg Kravis Roberts is hoping to create a new paradigm for investing in infrastructure. Part of its ‘toolkit’ involves people with experience in crackers – but not the RJR Nabisco kind. Cezary Podkul caught up with infrastructure pointmen Marc Lipschultz and Raj Agrawal to find out more A MEMORABLE PASSAGE from Barbarians at investing in infrastructure and infrastructure- the Gate, the book chronicling arguably Kohl- related businesses,” he says, pointing to KKR’s berg Kravis Roberts’ (KKR) most famous deal nine infrastructure-related investments con- – the $31.4 billion LBO of food and tobacco summated over the last decade, including an conglomerate RJR Nabisco – shows how his- investment in electric transmission operator tory has a funny way of repeating itself. ITC in 2003 in a $610 million deal. “‘So this is what it’s come to,’ he thought. But unlike ITC, 80 percent to 90 percent of ‘Every investment banker with an extra nickel investment opportunities KKR found, while in his pocket thinks he ought to go into LBOs’. attractive as infrastructure investments on After five years of steadily mounting competi- their own, didn’t have “an appropriate home” tion, Kravis was sick of it.” within KKR. “And, of course, that’s a tremen- Twenty years on, as private equity firms the dous loss of opportunity,” says Lipschultz. world over set their sights on infrastructure, There was something else, though, that the newest asset class to capture the imagina- was bothering Lipschultz as he watched the tion of institutional investors, one is apt to hear market for infrastructure evolve over the last a similar sentiment being expressed. decade. Existing managers, focused on trans- Except this time it is likely to come from actions more so than on returns, invested in managers which have been staking out the the sector without “the toolkit it would take space for the better part of the last decade, to ultimately deliver an attractive result for wondering why now every private equity firm investors,” he says. with a nickel in its pocket is wanting to get into Consequently, early investors over-prom- infrastructure. ised and under-delivered. “The infrastruc- InfrastructureInvestor pondered the same ture market was talking about, ‘what we’re Lipschultz: ‘Infrastrucuture 2.0’ here we come on the way to meet Marc Lipschultz and, via doing is buying very long-duration, no-risk, remote satellite TV, Raj Agrawal, leaders of the “For the last ten years, high return assets. And they’re passive,’” firm’s new infrastructure investment team, in meaning that they do not have to be actively KKR’s lofty New York headquarters overlook- we’ve done a lot of investing managed because of their inherent stability. ing Central Park. in infrastructure and “It doesn’t work that way. I mean, there’s It didn’t take long to find out. infrastructure-related always the one-off that’s going to exist in the “There’s going to have to be a version 2.0 world but systematically, it should be obvi- [of infrastructure investing],” says Lipschultz, businesses” ous, that that’s unachievable. And yet, it was and the 33 year-old private equity firm, he be- implicitly what people hoped they were get- lieves, is poised to lead the way. ting themselves into in version 1.0 of infra- Broach the idea of investing in infrastruc- structure,” he adds. ture with Lipschultz, and the first thing the 15- And now, he says, the infrastructure mar- year KKR veteran is likely to say is that this is ket is at “a pivotal moment” when everyone not a new area of expertise for KKR. is asking, “what’s next?” “For the last ten years, we’ve done a lot of Of this much Lipschultz says he is abso- february 2010 infrastructure investor 29 insider marc lipschultz and raj agrawal, kohlberg kravis roberts lutely certain: “Simply repeating version 1.0 “The head of KKR Capstone [Dean Nel- with the same strategies and the same man- “Today infrastructure looks a son] is a chemical engineer,” says Lipschultz. agers is likely to yield the same result.” “[Nelson] started his career working with And so, on 16 May 2008, in a calm and lot like private equity looked refining hydrocrackers, which are these very collected press release, KKR announced to in the 80s in terms of the complex, high capacity, fixed enterprise busi- the world “plans for investments in global maturity of the market” nesses.” Improving efficiency and capacity uti- infrastructure assets,” to be led globally by lisation, as he was tasked with doing, “is very former Lazard energy banker and TXU advi- much a part of how you create value, frankly, sor George Bilicic. in infrastructure.” The effort was not without its fits-and- But investing and operational prowess can starts; less than six months after the announce- only get one so far in infrastructure investing. ment, Bilicic rejoined his old shop (the word Infrastructure, as everyone knows, is loaded at the time was that he missed doing advisory with highly public, visible, important assets. work). Hence, says Raj Agrawal, Lipschultz’s Despite the setback, Lipschultz didn’t Menlo Park, California-based counterpart, waste much time. He’s spent the better part infrastructure assets come pre-packaged with of the last 18 months building up his team, “inherently interested” stakeholders, such which is comprised of three core groups of as regulators, public interest groups, labour professionals: investors, operations experts unions and governments. And that only mag- and stakeholder management experts. nifies the importance of stakeholder man- He calls them the “three critical capa- agement – already a crucial aspect of private bilities” needed “to make this business work”. equity investing – for infrastructure. Around KKR’s offices, they’re also known as “infrastructure 2.0.” ALIGNMENT OF INTEREST On the investment side, Lipschultz says he’s assembled a team that will apply a dif- Agrawal says that KKR’s infrastructure team ferent kind of lens to the infrastructure asset plans on making full use of the firm’s seven- class. person strong stakeholder management team, “I don’t think it’s been very well defined which is tasked with helping identify key stake- in the past and I think it’s one of the failings, holders in every transaction and looking for candidly, of the sector,” he says. ways to align their interests and KKR’s interests KKR’s infrastructure team views infra- whenever possible. structure as a “special set of assets” with a “very In theory, this all sounds good. But can it distinct” collection of six characteristics, he work in practice? Henry Kravis and George says. Roberts, KKR’s co-founders, have already con- They must be physical, tangible assets; cluded that it can, says Lipschultz. provide a necessary good or service that is “They look at infrastructure and they look core to the functioning of the economy; have out 20 years and today infrastructure looks very high barriers to entry; provide inflation a lot like private equity looked in the 80s in protection; have limited sensitivity to the terms of the maturity of the market, the lim- economy; and have predictable cashflows over ited number of participants that have a full a long time horizon. toolkit,” says Lipschultz. In addition to seeking to minimise risk By stepping in with that full toolkit, he through careful selection, making businesses believes KKR can make a difference in help- more efficient and profitable will be a key -fo ing the asset class mature and grow to its full cus for KKR. potential. “Part of what I think is important about “We see this as a very large marketplace,” version 2.0 is to recognise that infrastructure he says. businesses are still businesses,” he says. And so, even if existing managers find As part of that recognition, he plans on themselves in the same position Kravis did 20 complementing his team with professionals years ago when he supposedly fumed about from KKR Capstone, a team of 50 executives nickel-backed bankers taking over his territo- with various types of operational expertise ry, in infrastructure, at least, there was likely that they bring to KKR portfolio companies. always going to be room for one more. n 30 infrastructure investor february 2010.

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