Why U.S. Highways Are Falling Into Private Equity Hands
>>>See my highlights at the bottom comparing highways to Social Security. Ask yourselves the question if the IBs are hanging around to manage the highways, or are they just passing them through and keeping a few percent. You know....like mortgage debt. Highway leases, mortgage debt. Hey!!! Its a revenue stream...quick...securitize it.<<<
May 16, 2008, 12:32 pm
Posted by Heidi N. Moore
Government is good for some things: collecting taxes, national security, entertaining election-year posturing and grandstanding.
But one thing government is not good at is managing public infrastructure: toll roads, airports, public utilities. That’s why private equity firms are raising billions of dollars to take over those assets. Kohlberg Kravis Roberts made a typically bold strike by hiring Lazard investment banker George Bilicic, whose reputation as a star investment banker will help KKR as it raises a $10 billion fund. Today, Pennsylvania is accepting final bids from private equity firms bidding to privatize the Pennsylvania Turnpike. Governor Ed Rendell has said he will announce the winner on Monday
To make sense of why private equity guys in shiny suits are suddenly so eager to fill our nation’s potholes, Deal Journal talked to Mayer Brown partner John Schmidt, who is representing Pennsylvania in its plan to privatize the roadway.
Deal Journal: What’s going on with all these private equity firms looking to raise money to invest in infrastructure?
John Schmidt: Every day you pick up the paper and you find that a major fund has raised more money than it expected to, or is raising a new fund. Capital is being raised in an almost amazing way, with funds that raised $2 billion before now pulling in $4 billion. The infrastructure of one of the strongest economies in the world has to be one of the best long-term investments in the world. Most of the money for the private equity investments is coming from big pension funds. There’s a lot of competition and the gestation period for the sector has been long. For instance, we’re on the second round of bidding in the Pennsylvania Turnpike deal. Back when we advised on the Chicago Skyway, we agreed that if the top bidders were within 10% of each other, we would have a second round — and we didn’t have to. This is a new development in having an infrastructure auction; big auctions like this have never gone to second round before.
It takes a long time to get deals done and there’s the complexity of doing them, plus it’s more competitive. The Chicago Skyway transaction, for instance, we closed in 2005, and it took us a couple of years to work on that, including getting a piece of state legislation passed. Midway Airport isn’t taking that long, but it’s more complicated. The governmental and political element slows down the process in a way that is beyond an ordinary M&A transaction.
Deal Journal: Two of the most successful bidders in these auctions have been Australian firms Macquarie and Babcock & Brown, who have a long history of investing in infrastructure and are backed by masses of Australian pension money. How can U.S. private equity firms compete against them?
John Schmidt: I don’t think the U.S. entities aren’t competitive. For the auction of underground parking in Chicago, the winning bidder was Morgan Stanley, which beat the Macquaries of the world. In Colorado, the winning bidder for the long-term lease of a parkway was Brisa, which is a Portuguese company.
Deal Journal: In Europe, privatizations of roads are common. Why has this not caught on in the U.S.?
John Schmidt: There are a lot of infrastructure assets around, but relatively few have been privatized in this country. Midway will be the first airport. Ed Rendell has been fighting hard in Pennsylvania because he believes this is the way to go. The large state transactions are such that they will always require legislative approval. Indiana privatized a toll road, which was controversial at the time, then put all $3.8 billion of the proceeds back into public infrastructure, and now they’re the only state with a fully-funded 10-year plan.
Deal Journal: Why don’t cities just use municipal bonds to raise money instead of courting private equity money?
John Schmidt: This is an alternative way to finance. You’re realizing the long-term equity value. Chicago got $1.8 billion out of the Skyway, so there’s a real public equity in these assets. You can come up with astronomical figures on how much the country needs to put into infrastructure at this point. The privatization of existing infrastructure, the existing toll roads, bridges, you easily get to $250 billion. You could get $100 billion in New York if you privatize the Triboro bridge and use that to fund the Second Ave. subway.
Deal Journal: Sounds great. But shouldn’t voters be worried about handing over tens of billions of dollars to the government? They’ve proven they can’t spend it wisely. Just look at the Social Security trust fund.
John Schmidt: That’s fair enough. You have to be careful. One of the good things that’s happened is that Mayor Daley and Mitch Daniels in Indiana have been smart about it. Daley put all the proceeds into debt reduction or a reserve fund. He was clear that this money will not be used to fund an operating deficit. That is the danger: Someone could take the capital from an infrastructure sale and use it to cover a deficit. That’s an issue. |
