Infrastructure Investing: What It Is and How to Break In
If there’s one long-running unfulfilled request on this site, it’s coverage of Project Finance.
I have gotten about 100+ requests to feature it, and I’ve even had numerous interviewees sign up and volunteer to speak about it… and then drop out at the last minute.
The bad news is that this is still not that elusive article on Project Finance.
But the good news is that this is very close, and it covers an area that is even more interesting in some ways: infrastructure investing.
If Project Finance is the “venture capital” of the toll road/bridge/airport world, infrastructure investing is the “private equity” of that same world.
And all you have to do to get in?
Land a bulge bracket offer in Australia, get forced out, wind up in Hong Kong without knowing the language, and improvise your way to success from there.
Here’s the full story:
Offer… Rescinded? How It All Began
Q: So let’s get started with your initial plan for getting into the industry, and how you ended up in an unexpected place.
A: Sure. My background wasn’t that unusual – I studied business/finance at a university in Australia and then applied to investment banking through the graduate recruiting process.
I had no idea what I wanted to do, but sitting in an office and wearing a suit seemed cool at the time (little did I know…), so I was set on IB from my 2nd year onward.
I applied for graduate positions in my last year, and the process itself was very similar to recruiting anywhere else: online assessments, phone interviews, and a few rounds of in-person interviews with questions and mini-case studies.
Q: Really? Not much was different even though you were recruiting in Australia?
A: Not really. The only quirk in the process: the “final round interview” consisted of a cocktail evening at an MD’s house, and they made you go up on stage and tell the bankers something about yourself.
That was probably the low-light of the recruiting process for me, and I can’t even remember what I said (or maybe I blocked it out?) – but it didn’t seem to matter much: I received a call the next day with an offer to start working at this bank.
Q: But the timing wasn’t the best.
A: Right, this was as we were heading into a recession and all banks in Australia were deferring or cutting graduate hires.
They asked if I was willing to move to Hong Kong because of “headcount issues” – they liked me, but could not support an additional hire in the Australian offices.
I said “no” at first because all my friends in family were in Australia and I really didn’t want to move all the way to Asia. Plus, I had heard that the hours were very long, even by IB standards, in HK.
Q: What made you change your mind and say “yes”?
A: Well, for one, the economy was terrible and there weren’t that many other options for new graduates. I had no real connection to Hong Kong and didn’t know the language(s), but I wasn’t about to lose a desirable offer just because I wanted to stay at home.
I got there and was placed into the Power & Utilities industry coverage team right away.
Since I didn’t know Mandarin, they had me work with companies across the entire Asia-Pacific region and I traveled to Southeast Asia (Thailand and Singapore) quite a lot in my first year there.
I wouldn’t say the hours were “worse,” necessarily; they were just as bad as NYC/London work hours. But the travel kept me sane and made it a bit more fun than the average “>IB analyst role, where you really are chained to your desk 95% of the time.
Q: I see… yeah, business travel tends to be fun at first and rapidly decline in “fun value” after a few months. So how long did you end up staying there?
A: Just over 2 years. I had done a ton of pitches and a few deals by then, and I was ready to move on.
IB in HK is increasingly driven by mainland China, so if you’re not a native Mandarin speaker or you don’t have relationships there it’s extremely tough to make yourself useful.
And as previous interviewees have pointed out, it’s not just the language: you can be from Taiwan or Hong Kong or Singapore and still not be “Chinese enough” to fit in with the mainland business culture.
Banks do cover Southeast Asia and other regions out of the Hong Kong office, but deals in those places fall apart very frequently – at an even higher rate than normal deals fall apart.
So their preference is to focus more and more on deals and clients in China.
Q: Yeah, that makes sense. So then you started looking for buy-side roles right around this time?
A: Yeah, just past the 2-year mark. At first, I focused on traditional PE funds in HK but I realized that roles for non-Mandarin speakers were limited and that Southeast Asia coverage roles were not necessarily ideal.
So I started thinking about going back to Australia and branching out into areas beyond traditional PE – one field that interested me was infrastructure investing, because it is a huge, developed market there and much bigger than you’d expect based on the country’s population and economy.
I found a few firms on eFinancialCareers, applied, and got in touch with a headhunter who set me up with phone interviews and eventually in-person interviews there (which was very tricky to coordinate since I was still working full-time in Hong Kong at that point).
Infrastructure Investing 101
Q: OK, great, so before we move into the recruiting process, I wanted to step back and explain what “infrastructure investing” is.
A: Sure. Just like in traditional PE, you split your time between origination (finding new assets to invest in) and deal execution (doing the deals), as well as managing the existing portfolio. There’s also some fundraising work depending on the fund that you’re at.
The difference is that you’re investing in assets that provide essential utilities or services – toll roads, airports, power plants, telecom, or even “social infrastructure” like hospitals and schools.
Infrastructure does NOT include real estate assets that are strictly for people to live in or for businesses to operate from – the distinction is that there must be some kind of essential service offered by the asset.
Many of these assets are extremely stable and will be around for decades; some, like airports, have natural monopolies that make them incredibly valuable.
They’re also less sensitive to economic and business cycles, and, at least in Australia, most of the investors in this sector are pension funds with an extremely long-term outlook who may favor stability over higher potential returns.
Many of these assets are dependent on government regulation, or are even developed in partnership with the government.
In Australia, for example, lots of utilities and transmission/distribution networks are regulated by the government and they actually tell you what your “allowed rate of return” can be and then set the pricing and terms to enforce that.
Q: I’m getting visions of 1984.
Isn’t it risky to invest in a sector that’s subject to so much regulation?
A: Haha, yes, in a way it is because the government could always step in and change the rules to reduce your returns.
On the other hand, the government is also keen to attract investment into the sector so that sort of balances things out.
Also, these assets are very, very stable, almost to the point of being boring.
You see assumptions like revenue growing at 3% per year, forever, linked to GDP growth or inflation – it’s not like working with normal companies where growth rates and margins may fluctuate wildly from year to year.
Q: So what are your targeted returns? Lower than normal PE, I’m assuming?
A: Yes, we tend to target 10-15% IRRs here – and sometimes the holding period is 10 years or more. Partially, that’s because there’s less liquidity and the buyer pool isn’t as wide as it might be for normal companies.
But it’s also because many of the assets have long-term contracts with suppliers and we try to take advantage of those when we hold the asset – a power station, for example, might have a power purchase agreement with a retail company lasting 15 or more years.
So it’s in our interest to hold the asset for as long as possible during the terms of that agreement.
Q: I see. And why is the market so big in Australia? I would have thought that infrastructure would be more significant in emerging markets.
A: It’s mostly a result of pension funds here growing to massive sizes because everyone has to contribute 9-12% of their salary toward pensions – and they like to play it safe and invest in stable, predictable assets such as infrastructure. The same thing has happened in Canada.
Developed countries still have a need for infrastructure: just look at the US, where most infrastructure is crumbling and desperately needs to be replaced and upgraded.
In Australia, another factor is the mining boom and the additional energy and mining projects that are driving infrastructure investment here.
All these new mines need a way to transport commodities to market, and much of that transportation might count as “infrastructure.”
Q: I see… so it’s partially government-driven and partially market-driven.
Last question before we move on: what’s the difference between Infrastructure Investing, Public Finance, and Project Finance? They all deal with similar types of assets.
A: I’m not an expert on the other two, but here’s how I see it:
- Project Finance: This is investing in the debt required to fund the construction of infrastructure assets, or required to acquire existing assets. PF firms spend a lot of time assessing the downside risk, how much money they can get back in the worst-case scenario, and so on.
- Infrastructure Investing: This is investing in the equity of infrastructure assets – mostly acquiring existing ones, but sometimes also greenfield projects.
- Public Finance: Less about building assets or buying assets, and more about the financing of these deals and how to get the funds to do everything – and you are raising those funds for governments rather than investment funds or normal companies.
Breaking Into Infrastructure Investing
Q: So let’s move back to your recruiting process at this firm – what was it like?
A: My fund has fewer than 20 “investment professionals,” so the process I went through was quite informal. I spoke with around half the office, and most of the questions focused on my deal experience, what I thought about the market, and how much I knew about infrastructure.
I had almost no time to prepare for any of this, but I went back through all my deals and reviewed every model there line-by-line (or at least, the closest I could come to that) and devoted most of my time to that.
They were interested in me because I had experience in the power/utilities sector, and increasingly infrastructure is expanding beyond toll roads/bridges/airports into power and energy-related assets.
As I said, the fund I’m at is relatively small so I didn’t have to complete traditional case studies or modeling tests – they mostly just asked about my experience.
Q: OK, so what specifically did they ask about the models you had built and the deals you worked on?
A: You could divide the questions like this:
- Why? – What was the purpose of the model and how did it impact the deal? For example, did I figure out that the asking price for a power plant only made sense if energy prices were 50% higher than current levels?
- What? – What did you build? For example, I might have explained that I built an operating model for a power generation company by separating it into its 3 main geographies, calculating revenue and expenses for an “average” power plant in each region, and then aggregating everything across all the regions.
- How? – How did you make the assumptions? Here, I would explain what sources we consulted for energy price assumptions, expense/margin trends, and also the impact of different assumptions on the output.
- What Next? – How did you personally contribute to this deal and what ended up happening? As a junior banker, of course, you’ll mostly be running the numbers and assisting with due diligence so most of your contributions will come in these areas. But you need to highlight discrepancies you found, numbers that seemed unreasonable, or potential problems that came up in due diligence. It’s OK if the deal fell apart, but you should probably try to frame it more as, “It’s ongoing – we’re still waiting for the buyer/seller to make a decision.”
Q: Great, I think that’s a good way to think about all your deals, even if you haven’t worked in power/utilities or infrastructure. So they liked you and gave you the offer right away?
A: Pretty much. I went through a few rounds of phone interviews, and then heard back a few days after this in-person firm visit.
They were flexible with start dates, so I had 2 months in between quitting my bank and starting at this new fund, which I used to relocate back home and travel a bit.
Q: And it sounds like, just as with traditional PE, they are really looking more for experienced candidates from IB and related fields as opposed to students straight out of undergrad. True?
A: At the junior level, every single person at my fund worked at a bank or at least in a “banking-type” role such as an analyst at a smaller corporate finance or advisory firm.
Industry experience can help a lot in infrastructure since it’s so specific. I haven’t seen anyone come here from a power or utilities company, but I’m sure it could happen.
I don’t think we’ve hired anyone from Big 4 accounting firms, but with the right skill set it might be possible. It just depends on your technical skills and how much sector exposure you’ve gotten.
For the more senior people, backgrounds are more varied. We’ve hired lawyers and other professionals who don’t necessarily have a finance background, but who do have extensive relationships and experience in infrastructure.
Q: Awesome! Thanks for your time. Now onto the job itself and the technical side…
Infrastructure Investing / Infrastructure Private Equity – Series:
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