Bridging the Gap

From Wisconsin to Washington D.C., budgetary issues are coming to a head. If lawmakers don’t shutter some legislative sessions, protestors threaten to do it for them. It isn’t just Amtrak that needs to be fully funded; as cash-strapped state and local governments look to offset rising pension liabilities and constrained budgets, they will have to strike deals with PE in order to accomplish these goals.

“At [local, state and federal] levels, you’ve got fairly significant debt issues,” said Jeffrey Corum, a director with Lincoln International. “We have budgets all over the country that are out of whack.”

Corum, who spoke with peHUB prior to the 2011 Building and Infrastructure Conference in New York with L.E.K. Consulting’s Robert Rourke, said investors should eye infrastructure assets with recurring revenue and a limited number of workers that will be impacted once cost-cutting measures go into effect. This would include state lottery systems (prized gems that only the most cash-strapped states would surrender), toll bridges and roads.

If state and local governments are not willing to unload some of those assets, there remain plenty of other options for private equity investors. Air and sea port operations, government-operated RV parks, sanitation, water treatment and, of course, parking services are all businesses behemoth private equity firms can—and will—pursue. Carlyle Infrastructure Partners, formed in 2007 with more than $1 billion, continues to pursue North American transportation and water infrastructure projects.

Corum and Rourke said that coming years should push more governments to unload assets tethered to high pension liabilities they can hardly afford to service.

Despite the fiscal constraints their primary sellers face, it won’t be easy. While infrastructure funding is not as much as a partisan issue as, say, social services, lawmakers have gunned down some infrastructure deals and PE professionals will sometimes find themselves up against lawmakers facing short-term re-election goals and a constituency legislators remain eager to impress.

Even when investors don’t manage to run afoul of unions or lawmakers, they can find themselves facing criticism simply for improving a business. When Morgan Stanley, the Abu Dhabi Investment Authority and Allianz Capital Partners teamed to lease 36,000 parking meters from the city of Chicago over 75 years for $1.16 billion, they added more meters and upped efficiency among parking ticket issuers. The result was a projected $11.6 billion win for the investors, but it came at the cost of lawmakers who railed against the deal long after its completion.

“It was a fair price for what Chicago was doing” with its meters, Rourke said of the deal.