Infrastructure

Blackstone's New $40 Billion Fund Shows Hard Proof in US Infrastructure Investing

Jon C. Ogg

Published: May 22, 2017 12:15 pm

Last Updated: January 12, 2020 11:47 am

In the age of mega-deals and unicorn valuations, perhaps nothing should be too shocking when it comes to size. That being said, a $40 billion private equity fund targeting infrastructure deals should be enough to raise more than just a few eyebrows on Wall Street and Main Street alike. Over the weekend came news that Blackstone Group L.P. (NYSE: BX) was launching a $40 billion private equity fund dedicated to infrastructure.

The anticipated fund size of $40 billion will come with half, $20 billion, coming from the Public Investment Fund of Saudi Arabia. Blackstone said in its communique that it anticipates $40 billion in total equity commitments in a permanent capital vehicle, which will have the $20 billion outside of the Saudi money coming from other investors.

While the fund is massive, the memorandum of understanding is currently shown to be nonbinding. The release also noted that the parties are continuing their negotiations. This may not be a done-done deal on the surface, but what was even more interesting than the $40 billion for equity is that Blackstone showed that the investment fund could reach as much as $100 billion in infrastructure projects when additional debt financing is included.

Blackstone already has invested in more than $40 billion of infrastructure-related projects globally over the past 15 years. It was also indicated that this might not solely be political as the two institutions were said to have started discussions back in May 2016.

It is hard to forget that Stephen Schwarzman, board chair and chief executive of the Blackstone Group, also chairs President Trump’s Strategic and Policy Forum. This forum was set up to give the president perspectives from business leaders pertaining to job creation and improving U.S. economic growth.

Blackstone also showed that this new investment fund will help the United States address its significant need for infrastructure improvement. As a reminder, the United States infrastructure was recently given a grade of D+ by the American Society of Civil Engineers, which also noted that independent estimates put the country’s infrastructure funding gap at up to $2 trillion and that as many as 15 million new jobs could be created.

There is a direct reference to the infrastructure investment ambitions set out by the president. The statement from the Public Investment Fund of the Kingdom of Saudi Arabia included:

This potential investment reflects our positive views around the ambitious infrastructure initiatives being undertaken in the United States as announced by President Trump, and the strategic opportunity for the Public Investment Fund to achieve long-term returns given historical investment shortfalls.

Blackstone’s statement in its release said:

There is broad agreement that the United States urgently needs to invest in its rapidly aging infrastructure.  This will create well-paying American jobs and will lay the foundation for stronger long-term economic growth. Blackstone has the talent, scale and experience to be an effective private sector partner in filling the massive infrastructure funding gap. We thank PIF for its strong endorsement of the United States and its vote of confidence in our country and Blackstone in making this investment.

Credit Suisse was the first that has been seen to address the direct impact of this new $40 billion fund for Blackstone. The firm already had an Outperform rating on Blackstone’s units, but the firm raised its target price to $45 from $42 in the call. Craig Siegenthaler of Credit Suisse estimates that the infrastructure business will add $0.08 to $0.10 in earnings per unit by 2020. That would show no change in 2017 and only a penny or two in 2018, rising thereafter.

One thing worth considering is that Credit Suisse was already at the highest official price target on Blackstone, even before this target hike. Siegenthaler’s report said:

This reinforces our thesis on this US Focus List stock – we were and remain positive on Blackstone’s future fundraising levels, potential for accrued carry build, and distributable earnings generation in its next realization cycle.

Wall Street also has cheered the deal, in a highly unusual gain for a private equity firm in a single day. Blackstone’s units traded up 7% at $32.00 in the noon hour on Monday. Its 52-week range is $22.45 to $31.98, and the consensus analyst target price was last seen at $35.13. Blackstone’s market cap is now almost $39 billion.