Thursday, 17 January 2019

Stonepeak expands infra investor universe

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In only seven years Stonepeak was able to build on relationships made at Macquarie and Blackstone to raise three funds and invest in some assets that are well known in project finance. By Alison Healey.

Stonepeak Infrastructure Partners was founded in 2011 by Michael Dorrell and Trent Vichie, both of whom started at Macquarie and moved on to Blackstone. The firm identifies itself as a North America-focused private equity firm with a “conservative yet opportunistic” approach to infrastructure investing.

Stonepeak invests in businesses comprising hard assets in target sectors that include power, renewables, and utilities, midstream oil and gas, communications, water, and transportation. The firm attributes its success to adherence to traditional, low-risk infrastructure assets and conservative use of leverage and structural enhancements, bringing strong downside protection across the portfolios of all three funds.

Stonepeak is an independent manager, wholly-owned by the Stonepeak team. Its inaugural fund raised US$1.6bn and closed in 2012.

The firm has come a long way since then, reaching final close in July this year on the US$7.2bn Stonepeak Infrastructure Fund III, with commitments from more than 100 institutions in North America, Europe, Asia, the Middle East, Australia and Latin America. Demand from investors exceeded the US$5bn target at first close in October 2017.

The close was the culmination of 18 years of partnership among its founders, and demonstrated trust earned from international investors, many of whom the team has built relationships with in other capacities over the years.

The fundraising effort followed the successful deployment of the US$3.5bn Stonepeak Infrastructure Fund II, which closed in 2015 and amassed a diversified portfolio of 11 investments in transportation, communication, midstream energy, power and utilities businesses.

“As we have progressed from fund one to two to three, the international representation among our LPs has increased exponentially,” said Dorrell. “Fund one was predominantly a local investor fund. Fund three is now around half international. There is increasing acknowledgement globally that Stonepeak is a leading institution for infrastructure investment.”

The firm has a total of US$15.8bn in assets under management (AUM) and has committed US$8.2bn in capital to 20 investments. In its short time in existence it has attracted more than 120 investors from 18 countries.

The firm is guided by a strategy as a diversified infrastructure investor with disciplined value orientation as well as a countercyclical and opportunistic approach to target markets.

Luke Taylor, Jack Howell and Brian McMullen round out the management team, guiding investments in transport, midstream, and water, respectively. The firm has 55 people dedicated to North American infrastructure, with 31 on the investment team, and three offices in New York, Houston, and Austin. It has a total of 16 operating partners, senior advisers and industrial specialists guiding its investment efforts.

Stonepeak made a well-publicised hire in the past year with the addition of another former Macquarie colleague and former Trump administration infrastructure adviser, DJ Gribbin, who joined as a senior operating partner. Gribbin is based in Leesburg, Virginia and is working on transactions mainly in the transportation space.

Stonepeak emphasises its focus on quality in term of assets, partners, people, and principles. It seeks out assets governed by a strong and established rule of law with relatively stable regulatory regimes. The firm sees opportunities arising from what it characterises as “deep and highly liquid debt and equity capital markets” supporting attractive financing terms and potential exit opportunities.

When evaluating prospective investments the firm also looks for conservative debt capitalisation, tailored to fit the underlying cashflow profile of the asset. The Fund I and II portfolios employ on average less than 40% debt capitalisation. It also favours the utilisation of consumer price index-linked contractual revenue escalators where possible and focuses on assets with long-term pricing power and strong underlying or secular growth characteristics.

In terms of structural enhancements typically used, approximately half of Fund I and II were invested as preferred equity, providing structural seniority and additional insulation against potential operational or financial risks. Stonepeak also seeks to utilise reset or recalibration mechanisms to shift key binary risks onto partners or counterparties.

For its first fund, markets dictated a build over buy approach, resulting in a diversified portfolio of nine investments in five sub-sectors. The deals were primarily sourced from existing Stonepeak relationships.

Key investments included providing US$108m to the Carlsbad desalination project in California and US$247m to ExteNet, an Illinois-based small-cell telecommunications provider.

Stonepeak prides itself on tangible value add-on in the investments it makes, as demonstrated by the Carlsbad project. The investment stemmed from a longstanding relationship between Stonepeak co-founder Dorrell and the developer, Poseidon Resources, which started in the mid-2000s.

Stonepeak was engaged in frequent communication with management throughout the development phase, which solidified its position as the preferred financial partner. The firm bilaterally and exclusively negotiated financial terms for providing construction equity well in advance of financial close and went on to manage the three-year, US$1bn construction process, including all project change orders and start-up and commissioning work, establishing stable commercial operations in early 2016.

ExteNet owns and operates multi-carrier, often referred to as neutral-host, and multi-technology distributed networks to ensure multiple wireless service providers (WSPs) can provide their 3G and 4G LTE services in both outdoor and indoor settings.

Stonepeak worked to enhance value in the company by introducing new data-driven sales analytics and implementing enhanced business development tools to help drive greater new sales bookings and activations. The firm paid more than it usually would for the investment, at 18x cashflows rather than the typical 8x, but the growth of small cells has outperformed the experts.

Fund II differentiated itself through its opportunistic focus on midstream energy in the first half of 2016 market dislocation, with exposure to utilities, transportation, power, and communications sub-sectors. A representative investment for Fund II was Golar Power, a London-based owner and operator of LNG carriers and floating storage regasification units (FSRUs), and a pioneer developer of floating liquefied natural gas vessels (FLNGVs).

With Golar, Stonepeak worked to identify and explore the niche FSRU market through ongoing review and research of transportation sector dynamics early in the process, approached all key FSRU market participants and proposed joint venture structures.

The firm recognised the opportunity to gain low-risk, long-term contracted transportation and power exposure, while exploiting the weakness in master limited partnership (MLP) and related financing markets and valuations.

Earlier this year Centrais Elétricas de Sergipe (CELSE) closed a US$1.34bn non-recourse project financing backing the 1.5GW Sergipe LNG-to-power project near Aracaju, sponsored by a joint venture between Golar Power and Ebrasil.

Golar Power is a joint venture created by Golar LNG and Stonepeak Infrastructure Partners. The team is developing the project through an integrated model, whereby a single project company purchases LNG, owns and operates both the FSRU and the power plant, and sells power to the power offtakers.

In late November, state-owned LNG Croatia picked Golar Power as the best bidder to deliver an FSRU for a planned European Union-backed liquefied natural gas (LNG) terminal in the northern Adriatic. It said Golar Power offered to convert the existing LNG carrier to an FSRU at a cost of US$180.8m.

Other recent Stonepeak investments include its development joint venture with Houston-based midstream energy company Targa Resources, which the firm entered into in February. The joint venture owns Targa’s 25% interest in the Gulf Coast Express pipeline, a 20% interest in the Grand Prix pipeline, and a 100% interest in Targa’s next fractionation train.

“There are many benefits to this structure as it allows Targa to bring in common equity at the project level at an attractive cost of capital, while the purchase option means Targa retains the upside associated with the projects,” said Targa chief executive officer Joe Bob Perkins.

Stonepeak committed approximately US$960m of capital including an initial contribution of approximately US$190m that was distributed to Targa to reimburse the company for capital spent.

Targa has an option to acquire all or part of Stonepeak’s interests for a four-year period beginning on the earlier of the date that all three projects started operating or January 1 2020. The purchase price will be based on a predetermined fixed return or multiple on invested capital, including distributions received by Stonepeak from the joint venture.

In recent months the firm was also visible to the project finance community with its acquisition of power assets from GenOn, formerly owned by NRG.

GenOn in March entered into a purchase and sale agreement with Stonepeak Kestrel Holdings for the Canal Units 1 and 2 electricity generating facilities with a combined summer capacity rating of approximately 1.1GW.

Total proceeds of approximately US$390.3m included the closing purchase price of US$320m, estimated working capital, including target fuel inventory, of US$32.5m, an anticipated refund of US$13.5m from NRG, and an estimated US$24.3m of post-closing excess fuel inventory payments.

Stonepeak remains involved as an investor in Magnolia LNG, a Louisiana-based project being developed by Australia’s LNG Ltd. The sponsor recently delayed a final investment decision (FID) on the project based on difficulty signing Chinese buyers for the project’s output amid US-China trade tensions.

LNG Ltd had planned to reach FID by the end of 2018. The project is designed to produce 8m tonnes of LNG.

“Global diversity of LNG supply is critical for the market of end-users to develop, and we see the US being a key supplier in that equation with a low cost of gas production and bountiful supplies,” said Vichie.

“We have near-term headwinds with global trade negotiations taking place, but this should not impact the long-term outlook for the market.”

Looking forward, Stonepeak recently made a key hire in Hajir Naghdy, former head of Macquarie Capital in Asia. Naghdy was active in the financing effort for the 128MW Formosa I, Taiwan’s first utility-scale offshore wind farm prior to starting as a senior managing director at Stonepeak in November. Naghdy will assist Stonepeak in raising a targeted renewables fund in 2019 with a goal of roughly US$1bn.

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