Can private equity play the infrastructure game?

by Vyvyan Tenorio and Christine Idzelis | Published April 3, 2009 at 1:22 PM ET

040609 infra.gif Until recently, aging infrastructure assets looked about as tantalizing to private equity investors as a bunch of trees. The comparison isn't far-fetched. The long-dated, low rates of return that infrastructure assets produce may be marginally better than the low single-digit returns that timberlands might yield after 40 years. Which is why U.S. buyout executives, hard-wired for high risk-reward bets, were less than enthused.

That mindset has changed the past few years. Five years ago, the city of Chicago sold a 99-year lease to Cintra, Concesiones de Infraestructuras de Transporte SA of Spain and Australia's Macquarie Infrastructure Group for $1.8 billion, giving the investors the right to operate the Chicago Skyway toll bridge. Many viewed the highway and bridge as a landmark event for privatization in the U.S., which has lagged Europe and Australia. Faced with crippling deficits and budgetary pressures, federal, state and local governments have increasingly turned to private capital to fill the funding gap for much-needed infrastructure improvements.

Robust credit markets also whetted investors' appetites for steady, long-term investments that with financial engineering could yield better-than-average returns for infrastructure. Macquarie was the category killer that established the listed fund model at least a decade earlier.

Since then, the ranks of private infrastructure funds have swelled, drawing in Washington's Carlyle Group, 3i Group plc of London, Swedish private equity firm EQT Partners and several bank-sponsored and independent players. However, competition has also increased, and players have tried to boost investment returns by using more leverage.

"If you build it, they will come"
Funds raised globally for infrastructure investments
Year	Funds raised ($bill.)
2004	$2.4
2005	5.2
2006	17.9
2007	34.3
2008	24.7
Source: Probitas Partners

With the global financial crisis and credit markets effectively stalled, infrastructure dealmaking -- often complex, multiparty transactions to begin with -- has become even more complicated. Political resistance is alive and well. The Pennsylvania legislature's recent rejection of a $12.8 billion turnpike concession sale underscores how American communities, and entrenched interests, are not eager to just hand critical assets over to private hands.

Lack of leverage also upended the debt-equity calculus. Listed infrastructure funds that relied on excessive leverage saw value vanish, leaving at least three Australian groups in receivership and the so-called Macquarie model in tatters.

Tight liquidity has derailed fundraising, not just for infrastructure vehicles, at least for the near term, experts say. New entrants, including New York's Kohlberg Kravis Roberts & Co. and Blackstone Group LP, both in the market with their first infrastructure funds, face recalcitrant institutional investors, many of whom are constrained by the denominator effect of sunken market values.

Moreover, experts believe leveraged buyout impresarios will need to offer more than financial alchemy to compete with project finance specialists. Of particular concern to limited partners is the matter of the PE model's economics -- 2% management fee and 20% carry -- broadly at odds with the less robust, low-return risk profile that infrastructure offers, observers say. That "long-term" investments for some PE funds may mean a holding period of less than five years has not have been lost on pension funds, either.

There are tensions between the low, steady-returns profile that institutional investors are attracted to and the classic PE fund structure, say investment bankers and placement agents. Thus, the PE model needs to evolve.

To some extent, that's now happening. KKR rocked the fundraising establishment by halving its fee and carry structure to 1% and 10% when it launched its fund last year. "To me, that tells you everything you need to know about returns expectations from infrastructure and where investors stand," says one fund manager who requested anonymity.

All this suggests private capital has a way to go. To be sure, the financial crisis may have only strengthened the impetus for privatization. There are those who note that after past excesses, lack of leverage may not be such a bad thing, particularly if investors focus on improving performance and enhancing asset value. Yet it remains to be seen whether private equity can play an effective, sustainable role.

If there are two people Chicago can point to as its biggest privatization advocates, they are Mayor Richard M. Daley and John Schmidt. Longtime Daley friend Schmidt, a partner at Mayer Brown LLP, had championed Skyway's privatization effort since 2002. Daley had in mind a concession sale of the Skyway system similar to Ontario's privatized concession to operate the 407 Express Toll Route for 99 years.

The Skyway is an eight-mile, six-lane, elevated roadway over the South Side of Chicago that includes a small steel truss bridge over the Calumet River. Opened to traffic in 1959, it had been a financial disaster and had been undergoing rehabilitation for years. For a time it enjoyed a reputation as a choice spot for gangland-style robberies, including a picaresque extortionist who held up tollbooths using different clients' vehicles from his backyard car repair service.

The avuncular Schmidt, now in his mid-60s, was Daley's first chief of staff after his initial election as mayor in 1989. In late 2004, Schmidt, serving as Chicago's legal adviser, sat alongside other city officials and representatives of adviser Goldman, Sachs & Co. at the opening of bids for Skyway.

"They opened the envelopes, sort of in reverse order," Schmidt recalls. The first one, from Abertis Infraestructuras SA of Spain, came in at $505 million. The second, from an ABN Amro-led group, was $770 million. Both were considerably below expectations. Then the Cintra-Macquarie bid was opened; it was for $1.82 billion, $1.1 billion more than the next-highest offer. "I said, 'Let me see that. Are we reading it correctly?' " he says.

Schmidt calls it an emotional moment. "I knew something extraordinary had happened," he says.

Under the 99-year concession agreement, the winners received exclusive rights to operate and collect toll revenue from the Skyway and be responsible for maintenance. As Daley envisioned, the proceeds were to be used to pay off Skyway debt and create a reserve trust.

Even before the Skyway deal had closed, Indiana was considering a similar project for the Indiana Toll Road, a 157-mile highway linking the Midwest and East Coast, one of the most heavily traveled truck routes in the U.S. In 2006, the state awarded the same consortium a $3.8 billion concession to operate the highway for 75 years. Different deals have been struck elsewhere, including Florida's agreement in March to pay a group led by Madrid-based Actividades de Construcción y Servicios SA as much as $1.8 billion over 35 years to design, build, operate and maintain new toll lanes along Interstate 595. Florida will set toll rates and pocket the revenue.

Have the floodgates opened, or are investors and advisers indulging in wishful thinking? Opinion is split. In the U.S. alone, the amount of money needed to fix public works is breathtaking. The American Society of Civil Engineers recently warned that after decades of underfunding and neglect, roughly $2.2 trillion will be needed over the next five years to improve the nation's infrastructure to acceptable standards. Globally, according to a recent Overseas Economic Cooperation Fund study, $2 trillion is needed annually for electricity transmission and distribution, road and rail transport, telecommunication and water through 2030.

The Obama administration's stimulus package and other legislative initiatives, including the creation of a National Infrastructure Reinvestment Bank, have dangled the promise of federal support, but the dollar commitments to date appear to be a trickle compared with the need.

Political resistance hasn't disappeared. In October, a much-publicized bid to privatize the Pennsylvania Turnpike for a $12.8 billion, 75-year lease, won by a consortium led by Citigroup Inc.'s Citi Infrastructure Investors arm and Abertis didn't pass legislative muster, a major setback for the bidders. Members of the legislature and other opponents appeared reluctant to forge ahead, partly because many were convinced the winning bidders would need to hike toll rates to recoup operating expenses and the sizable lease cost to generate a return. There was also fierce opposition from the Turnpike Commission, which has been running it for 70 years.

Citi and Abertis said they're not giving up yet and will likely try again.

"Buyout firms will have to pay careful attention to aligning their business models to public policy and community interests," says one private equity executive. Infrastructure assets are "so core to many people lives" that heightened sensitivity is essential.

Dealmaking has also slowed because infrastructure assets are not immune from a downturn, as some might want to believe. While it's unlikely that a household will cut back on its use of water, drivers might well avoid toll bridges and roads, says Ben Heap, co-head of infrastructure at UBS. Toll traffic has fallen by as much as 10% in some cases, he says.

Making matters worse, price hikes are based solely on inflation, which hasn't been this low in 50 years. "So there's a little bit of a double whammy," Heap says.

In the U.S., privatization of large-scale structures such as toll roads, airports, seaports and bridges has been slow to gain adherents. For much of the past few decades, government agencies relied on tax-exempt bonds to build and repair structures. Except for some municipal water supply, sanitation services and telecom that have been turned over to private contractors, these assets have mostly stayed within the public domain.

In Europe, pieces of infrastructure have been fully or partly privatized since the '80s. The OECD estimates that privatized assets now exceed $1 trillion for member countries. Various forms of public-private partnerships have developed. Typically, the public agency owner and provider of services becomes purchaser and regulator, while the private sector provides finance and management of assets while generating returns. In the U.K., more than 900 such partnerships, valued at £53 billion ($76 billion) have been signed from the mid-'90s to the end of 2007, the study says.

The model for infrastructure funds was pioneered in Australia by Macquarie, whose antecedents were in merchant banking. In the '90s, it capitalized on capital flows from Australia's pension schemes, known as superannuation funds, and set up infrastructure funds, many of which were publicly traded entities.

In Canada, pensions also began investing in infrastructure but went a step further, embarking on co-investments and direct investments. The Ontario Teachers' Pension Plan began investing in 2001, mostly as a direct investor. It had C$8.8 billion ($7 billion) in its global infrastructure portfolio as of end-December 2007, out of a total C$108.5 billion.

The Ontario Municipal Employees Retirement System established a subsidiary, Borealis Infrastructure Management Inc., in 1998. The unit, now with C$5.2 billion of assets, aims to have as much as $10 billion in its portfolio, with 60% of the capital in Canada, the rest primarily in the U.K., Western Europe and the U.S.

"The natural owner of an infrastructure asset is a pension or endowment fund that intends to hold the asset indefinitely," argues Leo de Bever, CEO of Alberta Investment Management Corp., in a recent essay in Infrastructure Investor, a PEI Media trade publication.

De Bever is one of the more outspoken apostles for direct infrastructure investments, recently publishing a book on the topic. AIMCo of Edmonton, Alberta, was established in 2008 to manage C$70 billion in pension assets.

Infrastructure is only now emerging as a distinct asset class. For pension funds, it's a perfect way to match long-term funding liabilities with long-term cash flows that infrastructure assets typically generate. "Money wants to find a home, and infrastructure is one of those areas offering investors legitimate gains," says Tony Perricone, a partner at Jones Day.

Last year, the California Public Employees' Retirement System, which used to lump its infrastructure investments with other alternative assets such as private equity, said it would allocate up to 3%, or about $7.2 billion, for infrastructure, with a net target return of 5% above inflation over five years. "We hope to generate stable, attractive investment returns with low to moderate risk as we deploy capital to meet a reported need of $1.6 trillion for U.S. infrastructure projects over the next five years," Rob Feckner, CalPERS board president, said at the time.

The California State Teachers' Retirement System also has a new policy in place, though it has yet to make an investment. Other states including Alaska, California, Oregon, Texas and Washington appear to be diving in as well.

Despite transactions having mostly been private-to-private deals to date, the surge in interest in infrastructure has sparked a fundraising frenzy. Even with liquidity constraining many large pension funds, private infrastructure pools raised nearly $25 billion last year. The total fell short of the record $34.3 billion raised in 2007 but still outpaced 2006, according to investment advisory firm Probitas Partners.

About 77 infrastructure funds globally are seeking an estimated $92 billion of commitments from institutions. The pace has been glacial, bankers and lawyers say, and raising all of it isn't a sure bet. "Fundraising has slowed tremendously, though unlike megabuyouts, there's still a fair amount of money going into infrastructure," says Kelly Deponte, managing director at Probitas. "Pension funds are looking at the demand side of the equation."

Braving the economic turmoil
Top 10 infrastructure funds now in the market
Rank	Fund	Fund manager	Manager country	Size ($mill.)
1	GS Infrastructure Partners II	GS Infrastructure Investment Group	U.S.	$7,500
2	Macquarie European Infrastructure Fund III	Macquarie Funds Group	Australia	6,691
3	Macquarie Infrastructure Partners II	Macquarie Funds Group	Australia	6,000
4	Citi Infrastructure Partners	Citigroup Infrastructure Investors	U.S.	4,000
4	KKR Infrastructure Fund	Kohlberg Kravis Roberts & Co.	U.S.	4,000
5	Alinda Infrastructure Fund II	Alinda Capital Partners LLC	U.S.	3,000
6	aAIM Infrastructure Fund	aAIM Infrastructure	U.K.	2,982
7	Fondi Italiani Per Le Infrastrutture	F2i SGR	Italy	2,704
8	CVC European Infrastructure Fund	CVC Infrastructure	U.K.	2,676
9	Santander Infrastructure Fund II	Santander Infrastructure Capital	U.K.	2,007
10	Gulf One Infrastructure Fund I	Gulf One	Bahrain	2,000
Source: Preqin

Most private infrastructure funds are sponsored by large financial institutions through their investment banking units, according to industry data. Goldman Sachs completed the first bank-sponsored fund in the U.S. in 2006, raising $6.5 billion, of which $750 million came from the investment bank. It is now campaigning for a successor fund, which industry reports say is capped at $7.5 billion, though a source says the actual target is well below that mark. Goldman Sachs declined to comment on the fund.

Its first fund was used for the $22 billion LBO of oil pipeline company Kinder Morgan Inc. and to purchase seaport facilities operator Associated British Ports Holdings plc, which a Goldman-led group bought for £2.8 billion in 2006.

Morgan Stanley Infrastructure Partners began investing in 2006, closing two major investments before it wrapped up its first fund with $4 billion in May 2008. The fund, which targets transportation, energy, utilities, social infrastructure and communications assets, surpassed its $2.5 billion goal despite a difficult environment.

It has a fund life of 15 years, looking to invest in assets highly correlated with inflation that can generate returns of 12% to 15%, says Sadek Wahba, Morgan Stanely's infrastructure head.

Last year it teamed with Ontario Teachers' to buy Saesa Group, a Chilean electric distribution, transmission and generation subsidiary of New Jersey electric utility Public Service Enterprise Group Inc., for roughly $870 million, plus debt. And in December 2006, Morgan invested in a $563 million purchase of Chicago Loop Parking LLC, the largest underground parking system in the U.S.

UBS closed its $1.52 billion infrastructure fund in October to invest in mature assets involving utilities and transportation, among others, aiming for returns of 10% to 13%, says Heap. Its first investment, in 2007, was a $348 million purchase of a 50% stake in Northern Star Generation LLC from another infrastructure fund, AIG Highstar Generation LLC. UBS was also part of a consortium that purchased British water and sewage company Southern Water Capital Ltd. from Royal Bank Investments Ltd. for £4.2 billion in 2007.

Citigroup launched Citi Infrastructure in 2007. It lured Felicity Gates, who previously led a Deutsche Bank AG affiliate's North American infrastructure business, and Juan Béjar, formerly head of infrastructure at Spain's Ferrovial Infraestructuras and former CEO of Cintra. Citi is still marketing its first infrastructure fund and wouldn't comment. Reports pegged the target at $5 billion.

Carlyle joined the fray with a $1.15 billion fund completed in November 2007. That year, it bought biosolid recycler Synagro Technologies Inc. for $772 million. And in May 2008, it took a majority stake in ITS Technologies & Logistics LLC, an intermodal facilities operator that helps move goods through North America by transferring containers from rail to trucks.

Carlyle says it aims to improve assets by making them more efficient through incentives or building them out through acquisition and expansion. Generally, "the most appropriate use of funds is for projects or assets with some level of existing operations," says Barry Gold, Carlyle's co-head of infrastructure.

What might help counter community resistance is to deploy capital into projects that benefit the public or provide "essential service" in a way sensitive to needs of all stakeholders, says Gold.

That means staying flexible, he adds.

Carlyle plans to look at the transportation, water distribution-wastewater treatment and social infrastructure sectors, which are public benefit assets that would serve users even in dire times, he says. But the firm won't rule out making greenfield investments that make economic sense, such as a shovel-ready road projects designed to relieve traffic congestion.

KKR launched its infrastructure initiative in May 2008 with a big splash. It poached energy investment banker George Bilicic of Lazard to spearhead the effort. Bilicic sat across the table from KKR when the buyout house, along with TPG Capital, acquired Texas utility TXU Corp., now Energy Future Holdings Corp., in the largest LBO on record. In informal discussions with LPs, KKR had talked about a $10 billion fund with limited partners, according to a source. Not long after Bilicic rejoined Lazard and assumed his old position as head of global power and utilities, KKR came out with a prospectus targeting a $4 billion fund to be led by Marc Lipschultz, who heads its energy and natural resources group.

Not to be outdone, Blackstone also aims to raise a fund reportedly targeting between $2 billion and $5 billion, though details are sketchy. Reports said the fund has not yet begun fundraising. According to Preqin Ltd., the New York firm will invest in a range of developed infrastructure assets in the U.S. and Europe. The firm recently hired Trent Vichie and Michael Dorrell from Macquarie Capital in New York as founding partners of Blackstone Infrastructure Partners.

KKR, Blackstone Group executives and Bilicic all declined to comment.

The focus for many institutional investors appears to be shifting to independent funds partly because of uncertainties over continuing support from financially stressed institutions, according to industry executives.

AIG Highstar, a private equity fund that invests in infrastructure, has dropped AIG from its name, although it remains tied to the embattled insurer in so far as AIG is a limited partner.

Founded in 2000 by Christopher Lee, a former Chase Manhattan Corp. and Lehman Brothers Inc. executive, the firm is in the market for its fourth vehicle, after raising $3.5 billion for its third in 2007.

Another large group, Global Infrastructure Partners of New York, is a joint venture between Credit Suisse Group and General Electric Co.'s infrastructure division, launched in late 2006. Credit Suisse sought to capitalize on its and GE's project finance expertise, a source says. Each contributed $500 million to a $5.64 billion fund that closed last March, having the advantage of raising money before the crunch hit.

GIP's team, mostly consisting of investment bankers, is led by Adebayo Ogunlesi, chairman and managing partner and a former CS investment banking chief. The fund, together with AIG affiliate AIG Financial Products Corp., acquired London City Airport, the U.K. capital's fifth airport, in 2006 for a reported $1.4 billion in October 2006.

How has that portfolio holding performed? "Better than OK, even in this environment," says a source.

Except for energy infrastructure specialists, some of which have been very successful, most U.S. players are first-time funds, and it's too early to judge performance. Those with exits may have an edge. Alinda Capital Partners LLC boasts the first independent infrastructure fund in the U.S. Launched in 2005 by ex-Citigroup project finance experts led by Christopher Beale, the firm completed a $3 billion fund in 2006.

Alinda began fundraising last year for a successor vehicle with a $3 billion target and has pretty much raised that amount. It helped that it has had partial realizations, including the sale of airport assets in Australia and in the U.K. divested by portfolio holding BAA Ltd., the British airports operator owned by Spanish construction group Grupo Ferrovial SA.

Alinda, GIP and other bank-sponsored funds now fundraising declined to comment.

Charting the risk-return profile for infrastructure and setting benchmarks remains a work in progress. Funds entering the market come up with a structure and strategy for investment vehicles, targeting returns that generally assume some leverage on the underlying portfolio. Early studies pegged net returns for most managers at between 9% and 12%. But those numbers predate the credit boom. They also vary depending on the underlying assets. According to J.P. Morgan Asset Management, toll roads may get 10% to 12% and airports may get 15% to 18%, against an average of 10% to 15%. For instance, Alinda Capital, focused mostly on brownfields, generally targets a base return of 12%, but it may gain a further 3% through operational enhancements and a potentially lucrative exit multiple, according to sources.

In general, brownfields investments with well-established cash flow tend to produce the lowest returns, with a target internal rate of return of about 10% to 12%. Depending on how much capital is invested, rehabilitated brownfields -- assets that are built but that may need capital improvements or expansion -- may offer 15% returns.

For greenfields, or projects that need to be built, investors may hope for 18% to 20% returns because they take on design, construction and operating risk. Most private infrastructure funds appear to have multiple investment targets, typically a combination of brownfields, greenfields and secondary investments, according to Preqin Ltd.

Even before the credit crunch, heightened competition fueled by the proliferation of funds eroded return expectations from double to single digits, the OECD reports. "The first-mover advantage typical for new asset classes has run out," it says. Macquarie's earlier funds were reporting IRRs of around 20% because "it had the market to themselves," says one New York fund manager. But as the market became more liquid and efficient, pricing has become more aggressive, with target IRRs relying on increasing amounts of debt and equity.

Critics have pointed to recent auctions such as the concession sale, announced in October, for Chicago's Midway Airport, the first privatization of a U.S. airport, saying bidding was quite aggressive. The winning group, Citi Infrastructure in partnership with Vancouver International Airport Authority and John Hancock Life Insurance Co., bid a little more than $2.5 billion.

"The whole market was appalled," says a fund manager familiar with the auction. The bid was all equity, the source says, but even without debt, bidders were targeting a 15% IRR.

The unsuccessful privatization of the Pennsylvania Turnpike also drew what many viewed an aggressive bid from Citi-Abertis, whose $12.8 billion offer, said to be 60 times projected Ebitda, was well above the next highest bid of $12.1 billion from Goldman and Transurban Group, Australia's second largest toll-road operator. Macquarie bid $8.1 billion, which fell below the threshold, and was shut out from the final round. Citi declined to comment on the auctions.

Infrastructure assets can usually support 50% to 75% debt in the capital structure, says UBS' Heap. But using too much leverage can backfire, as it did for Australia's Babcock & Brown Ltd. and Allco Finance Group Ltd., both of which emulated the Macquarie model and are now bankrupt. Analysts say it didn't help that some of their debt structures were provided on a short-term basis, a mismatch to the longer time frame for underlying projects.

"When times get tricky, it's possible to have plenty of breathing room at the operating level yet still be unable to meet debt service at the holding company level," says Heap. Their analysis didn't factor in the global financial crisis, which have forced such firms as Babcock to sell assets at fire-sale prices. "Infrastructure projects can handle more leverage than private equity projects in normal economic cycles, but not overly excessive leverage," says Mark Weisdorf, global chief investment officer of J.P. Morgan Asset Management, which has its own fund as well. "If a project's cash flows decline when an asset is 90% levered, it could cause problems."

The bankruptcies have hurt Macquarie, whose listed funds are down about 40% for the year amid continuing worries over asset valuation. Macquarie has considerably more resources than its bankrupt imitators, but the listed infrastructure fund model it pioneered has understandably taken some hits from critics who argue that it's "broken."

Last year, institutional advisory firm RiskMetrics Group Inc. issued a scathing critique of the complex structures of the model, which it argued was flawed, in part because of the danger of overpaying for assets. A spokesman for Macquarie says the firm addressed the report in detail at the time, including making various corrections. It has also made corporate governance changes in its listed funds since the report was published, he adds. In recent months, the firm has tended to take on the role of adviser rather than acquirer, sources say.

Under prevailing conditions, investors being pitched by PE-style infrastructure funds may need a lot more convincing. For one thing, the typical 2%-20% fee/carry structure is less compelling. Canadian pension funds have long argued that if infrastructure funds are pitching low- to midteen returns, the standard 2%-20% economics makes no sense, which is why they've tended to invest in assets directly. With limited leverage, there's even less justification for it, they say.

Still, most infrastructure funds retain 2%-20%, with a hurdle rate averaging 8%. There are variations: The management fee might be a sliding scale, and the hurdle rate could range anywhere from 6% to 12%. Carlyle came in early in the cycle with a 1.5%-20% structure and a 12-year life, plus a two-year extension. The fund is targeting returns in the upper teens, a source says.

KKR's diminished rates are a big departure," says a large LP in KKR's buyout funds. "That does say that some of the pension funds aren't prepared to pay 2% to 20% on products that have a lower risk profile in a class where they are or can be more direct participants themselves."

Another concern is the risk that PE funds might stretch the definition of infrastructure. As one disgruntled pension fund manager explains: "You can have two different power plants. One fully contracted for fuel supply and providing electricity for 50 years. That's an infrastructure plant by our definition. On the other hand, another plant may buy fuel in the spot market and sell electricity in the spot market. That's a merchant power plant, and there's lots of them around. In theory, the first will have much lower returns and won't sustain a 2% to 20% structure." Says one Canadian investment officer: "If private equity looks into it, they'll start pushing into the second type. It's in their DNA."

Moreover, pension funds with long-term funding liabilities to worry about seek a very high return of capital to cover those liabilities. Buyout shops normally have a holding period of about five years, but that's not usually long enough for pension funds and other investors.

"IRRs are only one snapshot of performance," says one fund manager. "Sophisticated investors look at how much capital comes back in 10 years or more." Alinda Capital and others have a 10-year holding period, but some funds may have shorter holds and exit within five years, sources say.

Investors are also leery of the lack of infrastructure expertise among traditional private equity firms. "There are LPs out there saying that other funds might have more or deeper expertise in infrastructure than KKR or Blackstone," says one investment adviser. To be fair, KKR has been hiring project finance experts as part of the investment team, as have others, but there's a shortage of truly seasoned infrastructure executives, industry observers say.

All things considered, private equity funds with appropriate structures might still get the benefit of the doubt. For pension funds that are increasingly attracted to the asset class, the advantages of improving social and economic infrastructure assets may outweigh concerns over low returns.

At the same time, public-sector authorities will need to adapt their own management models to reward employees for efficiencies, cost savings and making the asset work better for users, says Gold. Accountability will be important, and revenue sharing is one way of achieving that, he adds.

And while financial engineering may ultimately help boost fund returns, it isn't the only factor, experts say. Fund managers can just as well focus on operational changes to get multiples of return on capital. In that respect, the LBO folks might yet make a good stab at outperforming their peers.