Veteran infrastructure investor Highstar Capital is betting it can outshine its private equity rivals as competition for stable, long-term assets heats up. The New York firm is in the market for a new fund, sources say, having rapidly deployed its last vehicle, which closed at $3.5 billion in the fall of 2007. Demand for infrastructure investing is rising, and with the buyout market moribund, banks and sponsors such as Kohlberg Kravis Roberts & Co. and Blackstone Group LP have launched first-time infrastructure funds.

But Highstar founder Christopher Lee is standing his ground. "I'm the guy with 10 years' advantage and head start to all these big dogs," he says.

The firm closed its first infrastructure fund in 2000, targeting transportation, energy, water and waste management assets with subpar management or operating issues. Lee concedes his share of "black eyes" over the years, but quickly adds that the experience has taught him valuable lessons about operating and regulatory risks inherent to infrastructure investing.

-- See related infrastructure stories --
Can private equity play the infrastructure game?
The alternative lifestyle
Going private 2.0
Highstar: A value on experience

Sponsors aren't exactly naive, however. KKR has worked closely with regulators for two utility investments made by its buyout fund. In October 2007, it teamed with TPG Capital in the $45 billion buyout of Texas utility Energy Future Holdings Corp., formerly TXU Corp. That year, it cashed out of ITC Holdings Corp., a Novi, Mich., independent transmission company.

Highstar has done several of its own energy infrastructure deals. Lee says his firm was the first financial buyer of a natural gas pipeline, purchasing Southern Star Central Corp. from Williams Cos. in 2002. Three years later, Highstar sold the pipeline to GE Commercial Finance Energy Financial Services and Canadian pension plan manager Caisse de dépôt et placement du Québec for $362 million, plus the assumption of $476 million of debt and preferred stock. In 2007 Highstar, along with Goldman Sachs Capital Partners, Carlyle Group and Riverstone Holdings LLC, took private the pipeline operator Kinder Morgan Inc.

As for alternative energy, Highstar will venture only into areas it knows well and where technology is proven. "We take a cold, hard look at technology on its own commercial merits," says Lee. "I'm not putting a nickel in technology dependent on tax subsidy."

Highstar has avoided deals in distressed ethanol but sees potential in landfill gas facilities that capture and convert methane to energy.

Highstar funds have 10-year lives, though it has typically executed its investments in a shorter, three- to five-year cycle, he says. In October, Highstar sold its 50% stake in Dutch power generation company InterGen NV to Indian infrastructure developer GMR Infrastructure Ltd. for more than $1 billion. The firm held onto its interest for about three years before taking its money off the table, while its partner, Canada's Ontario Teachers' Pension Plan, remains invested.

Highstar will likely retain its port assets longer, says Lee, as it pursues a rollup strategy using its portfolio company, Iselin, N.J.-based Ports America Inc., the largest independent terminal operator in the U.S. Highstar bought the business, then known as P&O Ports North America, from Dubai state-backed marine terminal operator DP World for roughly $1 billion in 2007.

In March, Ports America unveiled a joint venture with Mediterranean Shipping Co. SA to upgrade and operate five container berths in the Port of Oakland, Calif., through a 50-year concession and lease agreement.

The partners will inject up to $500 million in the project, funding it with equity. They're not assuming they'll be able to refinance once credit markets reopen. "In the current environment, that's the right way to go," Lee says.