Infrastructure's Next Frontiers w/ Stonepeak’s Michael Dorrell

Previously on "DriPowder," Mike Doral, Chairman, CEO, and co-founder of Stonepeak broke down infrastructure cycles and explained what he remains strikingly calm about the AI buildout today. So there is such buildup and demand for these markets that even if you have a hit for a couple of years, I'm confident over time, someone will win that data center. Today on the show, we'll dive deeper into the energy implications of that buildout. I'll ask Mike how he's zeroing in on opportunities across the energy sector and whether this explosion and demand will complicate or even accelerate the broader energy transition. You're going to have this really interesting collision between the desire to have more AI and all the national security that comes without the desired tech companies to have more AI, the desire of politicians to get power prices down, then he got permitting, reforming all of that. It's a fascinating collision of all these pretty powerful forces coming together. And I think we're watching that in real time. We'll then shift to global supply chains and logistics, where Mike sees some of the most compelling opportunities in the era of ensuring, friend-shoring, and de-globalization. Instead of coming directly from Toronto, it's going through a secure route. And so if you've got a given volume of trade and you're making it less efficient, by definition, you need more infrastructure to support it. I'm Hugh McArthur, Chairman of Baines Global Private Equity Practice, and this is Dry Powder. Mike, I happen to work in the utility industry in the United States about 30 years ago. And 30 years ago, we had a 25% net overhang in generation capacity in the US. That is, we had much more than we needed. And through the retirement of all of these nuclear assets and other things over time, like that, we've willed it down to basically, we don't have any excess generation capacity anymore. And now, with growing demand at 5% a year, which is a very big number in energy terms, we need to get that capacity online. Given that, where are you seeing the best energy infrastructure investment opportunities right now? Gas supply for short. So we've made a big investor in gas infrastructure, both because you need it domestically, but also there's massive demand abroad for our gas. So you've got all the energy export facilities. We just invested in a joint venture facility that's $16 billion or so. So it's an energy export facility on the coast of Louisiana, just as an example. And that a bunch of domestic gas infrastructure as well. I think the oil trick utilities are a really interesting place to look, but we're not the only one looking at those. I say that's a well-known bet at the moment. And so we've struggled a little bit to find oil trick utilities where we think the returns are high enough for us. That's the easiest way to access increased spending in power. Reunables is tough in the US at the moment. It's a really interesting dynamic in renewables where I always said renewables was a very uninteresting place to invest three or four years ago because there was just so much capital available for renewables projects that everyone was doing it and the returns were pretty lackluster. Today, you might not believe it looking at the headlines, but we've built the more renewables in the US today than we have at any other point in history. But there's no capital available for renewables. And it's for two reasons. One is that there was a bust in financial markets for green energy about two years ago because it had just been too exuberant. And so the listed markets for green energy are off 50 or 60% from their highs of two or three years ago. So people got burned a lot simply because it was too exuberant. You had a bunch of energy companies, for example, like traditional oil and gas companies, almost paying anything to buy renewables, not for financial reasons, but more for qualitative reasons. That's all stopped. But then you've also got the administration, which is obviously pretty resistant to renewables overall. And so as a consequence of that, you've got a market where there's enormous build of renewables going on, but no capital available. So I actually think it's one of the most interesting times in history to invest in US renewables as a consequence of that. And then there's more and more of a push by regulators to insist that builders of data centers bring their own power with them. And so that's a debate going on right now. The big tech companies are resisting that for obvious reasons. But we're starting to see the leading edge of a pretty big price hit that consumers are facing on the power side because of this big increase in power demand. Power prices often get set a few years in advance. I'll give you an example. So PGM, which is one of the biggest power markets in the US, it covers a bunch of the East Coast and Midwest markets and it includes Virginia, which is the biggest data center market in the US. PGM had a capacity price auction, which is component of power prices last year. And it sets the capacity price three years in advance. That went up by a factor of three or four X or something like that. So that will filter into power prices over time. That alone was something like a 10 to 15% increase in the price of retail power. That will be felt in about two more years. That's not going to go down very well with consumers or politicians, et cetera. So I've been waiting for that issue to start to hit the front pages. And the last two or three months, it has. So Mikey Sherrill, who just got elected to New Jersey, one of her top issues is power prices in New Jersey. I'm seeing other governors raise that. It's on the front page of the Wall Street Journal. Now, that I think is only going to increase over time. And you're going to have this really interesting collision between the desire to have more AI and all the national security that comes without the desired tech companies to have more AI, the desire of political positions to get power prices down. Then you got permitting, reform and all of that. And I think we're watching that in real time at the moment. I think that sounds right. One other topic I really wanted to follow up with you on because I know you're investing in it and you're watching it closely, which is somewhat related to the energy topic we're just discussing. This notion of ensuring or French-oring, how do you take things that were disparately located all over the world and kind of redo supply chains so that they're in either domestic locations or they're in nearby friendly locations. And it really seems that global logistics is having to adapt in many industries to actually make that happen. How are you thinking about the supply chain infrastructure opportunities and what is Stone Peak doing to pursue them? I think it's one of the most interesting opportunities in infrastructure today. I don't see global trade slowing down. I think NetNet, the US will continue to be a massive importer of goods and China will continue to be a massive exporter. But the direct trade between the two is going to be disintermediated by other nations, be it other Asian nations or Latin American nations. And so that has a really interesting effect on supply chains. Firstly, there's a whole lot of building that takes place in Brazil and Vietnam and Malaysia etc. Where the Chinese are starting to move their manufacturing to those regions. So we're a big player and that we build a lot of industrial warehouses in Asia, for instance. We back to the team that formerly built warehouses and facilities for the big German car manufacturers in and around Malaysia, just as an example. But also for a fixed volume of trade, the less efficient we make it. So all this disintermediation and French drawing that's going on, that's by definition making trade less efficient. Instead of coming directly from China, it's going through a secure route. Like just to give you a simple one, you need more containers. Just going to be more demand for containers because you're being less efficient with those containers. So we are now the biggest owner of shipping containers in the world, for instance. Yep. So anyway, we've made a big, big investor in supply chains in general where the biggest owner of LNG containerized vessels, for example, like we ship something like, oh man, I think it's like 10 or 12% of the world's LNG is on our boats where the biggest investor in cold storage in the world, for instance. And that's the trend you mentioned, the French drawing and on showing. But you've got other trends going on, for instance, as economies modernize in Asia and Latin America and other places, well, they want more cold storage because food security and keep me viruses and pathogens out of the food supply becomes more and more important. So there's just such incredible demand for the supply chain infrastructure that we found that a very interesting place to invest in. I would say our overall thesis is that if you are the dominant supply chain provider, then it's very difficult for someone else to take you on. And I'll give you an example. So we are the dominant supplier of palettes for fruit and vegetable logistics. And by palettes, I literally just mean like plastic boxes. A literal palette. And what's happening in Europe and the US is that the big food companies, they want to automate the logistics around fruit and vegetables. And you can't do that if it's transported to cowboy. It's just. You know, if a cowboy falls apart and it's, you know, and so what's happening is that grocery chain by grocery chain and by fruit and by vegetable, they're palatizing the supply chain. So warm up might put out an RFP for palates to bananas. And then Kroger's might put an RFP for palates for cantaloupe. So, you know, like every different vegetable, every different fruit has a slightly different container. And these containers take the food from the producer to the grocery store, and then you've got to pick up the container and wash it and ship it back to a farm or a production region. Well, just a Europe, for example. So, if you have the dominant network in Europe, for instance, then if a new grocery chain comes out with a RFP for a new vegetable, so go and make it up. Like, Tesco, a cowboy that says, we put it at RFP for celery. Right. Well, it's very hard for someone to come and win that RFP for a one-off trip for celery when we owe, you know, these tentacles all over Europe already doing a lot of this palatized trade. We can add celery to our network so much more cheaply than a new entrant. And so, there's a real natural barrier to entry when you are the dominant logistics, this scarfire. Fascinating. And a lot of drivers that I hadn't thought about around logistics infrastructure globally. Really high. I'm sure you do this in your private equity world, but we look a lot at Return on Capital. So, Return on Build Cost for Business. It tells you a lot about the competitive dynamics for the industry because if it's a library to entry business, Return on Build Cost will get bid down quite low because new entrances will come down and you won't earn excess returns. But we've found the Return on Capital for these infrastructure businesses and the big scale logistics providers are great examples of this. They've got very nice returns on Capital because they do have these natural barriers to entry. Right. Now, it makes a lot of sense. This has been an incredible whirlwind tour through infrastructure. It's history, how it's changed over time. The digital infrastructure build out driven by AI, energy and how that's played into that and now logistics. And it's fascinating that infrastructure investing really didn't exist when you entered the workforce. You weren't particularly interested in it. It certainly is not existing now in anything like the current form that it existed in when you got involved in it. What would you say to younger people that are wondering, how do I get involved in investing like this? How should I think about it? What advice would you give to a younger person and what their careers should look like? I went to law school. I'm a math science person and somehow I ended up in law school and I was awful at it. I had no interest in it, but I thought I'd become a lawyer because everyone in my peers was becoming a lawyer. And then I found a brochure in my apartment that one of my roommates had, he's older brother, an interviewed at McCory. It was in McCory, brochure. I read this thing. I thought my goodness. This sounds fascinating and I literally went out and bought barbarians at the gate, that famous KKR takes over in a Biscoe book and I read every single Wall Street book. I couldn't get enough of it. It just appeals so much to me. So I dropped law and just pursued this Wall Street investment banking career, not knowing much about it and not knowing where it would take me. But I really worked unbelievably hard in my career. I'm always so hard in my career, the whole time. Not quite knowing where it will take me, but just knowing that if. Here's my advice to sum it up. I think you've got to have a bit of a sense of, listen to your gut as to where it's guiding you in terms of just what feel generally. Do you want to be a medicine or do you want to be in finance or do you want to be an advocate? Your gut will have. There'll be some broad interest among the big fields that will appeal to you. And then it's working your butt off in that field. Be quite cognizant that you probably don't know today, quite where you're going to end up. But if you are in an area that generally interests you and you're working very hard, that has a habit of throwing up opportunities for you. And when we interview a bunch of young folks at Alphyrn, it's very clear to me there's always strong trends. Everyone wants to. There's a bunch of gossip amongst these folks. They all think I've got to be on this hot. This particular hot topic, whatever it might be. I always laugh at it because it's usually two or three years behind where the reality is. So I wouldn't be too concerned about what your peer group is saying about where you've got to be in the hot trend. I'd be much more interested in. Where's my gut telling me I'm interested? Just broadly. And then I'm going to work as hard as I can because I'm not going to know. Maybe Tom's 30. Maybe Tom 40. What really grabs me. But some's going to pop up in that journey. And if I'm the person working hard in a field that broadly interests me, that I think's going to give me the greatest opportunity to do something I really love and be successful at it. I love that advice. I love the fact that you're a math and science guy that went to law school. I'm a reading and writing guy who went to MIT. So I did the right work. We did the exact opposite way. We had to swap. We showed the swap as well. But when we wound up in similar places doing similar things somehow. Lots of ways to get there, right? Mike, this has been an incredible whirlwind tour. I'm sure our audience has learned a tremendous amount. And having your expertise on the show has been a real pleasure. So I wanted to thank you again very much for coming on. Don't just thank you. Really appreciate it. Thanks for having me. I'm Hugh MacArthur. Thank you for listening.