The three pillars of a ‘classic Blackstone infra deal’

What makes a classic Blackstone infrastructure deal? That would always be an interesting question in its own right, but it gains added prominence when you consider that infrastructure was actually Blackstone's best-performing asset class of 2024, generating a 21% gross return, according to the firm's Q4 results. As it turns out, there are three pillars to a Blackstone deal, as Global Head of Infrastructure Sean Klimczak reveals in the latest episode of the Infrastructure Investor Podcast. That forms a big part of our discussion, which also explores the advantages of building a portfolio within an open-ended framework, the enduring appeal of the transportation sector, and, of course, Blackstone's blockbuster acquisition of Pan-Asian data center business Airtrunk. I'm Bruno Alves, Editor-in-Chief of Infrastructure Investor, and this is the Infrastructure Investor Podcast. Hi, Sean. Good to see you. Welcome to the podcast. Hey, Bruno. Great to be with you. Many thanks for the time here today. So Sean, just before Christmas, we actually had Verena Lim of Macquarie here on the podcast. And obviously, you know, Verena was on the sell side of Airtrunk, the Pan-Asia data center business that Blackstone-led consortium acquired. And I want to ask you the same question that I asked Verena when she was on the acquisition side. And the question I asked her was, how much of the acquisition price that you paid for Airtrunk is for what is there in terms of contracted capacity, operational assets, etc., versus what's in the pipeline and yet to come? I would say as it relates to Airtrunk, we were really excited about backing an industry leader, the largest data center developer in Asia, backing a founder, a visionary, Robin Kahuta, and investing behind a business where Blackstone had real scale. So when you think about that opportunity there, it was underpinned by in excess of 800 megawatts of existing capacity that was fully contracted. And so the lion's share of the value of Airtrunk was buying the existing in-place cash flows. There's of course a moderate piece of that business in that purchase price that is ascribed to future development. But I would just say, as we think about the future development opportunity there, we thought we would amortize that premium just over the first handful of years. So it's an investment that we're incredibly excited about. And as I just look at Asia more broadly, I would say it's arguably the most exciting market for data centers on a go-forward basis. Let's use a market like India, where there are fewer data centers in India with its 1.5 billion people than we have in, say, Chicago here in the US, which is the number five data center market in North America. So I would just say, we don't think that will be the case five years from now. And we're incredibly excited about the opportunities ahead. When you went into it, one thing that I thought caught my eye, and I think also caught the eye of quite a few other people, is you drew together four different Blackstone strategies. So real estate infrastructure, tactical ops, and private equity into your AirTron bid alongside your bidding partner. And I think that the competitive advantage of doing that is kind of fairly obvious, given the scale of this. But I just want to play devil's advocate for a second and also ask you, is there a risk of sending a message here that you're kind of blurring different risk return profiles to get into these data center assets? Or do you fear it creates the impression that you're sort of giving the message that they fit all kinds of risk return strategies? What is the thinking there? Yeah. Well, listen, I think we look at an opportunity like AirTron, and we think it presented an opportunity for us to leverage the best of Blackstone, to leverage our scale, to leverage our global reach, and to leverage the insights across different groups. So I look at, for instance, the ability to leverage our leading real estate teams' views on the real estate aspects of the transaction and to leverage our infrastructure views on, for instance, matters like power access. I think it represents an opportunity for us to put the best of Blackstone together. As it relates to the opportunity, I would just say what we're looking at doing here is building long-term contracted data centers where you've got certainty of cash flow, but where we think the underlying returns are actually quite high, I should say. And so as I look at it, I don't view it as a blurring of returns. I think the opportunity in data centers is attractive enough to bring in other groups of the firm. And as you said, one of the competitive advantages is we could be one partner in one check here, but where we didn't actually have to go out on the risk spectrum, for instance, for our infrastructure business, we're going out and signing 15-plus-year contracts with the most creditworthy counterparties in the world. And you've been, I think it's fair to say, very bullish on the generational opportunity to invest at the intersection of data centers and power. You wrote a piece not that long ago exactly on that. And there's no doubt that the CAPEX needs are huge in this sector. And I think you've alluded to what I'm already about to ask you next, but I really wanted to get your take about how much of the opportunity do you think ticks the boxes of traditional infrastructure investments? You know, when it comes to good contracts, barriers to entry, long-term duration, etc. Because sometimes there's a bit of this feeling that you just cannot lose money in this sector nowadays because of the size of the opportunity. Yeah, listen, the industry is not one without risk, and it's not one that will be straight up and to the right. But what I would just say is we look at this underlying asset class, and we think it's quite attractive and checks all of the boxes for infrastructure. So when you think about it in terms of what are we ultimately building, we're building the equivalent of a warehouse with access to significant power and air conditioning, and we're contracting that out for 15 to 20 years. So if you're building data centers with lump sum turnkey construction contracts, and you have your financing in place and your long-term contract with the offtaker, one of the most creditworthy counterparties in the world, you know, that feels to us to be a core plus investment during the construction phase, and then that very quickly flips to a core or super core 15 to 20-year investment after construction. And so I look at it and, you know, believe it checks all of the boxes for infrastructure. I think the big question you have to think about is just the acquisition premium. And if I think about, for instance, our investment in QTS, where at this point, every incremental investment is being done at book value and where we're not, because of our long-term hold perspective, we're not going out and paying an acquisition premium for a platform each time we do a new data center. I continue to be incredibly excited about the opportunity there. And I think you've just hit on a really important point, because everybody is really piling into the sector these days, and generalists and specialists, et cetera, and that puts pressure on valuations. So you're alluding to platform investment as a way of not getting stuck in this kind of higher valuation territory. What else do you try and do to make sure you're acquiring a reasonable value? Yeah. So listen, I think from this point forward, because we've got our primary platforms in the form of QTS, QTS Europe, and Airtrunk, I think really what we're focused on right now is trying to think about where will future developments be and ensuring that we have powered land available for our hyperscale partners when they need it, ensuring that you've got the supply chain lined up, you've got the right partnerships with utilities, and really trying to escape to where the puck is going rather than where it is. And just to touch on the power question for a second, it's obviously what everybody talks about these days, you're doing this at scale. It feels as much of a problem as an opportunity, if you want to put it that way, but I really want to hear from somebody who, like you guys, that are doing it. How are you viewing the power question and appreciate it's different in different markets? Yeah. Well, listen, I think we benefit at Blackstone from having the ability to pair our real estate knowledge with our infrastructure knowledge and that deep understanding of the power markets and having spent now more than 25 years around those markets. I think it allows us to better understand, again, sort of where things are headed. And so as I think about the power markets, there are certainly, if you look at some of the most traditional markets like Northern Virginia, you could be quoted lead times of roughly five to seven years to access power. And so that's where I think we've been creative and have tried to anticipate where new demand could develop, take a market like Atlanta, where we've been a meaningful investor and where we anticipated where opportunity would present itself. And so I think a lot of this really does come down to trying to think about access to power, be it renewable power, be it new gas fire generation power, understanding how do you minimize the infrastructure that needs to be built for any given data center and really trying to think years ahead as to where will the trends in this industry go. I fundamentally believe that we will be in a market where we don't ship natural gas thousands of miles away from where it is taken out of the ground, then build a new power generation facility and then build a long distance transmission line back to data centers. I fundamentally think there will be a trend toward co-location and the elimination of that infrastructure and where these data centers get built over time, I think will evolve. Yeah, no, that makes sense. And it strikes me we've been talking about for some time now what is really kind of the trendiest sector in infrastructure these days. But let's switch gears and talk a little bit, a sector which feels like it fell out of favor for a little while, but is now coming back. And I'm referring to transportation, except for you guys, it never really fell out of favor, did it? Because you've been steadily investing in transportation and you have been doing it throughout the COVID years. And so I just wanted to get your take on the sector. To your point, we've been an active investor in transportation for years. We've now invested behind over $70 billion of enterprise value of transportation businesses. As I look across our strategy, transportation is consistently represented roughly a third of what we do. We continue to be very excited about the underlying mega trend of behind the movement of people and goods and see many underlying sectors that we think are going to grow at multiples of GDP, take crews, take ports, both of which have grown roughly 2x GDP over the past 20 years, take even airports, which have grown roughly 60% faster than GDP. So we love the underlying sector and we think from a portfolio construction perspective, it's important to have that balance behind those businesses. And I just look at investing behind things like ports, airports, roads, and rail. And I think that diversification is important. And then as you referenced, there are moments of dislocation and thinking about opportunities to be an active acquirer of assets in a dislocation like COVID. That's why we were one of the most active investors in that window. Not many people were excited about buying airports, toll roads, and rest stops in the midst of sort of a pre-vaccine world. But I would just say we saw the underlying mega trends there and acted decisively. How are you thinking from a portfolio construction perspective? I'm still staying in transportation. How are you thinking about a mix of what, at least on the outside, looked like more traditional assets, such as some of the roads, networks, and toll roads you have in Europe? And then something like your very recent acquisition of safe harbor marinas, which looks less like that traditional infrastructure asset. How do you mix and match these different types of assets? Yeah. So listen, for us, we are very big believers in the importance of investing behind hard assets and concessions, businesses that have inflation protection, that have moats. And as I think about, I think we see a lot of the same trends that we see in other traditional infrastructure assets in marinas. I would call marinas FBOs for boats. I think we all accept that the signature aviations and Atlantics of the world are infrastructure. And we look at marinas and we see the same underlying assets, the stickiness of customers, lion's share, the super majority of revenues are coming from storage with customers that have been with safe harbor for in excess of seven years. And so we look at that asset class and we see it as a whole. all of the fundamental underlying demand drivers that you would want in a GDP plus growing transportation sector. You've actually got declining supply, roughly 1% per year declining supply. And fundamentally, we think the returns on invested capital are quite attractive there. And lastly, it's a sector that has yet to be consolidated. And Safe Harbor is roughly 2x larger than its next largest competitor. And so we see a real opportunity there, very similar, I would say, to the way that we thought about the FBO sector. And last question on transportation. Are there any sectors and or geographies that you're not active in, but you're eyeing or you want to make sure you're active in a few years? Yeah, listen, I think we've got a great footprint across North America and Europe. There are certainly significant opportunities that we see in the Asia-Pacific region. You take a look at the underlying population growth stats, the economy growth stats, and just the need for significant infrastructure capital in that part of the world. And so if I looked out five or so years, I would expect to see us be a meaningful investor in transport in that region. And again, providing the balance to what we're doing in the region is an important thing with the transportation vertical. One of the things I've always appreciated about your model and the infrastructure business line at Blackstone is you went open-ended, which in itself is still a little bit atypical. But then you went open-ended outside of the super core realm that is being pursued by the newest generation of open-ended strategies. I really wanted to explore that a bit because you've essentially been building businesses now within this open-ended framework. It's been, I think, six-plus years into this journey. So how is that working out for you? Well, I think there's certainly an education process about thinking about infrastructure through an open-ended core and core-plus lens. But fundamentally, I think when you just take a look at the sector, the open-ended fund structure aligns very well with the underlying asset class. Critical assets like ports and utilities aren't meant to be bought, fixed, and flipped. And I think the perpetual structures allow us to preserve the optionality of closed-end funds where we have the ability to sell, but where we're not a forced seller. Second thing I'd hit is that I think the open-ended fund structure is quite attractive for founders, families, and corporates. That's been roughly 75% of what we've done. And I think it is attractive to those partners because we could be more of a strategic investor, think more like an entrepreneur, than just being a financial investor. And lastly, I think the other thing that folks have appreciated over time is that it causes you to high-grade the types of businesses behind which you invest. If you're looking at a model for five years and you've got a turnaround strategy, you can make most businesses and infrastructure pencil out. Whereas when you think about looking at returns over a 10-, 15-, 20-year time horizon, it causes you to really focus on the underlying industry growth rates and to try to think more structurally. And it also causes you to high-grade the types of businesses behind which you invest. And so as I think about it, that thematic GDP-plus-growing lens that we take to the sector, I think, really is amplified or the importance of it is underlined because of the open-ended fund structure. I know you mentioned optionality in terms of you're not a forced seller and you can choose when to exit. I wonder, does the framework within which you operate, do you feel it really incentivizes you to hold on to these assets for longer, if not forever in some cases? Or I guess what I'm getting at is, obviously, if you get a good offer, you will exit. But otherwise, what would it take for you to exit? Yeah, so I think that the fundamental point here is that we are investors seeking to deliver great returns for our LPs. And so for us, we look at each investment every single quarter and try to decide, should we hold or should we sell? And sometimes the selling should be selling off stabilized assets that have been built in our operating and may not, on an individual asset level, hurdle toward the returns that we're targeting. So I would expect that you will see us be an active seller of underlying assets. It could be that you're selling those stabilized assets, but keeping the engine, the vehicle that is creating those attractive new opportunities, or it could be a sale of an entire business. And I think you have seen us do a bit of that to date in our first six and a half years. And I would expect over the coming years, you should see active portfolio management. Actually, I wanna also talk a little bit about your returns. I think it was in your Q4 results. I think it was Blackstone CEO, Stephen Schwarzman. He said infrastructure was generating a 21% gross return for Blackstone in 2024, which was actually more than any of the firm's other strategies, if I'm not mistaken. And he also highlighted your strategy has delivered a 17% net return since inception. Now, those are pretty punchy figures for infrastructure, I think. I don't see any LP telling you, Sean, your return is too high, stop doing that. But I am curious to explore what is underpinning this very strong performance? You know, so if I just take a look at our strategy and what we have done, I think we've done a few things. Number one, we've been thematic, investing behind GDP plus growing sectors. And in many of those instances, getting sort of capturing the flag first, leading the QTS take private before other transactions were done, or investing behind FBOs relatively early in the sector's focus on that, or even more recently, utilities before the uptick in power demand and the expectations for rate-based growth. So I think we've been focused on the mega trends, and I think leveraging the broader scale of Blackstone to spot those trends early has been a meaningful contributor to returns. Number two, we've backed industry-leading, generally founder-led businesses. And we are very big fans of investing behind and backing those founders, those families. And we think that's a key differentiator. I think it's probably one of the characteristics of a deal that has been most highly correlated with good returns for me over time. And then the third thing I'd say is, is that we spend a lot of time focused on how do we improve the operations of our portfolio companies? And so if I were to think about something like a business, like a Carex, our North American ports business, the efficiency efforts that are underway there, I think have been a meaningful driver of returns for that transaction, and have candidly allowed that company to become best in class from a margins perspective. So I think it's a series of different things. Like anything in life, it's getting to a trend quicker than perhaps the pack or being willing to act like we were talking about with transportation in moments of dislocation. It's backing great founders and families, and it's certainly working with our companies to improve their operations. And do you feel that essentially you're always kind of doing those three things, right? You're always trying to get in early and backing kind of these founder-led businesses, and then being operationally intensive, or is it the case that this fluctuates? Sometimes you're not being so operationally intensive, or sometimes you're not that early. How does that mix tend to play out? Yeah, I think about those as being three legs of the Blackstone infrastructure strategy stool. And of course you can lean a little bit more on certain of those areas over time, but I think fundamentally, if you wanna think about what makes a classic Blackstone infrastructure deal, those are the three primary legs of the stool. So when we caught up with you and the team in 2021, I remember towards the end of our interview, Blackstone president John Gray saying that over time he expected infrastructure would become a $100 billion business for Blackstone. And he said something to the effect of the asset class being very large and still being in the early days of it. And then he ended with, but it's not going to happen overnight for us. It never does. It doesn't feel like it's happening overnight, but you guys are at like 55 billion, if I'm not mistaken. So it doesn't feel like it's taking that long either. How do you feel about this 100 billion figure now five years down the line? Yeah, listen, we're incredibly proud of the growth of the infrastructure strategy at Blackstone. And it's a testament to the remarkable team that we have here. I'm not focused on size of our platform other than certainly scale helps us differentiate ourselves and break away a bit from the pack on transactions, witness something like an air trunk. So I do think there are a lot of benefits to having a broader base to our business. As we build our business in Europe and Asia, there will be learnings that we have from each of those different regions that we can then apply in North America or sort of any other parts of the world. And Sean, just one last question. How do you feel infrastructure is being assessed at Blackstone these days? For example, I'm thinking about the BlackRock acquisition of global infrastructure partners, Larry Fink coming out and saying he sees infrastructure as the future of private markets. Do you feel the asset class has, let's say, a higher standing internally these days than five years ago? Well, I think we as Blackstone are incredibly excited about the infrastructure asset class. As you referenced before, I think the industry is still in its early stages of development. And as I think about sort of the last 15 years, we've seen an 8X growth in the market from 150 billion to roughly $1.3 trillion today. I continue to see significant growth in front of us. And as we're out speaking with investors around the world, I think investors continue to see this as a very attractive asset class. And if you break it down, it has four really important attributes, the first of which are returns. It's an asset class that has beaten global equities over the last 15 years. The second thing is it provides diversification. You think about the diversification effects of infrastructure and you compare it to equities, there's only a 0.6 correlation, real estate roughly a 0.35 correlation, and actually a modest negative correlation with bonds. So I think there's a spot for it in portfolios. The third being the inflation protection that the asset class provides with hard assets and concessions where you've got real barriers to entry and an ability to pass along inflationary pressures. And then lastly, it's an asset class that has produced yield. And so when I think about the returns, the diversification, the inflation effect, and the yield or RDIY, as we call it here, I think it's an asset class that certainly the historical tailwinds are explicable and we continue to be very excited about the path ahead here at the firm. That again was Sean Klimchak, Blackstone's Global Head of Infrastructure. To hear more of our episodes, head over to infrastructureinvestor.com forward slash podcast, or you can search and subscribe to the Infrastructure Investor podcast wherever you like to listen.