Thirteen months after unveiling a gigantic pledge from Saudi Arabia’s sovereign wealth fund, Blackstone Group LP is nearing a first close of $5 billion for its inaugural infrastructure fund, according to people familiar with the matter.

The fundraising, expected to be finalized this week, is slightly behind schedule but will mark the biggest initial close for a first-time fund across any alternative investment strategy after SoftBank’s $100 billion Vision Fund and the China Structural Reform Fund, according to Preqin. The data exclude funds with a single close.

A spokeswoman for New York-based Blackstone declined to comment.

The planned $40 billion fund — Blackstone Infrastructure Partners — raised eyebrows when it was unveiled last May in Riyadh during a visit from President Donald Trump and business leaders including Stephen Schwarzman, Blackstone’s chairman and chief executive officer. The Public Investment Fund of Saudi Arabia, known as PIF, pledged as much as $20 billion, on the condition that every dollar would be matched against commitments from other investors.

Industry executives have said even the optics of PIF’s massive presence in the Blackstone fund could put it at a disadvantage when vying for investments that require support from local, state or federal officials. Still, the Saudis will have a minority position in any deal and no investment discretion, according to some of the people.

Playing Catch-Up

The first close gives Blackstone a dedicated fund in an area where key rivals broke ground more than a decade ago. While the close isn’t as large as some observers expected, the fact that Blackstone has reached this juncture at all signals that naysayers’ prognostications may have been premature.

The capital raising comes even as Trump has yet to deliver on a promise to facilitate the investment of as much as $1.7 trillion in the next decade. “It would be helpful if they do something around infrastructure,” Blackstone President Jonathan Gray said of the federal government in May. Still, “there’s tons to do even without it,” the firm’s chief financial officer, Michael Chae, said on an earnings call in February.

The firm initially didn’t say whether it was aiming to raise the matching commitments in one fell swoop, but on a call with reporters in February, Blackstone’s then-president, Tony James, clarified that the $40 billion would be gathered “over the next decade or so.”

A January memorandum from a Pennsylvania pension plan said Blackstone was seeking $7.5 billion during its initial fundraising phase. That time frame includes the next nine months, over which there will be additional closes, said some of the people with knowledge of the matter, who requested anonymity because the information is private. After March 2019, the fund won’t accept new pledges until its coffers have been emptied, an investment period Blackstone expects to last three to four years, the people said. All along, the firm had been targeting between $5 billion to $7.5 billion of outside capital to form a fund of $10 billion to $15 billion including the PIF match during the initial phase, said the people.

Slight Delay

A first close for the infrastructure fund in the current quarter was Blackstone’s intention since inception, Chae said at a conference this month. Still, the June time stamp is behind the March or April projection set internally, in part because senior hires took longer to get on board, according to people with knowledge of the matter and the Pennsylvania memo. Apart from PIF, investors include the Pennsylvania Public School Employees’ Retirement System, which is cutting a $500 million check, the New Mexico State Investment Council and the Parochial Employees’ Retirement System of Louisiana, according to fund disclosures and Bloomberg data.

The fund’s perpetual, or open-ended, structure is designed to match the lifespan of infrastructure assets, meaning it won’t be forced to sell to realize profits within a set timetable. Targeting an annualized return after fees of 10 percent, its areas of focus include assets such as ports, waste facilities and telecommunications towers.

Blackstone has firmed up its senior infrastructure ranks, promoting internally and hiring from rival investors such as EIG Global Energy Partners and OMERS Infrastructure as well as from General Electric Co. It’s still searching for mid-level investment professionals, according to people with knowledge of its staffing needs.

Round Two

The firm’s second foray into infrastructure is already more successful than its first. It tried raising at least $2 billion after the global financial crisis, but eventually allowed that team to spin out in 2011 to form Stonepeak Infrastructure Partners, which is in the final stages of raising as much as $7.2 billion for its third fund. Blackstone may be catching up to KKR & Co., which recently held a first close of $6 billion on its third infrastructure fund. Another rival, Carlyle Group LP, is raising a $2.5 billion infrastructure fund while the senior partner anointed to lead Apollo Global Management LLC’s efforts in the sector is leaving the firm.

Besides competition from other funds, Blackstone could find itself facing off against longtime infrastructure investors such as Canada Pension Plan Investment Board, which had C$28.6 billion in the sector as of March 31.

The fund, which intends to allow its investors to contribute additional cash into certain large deals, is yet to put any of its capital to work but has been actively pursuing opportunities including a stake in APM Terminals — a ports business owned by Danish shipping company AP Moller-Maersk A/S — and a 49.99 percent holding in mobile transmission towers owned by Altice Europe NV, according to people familiar with the matter.

KKR triumphed in the auction for the Altice French towers in a deal announced last week while APM Terminals has since decided not to sell a stake, people with knowledge of the matter said. Thomas Boyd, an APM Terminals spokesman, declined to comment.

Despite assurances from executives such as James, who in February said he was “very confident” Blackstone’s infrastructure fund would reach $40 billion in the long term, it’s not guaranteed that the infrastructure unit will be able to replicate the growth of its real estate arm, which had a deeper track record before it launched its open-ended effort. That fund, known as Blackstone Property Partners, had $1.4 billion under management as of March 2014. By the same date in 2018, that figure had grown to $27.2 billion.

Bloomberg

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