BlackRock's Pricey Infra Deal Will Beget More M&A

It’s a seller’s market for infrastructure asset managers. Conventional and alternative investment firms are falling over themselves to expand in this lucrative area, and M&A is the easiest way for them to leapfrog the competition. Don’t expect high deal prices to act as a break. Consolidation into scale players just creates more pressure on smaller infrastructure managers to bulk up.

BlackRock Inc.’s agreement to buy Global Infrastructure Partners (GIP) for $12.5 billion earlier this month is the latest and most eye-catching transaction in the sector and follows recent smaller deals by CVC Capital Partners and others.

Infrastructure isn’t a new asset class by any means but it’s the flavor of the month. The business accesses private capital to support core needs like roads, airports, data centers, power grids and telecoms networks. Governments save money while investors gain exposure to predictable, long-term cash flows which — to varying degrees — rise with inflation. That makes infrastructure a good match for pension liabilities.

You can see the attraction for investment management firms sitting in the middle of the money flows. Infrastructure offers a fee stream that’s durable, growing and nicely profitable. For regular firms like BlackRock, the business is more rewarding than active and passive fund management and makes you look a bit more like the alternative investment firms that enjoy high stock-market valuations. For private equity, infrastructure offers diversification from leveraged buyouts — a needed strategic shift now that the cheap debt that fueled past returns is history.

A Better Alternative

Of course, BlackRock’s deal is easily digestible for an investment behemoth with a $120 billion market value. Only around one-quarter of the purchase price is cash, and that’s being borrowed. The rest will be delivered in BlackRock shares, and a chunk of these are subject to GIP performance targets.