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Lehman targets $1bn for debut infrastructure fund

Goldman Sachs, currently raising $7.5bn for infrastructure, isn’t the only investment banking giant looking to capitalise on the increasingly popular asset class.

Lehman Brothers’ merchant banking arm is raising a $1 billion (€627 million) infrastructure fund, its first foray into the booming strategy, according to an industry source.

Lehman’s infrastructure unit, directed by Emil Henry, a former assistant secretary for the US Treasury Department, has just begun marketing the fund. Investor response is so positive that the investment bank may raise the fund’s initial target to $2 billion, the source said.

A Lehman spokesman declined comment.

Lehman’s move into infrastructure comes as investment banking rival Goldman Sachs looks to raise $7.5 billion for what may be the largest-ever infrastructure vehicle raised by a North American firm.

GS Infrastructure Partners II will focus on core infrastructure sectors, with an emphasis on mature transport and utility opportunities in North America and Europe and seeks an internal rate of return between 10 percent and 15 percent, a source familiar with the fund told PEO.

Dow Jones first reported Goldman’s target and terms earlier this week. The fund will charge a 1.5 percent annual management fee to investors that commit less than $100 million; 1.25 percent to commitments between $100 million and $250 million; and 1 percent to commitments between $250 million and $500 million. Fees will be negotiated in excess of $500 million and a standard 20 percent carry fee with an 8 percent hurdle rate will apply.

A spokesman for Goldman declined comment.

If Goldman succeeds in hitting its target, the new vehicle would dwarf its current infrastructure fund, closed in December 2006 on $6 billion. It would also surpass Australian infrastructure giant Macquarie Funds Management Group’s 2007 infrastructure fund, which closed on €4.6 billion.

Macquarie, however, looks set to raise the world’s largest infrastructure fund; it intends to launch an $11.8 billion fund, according to various media reports in January.

Both the Lehman and Goldman funds crystallise the growing interest in infrastructure as a potentially lucrative alternative asset class. Between 2006 and 2007, fundraising for the asset class nearly doubled to $34.3 billion, according to the Probitas Partners 2008 Private Equity Deskbook.

As mega-buyout activity stagnates and the US economy teeters on recession, more and more investors are turning towards infrastructure, as most infrastructure investments are viewed as relatively shielded from macro business cycles. Several LPs, including the trend-setting California State Employees’ Retirement System, have carved out infrastructure allocations as part of their inflation-linked portfolio, a trend well in place before the credit crunch.   

Moreover, governments at all levels in the US and Europe are increasingly turning towards private financing for maintenance of roads, tolls, airports and other infrastructure mainstays. Although infrastructure projects often require significant debt financing, most projects are conservatively financed with asset-based lending.

In December, Goldman teamed up with Macquarie for a $544 million take-private of Waste Industries USA, a refuse and recycling company. Other investments from Goldman’s first infrastructure fund include the $22 billion buyout of Kinder Morgan, a gas pipeline operator.