“They could have asked me in German. “So, of course I say, ‘Oh, we’re open to both options’,” he recalls with a laugh.
“You were working so hard, like a duck on top of the water, to try to learn about what you were doing. But by the time you’ve done that for five years, you’ve been battle-hardened.”
More than two decades on, Dorrell is still using those early lessons as the co-founder, chairman and CEO of Stonepeak. The 13-year-old Wall Street infrastructure giant has $US65 billion ($101 billion) under management, almost 250 staff, and investments in North America, Europe and Asia across three sectors: transport and logistics, digital infrastructure, and energy.
There was enormous opportunity to just go to these companies and say, ‘Hey, would you be interested in doing this’?
— Mike Dorrell, Stonepeak CEO
“For the first time since I’ve been doing this, all three sectors have unbelievable capital tailwinds,” he says. Supply chains are being reshaped by geopolitical tensions, the energy transition is gathering steam, and data demand is surging.
But in a world where it seems every investor is spruiking the growth of hyperscale data centres amid the artificial intelligence revolution, Dorrell is more cautious, and is hunting in a more specific niche of the data centre sector.
Different strokes
In many ways, the story of Stonepeak’s growth has been built around the very first lesson that Macquarie learnt when it arrived in the US: that is, the infrastructure model that had worked brilliantly for it in Australia in the 1980s and 1990s just wouldn’t fly in the US.
Mike Dorrell’s introduction to infrastructure was old-school – it was either sink or swim.
Max Mason-Hubers
In Australia, Macquarie had surfed a huge wave of government privatisations to scoop up toll roads and airports, eventually spinning these into satellite funds. But in the US, the deep municipal bond market meant there was not the same pressure on governments to sell assets, so Bleach and his team had to think differently.
The good thing was that the market was enormous, and there was no shortage of valuable infrastructure held privately. Macquarie could dodge big, competitive auctions for assets and instead negotiate creative deals with individual parties.
“There was enormous opportunity to just go to these companies and say, ‘Hey, would you be interested in doing this’?” Dorrell says.
There was serious money to be made; Dorrell says a deal to buy an electricity grid in Michigan from a power generator, which saw Macquarie make 3.5 times its money in about three years, was emblematic of the times. And between about 2002 and 2006, Macquarie had the market mainly to itself.
But by 2006, Wall Street had woken up to the Macquarie model and its ability to make money from management fees, advisory fees and carried interest. The Wall Street banks raised huge infrastructure funds and went hunting for talent.
“And that’s when I took note,” Dorrell says.
Then in his early 30s, Dorrell and fellow Australian Macquarie operative Trent Vichie decided to strike out on their own. They put a pitch book together and began knocking on the doors of private equity firms; four firms made offers, and Dorrell and Vichie (who is now retired) decided to go with Blackstone after a memorable lunch with legendary CEO Steve Schwarzman.
While Dorrell wisely waited until after bonus time to resign, his luck didn’t hold – Macquarie CEO Moore happened to be in New York at the time. “He’s a person whom I admire greatly, but he’s not a pleasant guy to resign to.”
Dorrell remembers his time at Blackstone fondly, and came to count the company’s president, Tony James, as a mentor. But with the global financial crisis raging, it simply didn’t work. “Blackstone couldn’t have been better. We visited literally hundreds of LPs [limited partner investors] around the world, but we just couldn’t raise money.”
In the first week of 2011, the pair left to start Stonepeak. “Blackstone was nice enough to call it a spin-out, but it was just us starting again,” Dorrell says.
But this time, it worked. The GFC was disappearing into the rearview mirror, and Dorrell and Vichie had the Blackstone stamp on them, plus lots of good LP relationships and some very handy references from James.
Stonepeak raised funds from the likes of annuity giant TIAA, Oregon State Pension Plan, Texas Teachers Retirement System, and Washington State Pension Plan – one of the original supporters of Wall Street’s private equity sector.
The focus remains on what Stonepeak calls “off the run” deals sourced outside the traditional auction process; three-quarters of its deals have been sourced like this.
Dorrell says there have been several key changes in the market over the past decade, including a consolidation of competition. Most of the big Wall Street infrastructure funds struggled, leaving the stage to specialist players.
Another key change is interest rate settings. “Your biggest competition is always debt markets, so when interest rates were down to 1 per cent in the US, that was a pretty tough time because all these asset owners have a great alternative.”
Today, higher rates make selling assets more difficult, but it’s a great time to buy.
Infrastructure tailwinds
The idea that infrastructure is in a rare position to benefit from multiple tailwinds is gaining popularity across the market; Steve Eisman, one of the heroes of Michael Short’s book The Big Short, recently revealed how he studied onshoring, data and energy trends for two years, and is betting big on infrastructure stocks.
But Stonepeak is staying opportunistic and hunting in specific niches.
Data centres are a good example. Where investors are flooding into hyperscale data centres that will be crucial to the growth of AI, Dorrell is a little wary. Returns on capital in the listed hyperscale data centre sector have tended to be a little bit underwhelming. And while the rate of growth is certainly attractive, he is looking a decade or so down the track, when maintenance costs start to kick in and the contracts with tenants potentially become a bit harder to renew.
Dorrell emphasises that he is not a contrarian on hyperscale data centres, but he’s cautious amid the gold rush.
“Because the growth is so strong in data centres, I think this can go on a long time. But you just don’t want to be the last guy in there.”
He is excited about so-called connectivity data centres, which facilitate direct connections between data centres. These are rarer, Dorrell says, but offer attractive double-digit returns on book equity; Stonepeak owns half of CoreSite, one of the biggest operators in the US.
In energy, Stonepeak has found success in developing wind and solar projects in Asia, where returns have generally been better than in Europe and North America.
The slump in the value of renewable projects, caused by rising construction and debt costs, is creating opportunities, but Dorrell is playing carefully in this area, focusing on providing structured debt and preferred equity to developers and projects, rather than buying projects outright.
The pricing of these projects has improved a lot, but Dorrell wants to see a few more deals before he’s sure that risks in the sector are now being priced appropriately.
In transport and logistics, the firm bought the Port of Geelong in Victoria for $1.2 billion last year alongside Spirit Super. But it has also had great success finding the right niches, such as with its investment in a US business called TRAC Intermodal, the largest owner of three American companies that supply the chassis (basically trailers) used to move shipping containers around ports.
“You’ve got this business that covers the entire port market in the US that has the same demand drivers of a port, but was a lot cheaper to buy,” he says.
Where a port might go for 15 to 20 times earnings, Stonepeak bought TRAC for seven or eight times earnings, and has been able to double its profit margin to 40 per cent.
Dorrell concedes this isn’t the sort of business he would have placed in the infrastructure bucket when he arrived in 2001.
“Part of the trick to getting it right is to make sure you don’t stray outside the characteristics of infrastructure. You’ve got to have the pricing power. You’ve got to have high barriers to entry. And you’ve got to be providing an essential service.”