A new perspective on private equity stage financing: evidence from investments in infrastructure

This paper examines the staging of investments when private equity (PE) invests in the infrastructure sector. This sector is characterized by large upfront investment requirements and non-recourse deal structures. Over the last two decades, it has witnessed increasing PE investment activity. PE firms have the option to finance infrastructure project by infusing capital at once, or by staging infusions through multiple investments. In case the PE firm decides to disburse the capital in multiple investments, it creates the staging function, a mechanism successfully used in the past to combat risk and uncertainty. This study hypothesizes that the decision to stage investment is a response to the factors that influence infrastructure deals including institutional and financial environments, project structure, and reputation of the PE firm. This paper examines 358 worldwide infrastructure deals from 1990 to 2009 with PE investments of US$9.74 billion to analyze the choice for, the motives behind, the duration between, and the determinants of staging. We find that developing/transition economies and markets characterized by high inflation and interest rates increases PE propensity to stage. Further deals with larger investment sizes and younger investee companies pose increased risks, and PE firms seem to use their prior infrastructure experience and bargaining power to stage financing. Our results also confirm that long-term relationships between the PE firm and the investee company are advantageous to both parties. We believe that the positive results acquired through the PE staging strategy will help perpetuate it as one of the best tools available for PE investing in the infrastructure sector.