The United States is in dire need of infrastructure investment. In a recent Report Card for America’s Infrastructure, the American Society of Civil Engineers estimated that $3.6 trillion in investment was needed by 2020. From hazardous waste to transit, no single segment of U.S. infrastructure received a grade higher than B-. Many have been long aware of this pressing need, which is why infrastructure was part of presidential candidates’ platforms and, recently, a $9-billion water infrastructure bill passed the Senate. But addressing the multiple challenges involved in refurbishing American infrastructure shouldn’t be thought of solely in terms of politics and the public sphere. Rather, the role of private market actors including all types of private equity funds should be emphasized, particularly as public-private partnerships could prove one of the most effective tools in policymakers’ arsenals.
“…The role of private market actors including all types of private equity funds should be emphasized…”
-John Gabbert, Founder and CEO PitchBook
Given the low cost of municipal bonds and ongoing debate around the costs and benefits of privatization, public-private partnerships can prove to be a bit of a wild card, but that is only currently. Recently, the Internal Revenue Service released a regulation that made it easier for infrastructure projects to be financed by public-private partnerships, essentially by clarifying what can and can’t be real property for REIT purposes. Furthermore, given the broader global investment landscape, U.S. infrastructure is becoming a more compelling area in which to invest, given its lower volatility and risk profile. Granted, there are valid concerns, such as already-competitive pricing for the best-placed projects and the necessity for experience in infrastructure investment and ensuing business models. But as LPs grow more accepting of longer-term fund lifecycles and PE fund managers continue to face difficulties in traditionally sourcing quality deal flow, shifting focus to public-private partnerships to address infrastructure issues could prove fruitful. Brownfield opportunities (where existing projects such as toll roads or airports are turned over to private parties) as well as greenfield (construction of new assets) projects are everywhere in the United States.
Take IFM Investors’ purchase of Indiana Toll Road Concession Company in May 2015, which had 70+ U.S. pension funds supplying significant equity even as the capital structure included debt with maturities as long as 40 years, as proof of both global investors’ hunger for solid infrastructure opportunities and LPs’ flexibility. Over the past few years, PE activity within the construction, rail, road and infrastructure sectors in the U.S. has been more than healthy; $14.6 billion was invested in 2015. This year has seen significant slowing, but increased political urgency, plus more amenable regulations around financing structures, will doubtlessly spur PE investors’ appetites. //