Making predictions about the future is always fraught, particularly during a global health pandemic. At the start of 2021, few would have foreseen that infrastructure fundraising would brush aside market volatility and end the year surpassing pre-covid highs. Total funds raised reached $136.5 billion, eclipsing the previous record set in 2019 of $97.3 billion.
The hunt for stable, long-term cash yield – combined with high barriers to entry and a relatively low-risk profile – is shifting portfolios in favour of infrastructure. And while the bulk of capital raised may still be channelled into equity, competitive returns from infrastructure debt are also tempting investors.
“Infrastructure debt performance has been very resilient,” says Brent Burnett, co-head of real asset investments at Hamilton Lane. “You have lower default rates, better recovery rates and higher spreads relative to corporate securities. When you take all this into consideration, especially with institutions starved of yield, many investors view infrastructure debt as a pretty attractive place to put capital.”
Prime Capital estimates that infrastructure debt deals topped $513 billion across the first three quarters of last year, a 7 percent year-on-year increase. Sector-wise, investor appetite for digital infrastructure was one distinct trend. The asset class has thrived since the global shift to home working and swathes of retail moving online.
In North America, two major telecommunication deals stood out last year. Stonepeak bought out TPG’s fibre optics business for $8.1 billion in Q2. This was followed shortly after by Blackstone’s $10 billion acquisition of QTS Realty Trust, a data centre provider. Strong consumer demand for data and faster fibre saw the telecoms sector in North America grow to 21 percent of total deal value last year, an annual rise of 5 percentage points.
For private investors, the $1.2 trillion US bipartisan infrastructure bill, could also prove to be a decisive moment. The infrastructure package is the largest of its kind to be passed in the country for decades and has the potential to usher in a new era of public/private collaboration.
Splashing the cash
“I have no doubt in my mind that opportunities for an infrastructure investor in the US right now are absolutely vast,” says Lawrence Slade, CEO at Global Infrastructure Investor Association. “I think the key is to understand where it will be best to use federal money and where you can really bring in private money.”
Digital infrastructure is again an obvious example of where the private sector can play a distinct role. Consultant Deloitte says that a 10-percentage-point increase in broadband penetration in 2016 would have resulted in more than 875,000 additional domestic jobs in the US and an extra $186 billion in economic output by 2019, underscoring the scale of the digital divide.
“Let’s make sure that we are not using federal money where there is private capital that is ready, willing and able to invest,” adds Slade.
Another potential opportunity for greater private debt investment is electrification of the transport sector. President Biden’s infrastructure plan pledges $7.5 billion to build out a nationwide network of 500,000 EV chargers, with the deadline set for 2030. In February, the government is expected to release updated guidance for states and cities, including how best to catalyse private investment in the emerging EV sector.
“I think the private sector can really make an impact with destination EV charging points,” says Slade. “Shopping malls should be absolutely peppered with them, most of which should originate from the private sector.”
However, achieving 500,000 chargers across the time scale will be a stiff challenge. According to the Alternative Fuels Data Center, part of the US Department of Energy, an average of 5,322 public charging ports have been installed each quarter since the start of 2020. The agency says this will need to rise to 15,000 per quarter over the next nine years to meet Biden’s target.
Slade notes that to decarbonise the transport sector rapidly, the US might need to imitate countries that have set deadline bans on the sale of new internal combustion engine vehicles. California and at least 11 other states have announced bans, but a nationwide policy may yet be needed to incentivise investment and set the necessary pace.
On the renewables side, the bipartisan infrastructure bill also promises to invest more than $65 billion. Increasing the share of clean energy in the energy mix will be critical to Biden’s pledge to make the US a net-zero carbon emitting economy by 2050.
In 2020, renewable energy sources only provided 21 percent of the country’s electricity, while the EIA expects this to jump to 42 percent of the energy mix by 2050, based on current progress.
On the private investment side, fund managers are eyeing opportunities in green infra debt. Macquarie Asset Management estimates that the renewables sector has grown to about half of global infrastructure debt market by volume. “Renewable energy continues to be one of the largest and more resilient infrastructure sectors following the pandemic,” Tim Humphrey, co-head of Macquarie’s global infrastructure debt asset management business, told affiliate Infrastructure Investor in September.
“By the end of 2020, the value of renewable energy dealflow had returned to pre-pandemic levels. Building back greener to stimulate economic growth and achieve net zero should continue to be a tailwind for the sector in the years ahead.”
The American Investment Council says that private equity funded half of all private renewable investments across the US in 2020. And on the debt side, Blackstone launched its energy transition platform last year. The firm says it aims to invest in and lend about $100 billion to renewable energy companies, while roughly $100 trillion will be needed to decarbonise the global economy by 2050.
Blackstone made its first major renewables investment from the new platform in January, a $3 billion injection into wind, solar and transmission line developer Invenergy Renewables, described by Blackstone as one of the largest renewable energy deals in North American history.
“Wind, solar and battery storage deals are already attracting private debt financing, but waste-to-energy, recycling, clean gas power generation, CCS and nascent hydrogen opportunities also continue to be active or are emerging,” says Matt Wade, executive director of debt investments at IFM Investors.
The bipartisan infrastructure bill promises to invest billions of dollars to overhaul the country’s declining highways and roads. But Burnett warns that the government package alone is unlikely to unlock a wall of private infrastructure debt investment needed.
“I don’t think it will be a monumental shift in how infrastructure is going to be managed in this country,” he says. “You are talking about a multi-trillion-dollar asset class, with spending at just $600 billion over a 10-year period. For private infrastructure investors, it will probably only help on the margins of sectors they were already interested in.”
Burnett points to roads, bridges, construction and passenger rail, which will receive the bulk of federal investment. These assets have previously been a small target for private infrastructure investment and additional federal spending risks crowding out further private investments.
On the flipside, Burnett argues that where private debt can excel is with asset types of which banks have limited experience. “I think there are going to be a lot of opportunities for private infrastructure debt to come into early-stage renewables projects, particularly EV charging, because they are fairly new projects that may have a harder time attracting capital from traditional lending sources,” he says.
While the US infrastructure bill may not immediately open all doors to debt investors, the package at least showcases where the federal government plans to prioritise spending and shines a spotlight on where the funding gap is widest.