Private credit firms are seeing an opportunity to finance everything from public transit systems to local utilities as the federal government and banks pull back on funding.
US state and local infrastructure is in need of alternative funding sources as pandemic-era stimulus funds wane and the Trump administration seeks to cut costs. As inflation drives up construction costs and government balance sheets are pressured by higher expenses, there are fewer dollars to be allocated to projects.
That’s created an opening for private lenders to snatch up more of the infrastructure market, which would normally be dominated by public funding, according to Andy Prindle, the head of origination at lending firm Foundation Infrastructure Opportunities, a strategy within Foundation Credit.
“There’s a lot of investors out there who would love to have more direct access to infrastructure in the US,” Prindle said, speaking at a conference in Atlanta earlier this month. The US infrastructure market is complex, with tens-of-thousands of entities and a highly local structure.
Projects like new airport terminals or highways are funded in the $4 trillion municipal-bond market, through which states and cities raise cash. Although muni-debt issuance is coming at a rapid clip, potential funding freezes and cost-cutting measures have pressured budgets. Pivoting to private credit provides a plentiful pool of capital.
“There are definitely situations where having access to a more private, stickier capital base that’s looking to hold this investment for the long term and never anticipates selling it, provides value to borrowers,” Prindle said.
Many alternative asset managers have cited infrastructure as a way to grow their private credit shops beyond corporate direct lending. A boom in infrastructure deals — along with asset-backed finance — could swell the entire private debt market to as large as $40 trillion, as Apollo Global Management Inc. has estimated.
“The whole concept of infrastructure is low default rates, high recovery — that’s what makes it so valuable but also in some ways stable,” said Brookfield Asset Management Chief Financial Officer Hadley Peer Marshall, who is also the co-head of the firm’s infrastructure debt and structured solutions business.
In times of volatility, banks are also likely to pull bank from capital-intensive infrastructure projects, leaving an opening for private credit. Swooping in during these times has also become a tried and true maneuver for private credit firms, which often ramp up lending as other funding sources retreat or dwindle.
“Volatility in the market pushes some traditional lenders to the sideline in periods of concern around the macro environment, and infrastructure as an asset class is very resilient,” said Brent Canada, a partner in Ares Management Corp.’s infrastructure debt business.
For Ares, opportunities within infrastructure tied to federal funding are longer term.
“If we forecast five years forward, areas that experience shortages of federal funding, like water utilities or transportation, could be a place for private capital to move into,” Canada said.
Direct Access
Outside of the US, private capital has long flocked to infrastructure finance. By 2016, almost 50% of airports across the European Union, for example, were fully or partially privatized, according to a Stanford University report, compared to the US, where privately owned airports are a rarity.
Some private infrastructure investments have drawn criticism, including Macquarie Group Ltd.’s former ownership of UK utility Thames Water. Under its control, Thames Water became laden with debt that has since crippled the company. The Australian bank and asset manager, which exited the business in 2017, has said that debt helped fund necessary investments into the network.
Aside from injecting projects directly with capital, private firms can also fund infrastructure through publicly traded companies focused on these assets. Last year, Blackstone Inc.’s credit and insurance arm acquired a stake in two pipelines owned by EQT Corp. and associated transmission and storage assets for $3.5 billion.
As expenses tied to non-discretionary government spending on programs such as Medicare and Social Security, and interest payments increase, the US also has less capacity to spend on infrastructure, according to a Citigroup Inc. report this month.
“Already-large budget deficits and evolving infrastructure needs suggest a larger role for the private sector,” Citigroup wrote in its report.
As infrastructure projects become larger and more complex, “capital structures are becoming more sophisticated and private capital is playing more of a role,” said Brookfield’s Peer Marshall.
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