Making predictions about the future is always fraught with danger, 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 investor 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 particularly stood out last year. Stonepeak bought out TPG’s fibre optics business for $8.1 billion in the second quarter. 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.

Splashing the cash

For private investors, the $1.2 trillion US bipartisan infrastructure bill, signed into law in November, 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.

“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 country’s 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. “The 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 be scaled up to around 15,000 each quarter over the next nine years to successfully meet Biden’s target.

Slade points out 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 future bans, but a nationwide policy may yet be needed to incentivise investment and set the necessary pace.

Charting a new course

Upstream M&A in the US shale patch reached $66 billion in 2021, as private equity-backed exits gathered pace and investors increasingly turned to renewables.

Strong commodity price performance supported a wave of PE exits last year, with WTI averaging $71 a barrel and public operators motivated to add high-quality drilling inventory to their portfolios. PE exits were largely tilted to the Delaware play in Texas for oil and the Haynesville basin in West Louisiana for natural gas, traditional hotbeds of private investment.

“These investments were bumping up against the typical five-year investment window when PE is often ready to monetise, so the emergence of buyers was a very welcome development,” says Andrew Dittmar, director at energy data researcher Enverus.

Dedicated renewables funds comprised 61 percent of all sector-specific vehicles that closed between Q1 and Q3 last year, and the US energy sector was no exception. “Responsible investment and ESG metrics are going to be a key piece of all oil and gas investment decisions going forward, including in the M&A markets,” adds Dittmar. “Assets that screen well on ESG will likely bring a premium in the market and assets that screen very poorly risk becoming stranded.”

Greener approach

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 generated, while the EIA expects this to jump to 42 percent of the country’s energy mix by 2050, based on current progress.

On the private investment side, fund managers are eyeing opportunities in green infrastructure debt. Macquarie Asset Management estimates that the renewable energy 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 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.

Limiting factors

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.

A sign of things to come

Through the pandemic period, infrastructure debt has displayed resilience because of stable incomes and downside protection from exposure to long-dated cashflows.

Looking post-pandemic, US bank JPMorgan expects real assets to benefit from the projected rise in inflation and GDP growth, generating stable returns over the next decade and a high proportion of this from operating yield.

The global underinvestment gap for the asset class also means there will be plenty of opportunities for institutional investors over the next few decades. The Global Infrastructure Hub, formed by the G20, estimates that the funding gap has widened to $15 trillion, with the US needing to source an additional $3.8 trillion.