Digital financial assets can help bridge the infra funding gap

Increasing connectivity between banks and investors can solve the urgent need for capital, increase private capital participation and create a thriving secondary market for infrastructure debt, say Pontoro’s Antonio Vitti and Bob Dewing

Infrastructure investments are essential to support our current and future living standards. Balanced supply and demand for infrastructure investments generate economic growth and prosperity, improve health outcomes and drive job growth. To achieve this balance, access to significant capital flows is crucial, regardless of economic cycles.

A startling $94 trillion of global infrastructure financing is estimated to be required by 2040. Although public funding remains a critical source of this much-needed financing, falling tax revenues and $20 trillion of costly pandemic responses have driven debt to a record 365 percent of global GDP.

In the US, failing roads, bridges and railways have become commonplace, while local governments face financial shortfalls that hinder publicly funded improvements.

Meanwhile, the private financing initiatives needed to support states, municipalities and privately owned infrastructure assets are not keeping pace. The bank loan syndication market, which is increasingly constrained by regulatory capital requirements versus growing project sizes, will be challenged to help meet the $15 trillion global capital shortfall, according to GI Hub estimates.

However, if banks can gain greater connectivity to investors, that would augment their financial asset generation capability, help solve the urgent need for capital, increase private capital participation and create a thriving secondary market for infrastructure debt.

Banks’ ability to support new lending capacity is currently limited by their distribution of infrastructure debt via syndication to known direct investors and other participating syndicate banks.

Many institutional investors seek debt assets with attractive risk-adjusted returns, low default rates and stable yields with built-in inflation protection. Infrastructure debt fits neatly into this classification.

Yet these investments are mostly inaccessible to the investors that cannot invest directly in illiquid private infrastructure loans or that lack the expertise to select and manage investments at the individual transaction level.

Connectivity and transparency

Following their successful deployment of technology across consumer business lines, banks are beginning to explore ways to use technology across their wholesale and commercial
businesses.

One new development is the digital asset platform, which promises to bring new methods of raising capital to the infrastructure project finance space by creating digital financial assets built on distributed financial technologies. This innovation can potentially bring new liquidity and greater transparency, expand capital sources, and accommodate a wider spectrum of loan sizes and tenors based on investor preferences.

“Digital financial platforms can build new connectivity to a broader group of qualified institutional investors”

Digital financial platforms can build new connectivity to a broader group of qualified institutional investors, transform risk and liquidity through the pooling of investments, and create efficient settlement technology. Importantly, these platforms can complement existing market participants.

Banks can focus on loan asset generation, augment their traditional syndication model with digital distribution, and help meet the significant capital shortfall in infrastructure by de-levering their balance sheets.

This will also lower structural and regulatory barriers to access infrastructure loans, enhance price discovery and liquidity, and improve access for more participants.

How can we build this bridge?

Our financial technology company Pontoro sources infrastructure and energy project loans that leading underwriting banks originated. This provides investors with greater access to these assets through an innovative digital asset platform with an evergreen fund vehicle.

That allows qualified institutional investors the ability to hold a diverse portfolio of assets managed by us. We will also give each investor the opportunity to create a bespoke sub-portfolio of specific assets from the general asset pool from within the fund itself.

By transforming these loans’ attributes through our platform and facilitating secondary liquidity and price discovery, Pontoro intends to increase the universe of institutional investors that can access this important asset class while improving connectivity between infrastructure assets and investors.

Simultaneously, by expanding demand and distribution, our technology will provide banks with a powerful tool to manage their balance sheets and capital ratios in response to changing market conditions.

Unlike other digital asset platforms that simply focus on improving cost efficiency, Pontoro first solves for matching demand with existing supply. In addition, we recognise that having critical asset expertise, relationships with institutional investors and understanding the regulatory landscape – including settlement, assurance and taxation – are key. Our approach is to engage large, accredited investors, transact in institutional-grade infrastructure assets in which our team has direct expertise, and not underwrite assets.

In our view, competing to underwrite assets, as other digital platforms often do on an individual, non-connected basis and distributing to mostly retail investors, leads to lower quality asset flow and creates a conflict of interest with investors. Furthermore, funding projects is typically only possible after achieving a critical mass of investors. This approach can also inhibit the formation of secondary liquidity.

Our objective is to create a new investment product to attract a broader range of qualified investors. We see appetite from institutional investors globally for these new digital assets. And some of the largest originating banks in Japan, Europe and the US are also interested in de-levering their balance sheets.

Benefits for key stakeholders

Pontoro and the emerging digital asset ecosystem have the potential to encourage banks to originate longer tenor loans, thereby better-matching loan duration to the lifespan of the underlying project and reducing refinancing risk for project sponsors.

Greater availability of longer tenor debt maturities would more closely match the preferences of large institutional investors, such as insurance companies and pension funds, which manage long-duration businesses.

We believe that banks would be more willing to originate longer tenor loans with a mechanism to recycle more of their capital into contracted or hedged projects.

This approach may also help green technology, which has additional refinancing risk due to its rapid technology obsolescence.

Digital assets help to resolve issues relating to price discovery, asset transparency and liquidity for opaque infrastructure assets. These new asset types facilitate transactions between currently restricted buyers and sellers and create scalable access for more institutional investors within this durable asset class.

In addition to longer tenor assets that appeal to traditional investors in infrastructure, secondary liquidity will allow investors to craft their own duration with on-the-run issuances.

Technological innovation is transforming the world of investing, and the present inertia surrounding infrastructure financing can likewise be addressed by technology-driven solutions.

We are facing a critical time for global infrastructure. Worldwide initiatives for substantial changes will require massive, sustained investment. Emerging digital asset technology can be a catalyst to unlock this value.

By bringing together the key stakeholders and increasing efficiency, we can remove the existing barriers and help to grow this vital global asset class.

Antonio Vitti and Bob Dewing are co-founders of Pontoro, a financial technology company building a platform to transform infrastructure financing.