During his State of the Union address in February 2018, US President Donald Trump called on Congress to produce a bill that would generate “at least $1.5 trillion for the new infrastructure investment” the country needed. This would be spurred by $200 billion in federal funds.
While neither the $200 billion nor any game-changing infrastructure bill has been seen since, private capital is doing its part to drive a revolution in the industry. Here are three key trends to keep an eye on.
1 Blackstone is bringing the heat
The $14 billion Blackstone Infrastructure Partners fund, which may yet grow to $40 billion, completed its first close with commitments from more than 80 investors, including a cornerstone investment from Saudi Arabia’s Public Investment Fund. The close is the largest ever for a first-time infrastructure fund and immediately puts Blackstone Infrastructure Partners among the industry’s largest investment vehicles.
The $10 billion Stonepeak Infrastructure Fund IV, which is currently in market, suggests that appetite for ever-larger funds is strong. The two previous Stonepeak funds – SIF II, which closed in 2014, and SIF III, which closed in 2018 – were sized at $3.5 billion and $7.2 billion, respectively.
However, Blackstone Infrastructure Partners is not just big. The fund also stands out for its heavy focus on North American infrastructure, which sets it apart from the globetrotting flagships managed by the likes of market leaders Brookfield or Global Infrastructure Partners.
Pension documents indicate that North America will account for 70 percent or more of Blackstone Infrastructure Partners’ investments. Two of its earliest investments were in Tallgrass Energy and Carrix as it pursues opportunities across energy, communications, transport, and water and waste.
2 Everything’s going green
The California State Teachers’ Retirement System has put reducing its carbon footprint at the top of its list of priorities. It is one of the few US institutions to adopt a formal policy on global warming and rolled out an 18-month low-carbon transition work plan in October.
Renewables continue to dominate North American infrastructure, with Will Marder, Wilmington Trust’s head of project finance, noting that “wind and solar are undoubtedly leading the charge”. After years of wind outpacing solar, the latter’s benefits – not least its shorter construction cycles and simpler tech – mean the situation is turning around. As Marder says, it’s “easier to figure out where the sun is going to shine than where the wind is going to blow”.
According to Mark Voccola, senior managing director at Ardian, the transition toward renewables and gas-fired power is producing many opportunities “in everything from pipelines to gathering systems and transmission lines”.
The opportunities in the US are more attractive than those in Canada, says Voccola’s colleague Stefano Mion, also a senior managing director at Ardian. This is because “the Canadian market is well developed” and “there are competitive advantages for local players” that make it harder for international funds to get involved.
3 PPPs are under the spotlight
There’s a lot of excitement about the potential of public-private partnerships, but alarm bells have also been sounded. Fluor Corporation has publicly shared its unease with fixed-price PPPs, while the likes of SNC-Lavalin and Skanska have stepped back after suffering losses.
“There have been snippets of commentary in companies’ earnings reports and earnings calls indicating undertones of frustration in [the PPP] market,” says Nicholas Varone, director of Fitch Ratings’ US corporate finance group.
However, Shearman & Sterling partner Paul Epstein believes the US federal government’s position – that states and localities should bear more responsibility for the cost of infrastructure improvements – provides openings for private investors: “It could also push states and localities to consider not only different funding models but also alternative procurement strategies, leading to more creativity in the way projects are designed and structured.”
Ohio State University’s first-of-its-kind energy management PPP, under which it will lease its utility system to the private sector in exchange for an upfront payment and 50-year concession agreement, is a good example. Whereas large transport PPPs have been delayed by political stalemate, university deals are often easier to get moving.
Doug Fried, US head of infrastructure, mining and commodities at Norton Rose Fulbright, says: “Investors have to deal with the boards of the universities, so these projects in some ways are less politically sensitive than those dealing with elected officials on things like toll roads.”