As part of a new report with Pitchbook, Jeremy Swan, Managing Principal of CohnReznick’s Financial Sponsors & Financial Services Industry practice, shared his perspectives on the outlook for private investment in infrastructure projects, the American Jobs Plan, how potential investors should prepare for opportunities, and more.
Read the full Q&A below, and register to receive the full report, which offers additional insights and data on the current state of infrastructure dealmaking; infrastructural deals by subsector; and fundraising and AUM.
Plus, find additional insights from Jeremy in video conversations at the end of this page.
Q: President Biden has pledged to spend trillions of dollars on infrastructure. What do you think are the potential private investment opportunities that this could create for private equity investors?
A: From a private investment perspective, the size and breadth of the American Jobs Plan has certainly drawn attention. The private investment community can play a critical role in helping to achieve the plan’s vision. It looks as though there will be significant opportunities not only to help with what is traditionally thought of as infrastructure – highways, bridges, ports, airports and transit systems, etc. – but also to strengthen the nation in a broader sense, through efforts to create jobs, improve public health, deliver clean drinking water, revitalize manufacturing, advance clean energy options, build affordable homes, and more.
Private equity investors are doubly well-positioned to contribute to the success of this “hard” and “soft” infrastructure. First, adding their financial capital to public capital will increase total resources to support the various plan components, thereby adding an accelerant for public infrastructure programs and investment. Given that private capital could be available much more quickly than public capital, PE could be an important accelerant for the program. Second, PE investors’ intellectual capital from project and operations experience will be a great value-add to all the public entities involved.
These infrastructure opportunities offer additional benefits for private equity investors:
- Extended cash flow: When compared to a typical private equity hold period of 5-8 years, many traditional infrastructure investments offer a longer life – some extending to 20, 25, or 30 years – and provide recurring cash flows. Think of the many business operations of an airport terminal, or tolls on a highway.
- Potential oversized returns: The amount of funding proposed and sheer scope of the American Jobs Plan across so many sectors is creating curiosity from investors – some who have not traditionally operated in the infrastructure sector.
- Purpose-driven investments: This infrastructure push comes at a time when interest is rising across the investment community – and the larger business world – in not only doing well, but doing good. It’s likely that many of the projects ahead will align with the aims of “impact investing” – projects that can drive meaningful change, from facilitating the transition to clean energy to increasing equitable access to housing, healthcare, education, and more. Those looking to meet limited partners’ expectations from an environmental, social, and governance (ESG) perspective – or reassessing their own firms’ policies and investments to make sure they are “walking the walk” on ESG – may find these projects a perfect opportunity to move toward those goals.
Q: In addition to the interest and optimism around traditional infrastructure funds, there's also this parallel optimism around infrastructure credit funds. What do you think about the enthusiasm on the credit side?
A: Private credit funds rose in popularity during the 2008 financial crisis, when the big banks became restricted and their lending activities became more regulated. These funds can deliver outstanding returns. They are matching long-term liabilities, and diversifying beyond the traditional business cycle holdings.
Infrastructure credit funds can generate a significant amount of institutional interest. They are highly attractive to investors because of their longer life when compared to traditional credit funds.
We’ve seen managers launching very sizable infrastructure private credit funds over the past year, and those funds are creating returns even without the impact of the Biden administration’s infrastructure plan. In most private deals, there is both an equity and a debt component to support the financing. Given where interest rates are right now, and given the ability for these funds to match the long-term liabilities and deliver pretty substantial returns, it's no surprise that we're seeing a ton of traction in the private credit markets.
Q: Are we likely to see an increased amount of M&A activity within infrastructure-related industries?
A: We may see a tremendous amount of industry-specific M&A activity as private equity firms prepare to position themselves for infrastructure-related investment opportunities. Whenever there is a catalyst for growth, you’re likely to see an increase in vertical consolidation. Some businesses are likely to pick up remarkable growth in a short period. If investors and management teams don’t plan for increases in capacity, their opportunities may be limited.
As an aside, access to capital will be a critical factor in supporting the increased level of M&A activity.
Q: PE capital invested in infrastructure hit $24.8 billion in 2020, a record. Why did infrastructure investment go up that much, especially during a pandemic?
A: You had about $25 billion invested in infrastructure in 2020 compared to $6 billion raised in 2019 and $10 billion in 2018. When you drill down into the numbers, there were a couple of large deals in 2020, with one transaction representing over half of the dollar volume. That being said, it is not surprising that the amount of capital invested in the infrastructure sector increased in 2020. The attractiveness of infrastructure investments, such as the predictable cash flows and longer life/hold periods, as well as a new, infrastructure-forward presidential administration are key drivers in the steady increase in transaction activity. Additionally, even though the coronavirus pandemic may have paused some infrastructure projects, the sector is somewhat resilient.
Q: On that note: A recent Moody’s study found relatively few infrastructure downgrades or defaults at the height of the pandemic. Please share your views on the sturdiness of infrastructure investing, both now and over the near term.
A: Infrastructure investments are relatively stable. Market conditions like the coronavirus pandemic can add complexities to infrastructure projects, even delay them, but good project managers don’t waste much time identifying solutions and moving projects forward.
Once an infrastructure project is initiated, it is very rare that it would come to a complete and sustainable halt. If you look at the credit quality, the risk of default throughout the pandemic, it didn't change dramatically, we didn't see a huge step up in default rates. On the infrastructure projects, we didn't see huge write-downs from the infrastructure funds that are invested in them. When a project gets started, in all likelihood, it will get completed.
The length and resilience of infrastructure projects is attractive to investors and their limited partners, and is also a hedge when it comes to downgrades or defaults.
That said, like any project, infrastructure projects are not without risk. Any large infrastructure project with significant capital carries a risk of fraud, waste, or abuse, such as leakage of dollars or materials disappearing off of job sites. It’s critical that there be a security program in place from both a financial perspective and an equipment perspective. Know how to track each dollar, from the point where it left the investor’s or the public entity’s account to the point where it was used to pay an invoice. Look at cost overruns for any risks, and continuously evaluate, is the progress of the project lining up with the resources put into it? Make sure, too, that those working on the project are meeting any applicable requirements for reporting and compliance.
Q: If you're an investor in the infrastructure space, are you thinking about investing in infrastructure projects, or investing in operating companies that are well-positioned to plug into the various infrastructure opportunities?
A: Good question. I think there are opportunities for both project investors and operating company investors. Whether investing in infrastructure or any other industry, a private equity investor will invest in those situations where they have experience and confidence in their firm’s ability to achieve their investment goals. If your team is experienced managing infrastructure projects, you may gravitate toward those opportunities. The same would be true of operating company investors.
Sometimes, the size and scope of the project will determine the roles played by the various private equity investors. Larger investors will be more attracted to larger infrastructure projects. Building highways or redeveloping an airport takes a different skill set than developing affordable housing or supporting access to quality health and child care. If you look at infrastructure projects as lifecycles, private equity investors are likely to play different roles along the lifecycle. Some will lead, and others will support, and some will even do both at different points along the way.
Industry-specific qualifications will be important: Both leading and supporting infrastructure projects will take industry expertise of private equity investors and service providers.
Q: What should infrastructure funds do to get ready for an escalation of infrastructure spending?
A: I think first and foremost, you need to pick and choose where you want to focus: Which industry or industries? At the project level or the company level?
Use the time before the infrastructure bill is finalized to get prepared for whatever your next steps may be. This may include:
- If you are not already familiar with the process and requirements for accessing federal and state-funded projects, get up to speed now, or consider hiring advisors to help you navigate their intricacies.
- Many federal contracting opportunities involve set-asides for veteran-owned, women-owned, and other types of businesses, including small business set-asides. It can be worth looking into the requirements to evaluate whether you qualify.
- Relatedly, many projects involving public agencies now have diversity goals that need to be hit, such as a contract requiring that a certain percentage of the work be completed by minority-owned firms. Understand what compliance metrics may apply to your projects, what you may need to do to meet them, and how to monitor for continuing compliance over the project lifecycle.
- Reach out to your contacts who could be instrumental in helping you win work.
- Stay abreast of the legislative landscape relative to the infrastructure bill. Get plugged in early and stay plugged in.
- Identify your differentiators. You’ll need to communicate and prove them when pursuing opportunities.
- Consider how to insert compliance, monitoring, and oversight of infrastructure projects to ensure that funds are used as intended and to mitigate fraud, waste, and abuse.
- If you don’t have them, develop repeatable and scalable project management processes and tools to support the timely completion of projects on budget.
- Solidify your firm’s ESG strategy. Are there goals or risks that a certain type of infrastructure and community investment could address? Being intentional about ESG can drive long-term stakeholder value.
From a financing perspective, get yourself up-to-speed on public-private partnership (P3) investment structures. Expect and plan for the due diligence required to establish them, which may include cost-benefit analyses of full cost and revenue projections, risk-sharing scenarios, public opinion, and other factors. Educate investors on the risk that may be involved, and be prepared to negotiate to protect them as risk is defined and delineated between the parties. And again, be ready to really tout your differentiators – what expertise, experience, creativity, and innovation can you bring to a public project?
The advantage of using those public-private partnership dollars alongside the public dollars is that it really puts a multiplier factor on the amount of dollars being put to work in these projects and the speed with which funds are available. If you examine what the private capital markets could contribute, we could be talking about a much larger infrastructure investment across the U.S.
The Biden administration will need to think about ways to incentivize the public and quasi-public agencies to embrace private investment in order to get these projects running. If we consider how much ground the U.S. needs to make up compared to the infrastructure investments of other developed countries, I’m not sure $2.1 trillion gets us there. But if you look at some federal dollar amount, multiplied by a factor of x, when you consider the private investment that could ride alongside that, we can get a lot closer a lot faster.
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