United States: Private Equity And Public-Private Partnerships: Potential Roles In Solving The U.S. Infrastructure Crisis

Against the backdrop of the White House's February 2018 release of its 53-page "Legislative Outline for Rebuilding Infrastructure in America," the prospects for publicprivate partnerships ("P3s") and private equity's role in U.S. infrastructure upgrades appeared on the rise. The Legislative Outline (a self-described roadmap for Congress to "draft and pass the most comprehensive infrastructure bill in our Nation's history") proposed allocating $200 billion of federal spending to new infrastructure projects over a 10-year period and recommended certain changes to streamline project permitting, consolidate required governmental approvals, and shorten project timelines, all with the goal of incentivizing private investment to help close the infrastructure investment gap. But with Congressional action appearing to be postponed until after the 2018 mid-term elections (though this is subject to change at any moment), one might expect interest on the part of PE firms in infrastructure to wane. Layer on a reliance in the White House's proposal on significant state and local contributions, and the prospects for excitement become even more dim. Or so it might seem.

PE Interest in Infrastructure

Perhaps surprising to some, investor appetite in the infrastructure sector continues to be strong. According to Prequin, private-equity firms raised a record $33.7 billion in 2017 for infrastructure funds focused on investments in North America, resulting in infrastructure-focused capital amassed at roughly $70 billion. Among the fund managers surveyed by Prequin, 74 percent plan to invest more infrastructure capital in 2018 than was invested in the prior 12 months, and 94 percent of those surveyed expect industry assets under management to increase in 2018. Notably, none of the fund managers surveyed expected the number of assets to decrease.

This strong investor appetite is evidenced by recent fund raises. For example, KKR's third dedicated infrastructure fund reportedly exceeded its $5 billion target in this year's first quarter, Brookfield Asset Management was able to close its inaugural infrastructure fund at the beginning of 2018 with an aggregate equity commitment of approximately $885 million (well in excess of its $700 million target), and Stonepeak Infrastructure Partners' latest fund surpassed its $7 billion hard cap in May after receiving $7.2 billion in commitments. These raises will serve to enlarge the hundreds of billions of dry powder already marked for infrastructure investment. And what will these resources be targeting? To the White House's dismay, it is anticipated that a very small percentage of infrastructure fund monies will be directed to public assets, such as toll roads and bridges, as Wall Street has typically shied away from this asset class because of the long project timelines and political hurdles that must be faced to complete the transactions. Rather, most of these funds are expected to be targeted to infrastructure projects that are already privately-owned, thereby increasing competition for these private assets. So where does that leave prospects for an infusion of private capital to save our crumbling and overcrowded highways and bridges?

Transportation Infrastructure: Public Highways, Transit and Airports

In the U.S., unlike many other countries that have centralized control over public infrastructure, states and local governments are largely responsible for decisions on infrastructure financing. The limited federal control – when combined with the robustness of the municipal bond market (a relatively cheap funding alternative), the uncertainties of state and local processes and the threat of shifting political tides – may steer PE funds away from competing for highway, transit and airport investment opportunities. These obstacles are troubling, but not catastrophic. Enactment of policies and legislation that incentivize private investment in public assets, through P3s or otherwise, could quickly overcome much of the existing reluctance. Legislative reform could trigger serious interest among PE firms and a commensurate boost in P3 procurements initiated by state agencies and local governments desperate for new transportation projects.

Perhaps most intriguing to PE funds in the short term are the administration's proposals in the Legislative Outline relating to brownfield assets. Among the more notable are the potential for sizeable brownfield federal assets to be candidates for privatization (e.g., Reagan National Airport and Dulles International Airport). Proposed modification of the Federal Aviation Administration's airport privatization program applicable to state- and locally-owned airports and the proposed streamlining of the environmental review process could ease regulatory and financing hurdles, making these assets more attractive to PE firms.

On the greenfield side, a sizable chunk of recent PE interest in new public infrastructure comes from firms with some ability to manage construction risks. Even so, state agencies and local governments are sometimes highly prescriptive in their project requirements, limiting the value the private sector may bring to P3 greenfield projects. Relaxation of regimented procurement processes and encouragement of "alternative technical concepts" and other private-sector innovations set the stage for a win-win: the public stands to benefit from higher quality, life-cycle oriented projects, and procurements become more attractive to a larger segment of the P3 community and its massive amounts of capital earmarked for infrastructure investment.

The merits, risks and consequences of these brownfield and greenfield initiatives continue to be highly debated, on both financial and policy grounds. Opponents to the measures claim that privatization will result in higher costs for the traveling public through a combination of taxes and user fees and that the proposed streamlining of the permit and approval processes will allow projects to move forward without the necessary protections for clean air, clean water, and other environmental elements.


The need for major improvements in public infrastructure is real and will only accelerate as legislative action continues to be deferred. With its Legislative Outline, the administration made clear that attracting private investment should be a key focus of the government's infrastructure plan. While private equity stands poised for deployment through P3s in both the brownfield and greenfield contexts, absent the adoption of necessary incentives and the injection of a meaningful stream of federal money, states and localities will remain hamstrung in unleashing the full potential P3s offer as viable and useful tools in solving the infrastructure crisis.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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