Private equity firms have a big opportunity in infrastructure financing.
This is for a couple reasons.
- It’s easier for private equity borrow money at favourable rates, in part because investing in bridges and roads is not considered a risky proposition.
- A giant source of competition has largely exited the market. Banks aren’t allowed to do as much infrastructure investment anymore, thanks to post-financial crises regulations.
These insights are from a S&P Capital IQ report tied to Infrastructure Week, a multi-city confab stretching from the nation’s capital all the way to one of this reporter’s former hometowns, in New Windsor, NY.
Banks like Goldman Sachs, Morgan Stanley, UBS and JP Morgan have been getting pushed out of deals by private equity firms like KKR and Blackstone.
This comes as the US has growing needs to improve bridges and road.
The S&P report says it will take $US3.6 trillion in infrastructure projects just to bring United States’ to “a state of good repair.”
That’s just America (where infrastructure spending has been on a lull). Globally, it is expected trillions more will be spent on roadways, bridges, power plants and other infrastructure.
It’s a similar line of thinking that got PE firms spending big on real estate transactions.
Infrastructure may offer a lesser average rate of return, but it tends to be a more secure investment that is less likely to suffer if the economy suffers broader losses.
The graphic (from the S&P report) highlights potential winners from the shift in infrastructure spending; the losers, according to the report: all banks. The lone ‘winner’ in the banking sector is Lazard — which has relationships with sovereign funds around the world that will also back infrastructure deals, according to the report.