Infrastructure Finance: How Private Capital Helps Build Tomorrow’s World
The past 10 to 15 years have seen a marked shift in the way that infrastructure projects around the world are financed. In the wake of the financial crisis of 2008-09, the role played by banks in supporting major infrastructure developments has receded and been replaced to a significant extent by private credit. This typically involves institutional investors, working alone or in groups, to provide longer-term debt financing.
The success of private credit in supporting infrastructure has been based on the long-term approach favored by lenders – an ideal fit for infrastructure projects that often take many years, if not decades to come to fruition – and the willingness of private credit providers to work closely with borrowers to understand their needs and offer bespoke finance solutions.
What is infrastructure finance?
Infrastructure finance is typically in one of two forms: an infrastructure corporate financing, or a project finance. Infrastructure corporate financing is relevant for companies with a proven track record and very long-term concessions/leases or outright ownership of assets, whereas project finance is typically used when large capital expenditures are required upfront, the project has a limited history of generating cash flows or the concession/lease terminates within the lifetime of the assets.
Across the infrastructure market capital borrowed, or equity raised, is typically linked specifically to the project rather than its sponsors – the businesses, governmental bodies or consortiums responsible for the subject infrastructure. As a result, the financing is normally repaid through the cash flow that the infrastructure assets generate over time.
Typical subject assets for infrastructure finance include ports and shipping terminals, airports, roads, bridges, tunnels, railway and bus systems, ferries, digital infrastructure, PPPs, stadiums and water/waste systems. “Our mandate in the infrastructure space is broad and covers anything that moves people, goods, or services,” explains Federico Chiaramonte, vice president for infrastructure at Pricoa Private Capital (PPC). “In a nutshell, we will operate across four verticals: transportation, social infrastructure, digital infrastructure, and water and waste treatment.”
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Our Four Verticals of Infrastructure
Changes and trends in infrastructure finance since the financial crisis
The capital limits and other regulatory constraints imposed on banks around the world in the wake of the global financial crisis have played a major role in changes in the infrastructure finance landscape. Bill Pappas, managing director for infrastructure at PPC, explains: “Private credit’s involvement in infrastructure has really emerged in a meaningful way over the past 10 to 12 years. There was a clear shift when banks started to pull away a bit from being the traditional source of financing, and that opened up the ability for private capital to step in and address a real need.”
Perhaps the most important factor behind the growth of private credit has been the close fit between the long-term nature of private credit lending and the way infrastructure projects are structured, short-term financing is just one component of an overall debt financing solution to address the full range of capital needs for these projects.
In terms of more recent developments, Chiaramonte adds: “Infrastructure is an asset class that is constantly evolving. We've seen a lot of interest from typical infrastructure players moving into new sectors, for example in digital infrastructure – we are looking to invest in data centres, fibre networks, and tower companies. Looking at developing markets in particular, we've seen that connectivity is the key for countries and economies to emerge.”
Private capital and bank finance: can they work together?
“Banks are still an important provider of capital in the infrastructure world,” says Daryl Skinner, vice president for infrastructure at PPC. “But what we've been able to do is work alongside them to offer something different: we provide long-term fixed-rate finance predominantly, but also floating-rate debt over a longer tenor, where required, which the banks sometimes can't do. But rather than replacing banks, it’s about finding the right areas for certain pockets of capital – and our capital suits infrastructure very well.”
“Banks are primarily focused on the shorter-term part of the capital structure – two, three, four, or five years, whereas we are working with institutional debt and long-term private placement debt, where maturities are anywhere from seven years to 10, 20, or even 30 years in some cases. The asset profile really supports taking a long-term view.”
Bill Pappas, Managing Director
PPC provides capital solutions to businesses that range in size from the equivalent of USD10-15 million in EBITDA (earnings before interest, tax, depreciation, and amortization) to companies that have EBITDA running into the hundreds of millions or even billions of dollars.
The importance of long-term partnerships
The most successful private credit providers recognize how crucial it is to establish enduring relationships with clients and sponsors. The often bespoke nature of infrastructure finance agreements means it is vital to understand exactly how each project/company operates and how capital requirements are likely to evolve over the long term.
“Our approach usually involves a detailed dialogue early in the process, so we can assess borrowers’ needs and develop tailored solutions. At PPC, we take great care to understand each business and the jurisdictions in which they operate: we have sectorial expertise as well as local knowledge, with ‘boots on the ground’ in all our key markets.”
Federico Chiaramonte, Vice President
Pappas adds: “The support that these custom-tailored private finance deals have provided has endured through business cycles, and through various crises. Post-COVID, for example, these assets have emerged in very good shape, and the flexibility we provide means they can withstand difficult situations: it allows them to do what is necessary to address the challenges they face.”
Looking to the future, the role of private credit looks set to become even more important. “It has become a critical part of the infrastructure investment landscape, and that is not going to change anytime soon,” explains Skinner. “We provide something unique that is somewhere between bank debt and a public bond. In addition, many of the businesses that we work with have found us to be critical, trusted partners.”