One bill down, investors eye potential of Build Back Better

Infrastructure managers like a lot of what's in the new $1.2 trillion infrastructure law, but many of them love how the Build Back Better Act could boost renewable energy projects.

The nearly $2 trillion Build Back Better Act, at least in the form passed Nov. 19 by the House of Representatives, could "produce more upside for U.S. GDP and jobs over the immediate term," said David Scaysbrook, co-founder and managing partner at $2.5 billion money manager Quinbrook Infrastructure Partners Group, City of Gold Coast, Australia. That's because the bill now before the Senate offers near-term investment stimulus that should entice private capital to accelerate the construction of more clean power plants, invest in new U.S. manufacturing facilities, establish a U.S. hydrogen sector and create electric vehicle infrastructure, among other projects, Mr. Scaysbrook said.

The Build Back Better Act, if passed, would be " my favorite bill ever," said Reuben Munger, Boulder, Colo.-based managing partner of $2.5 billion infrastructure manager Vision Ridge Partners.

While the infrastructure law is more general and more sector-focused on such areas as broadband, transportation and energy transmission, the Build Back Better Act is more targeted, supporting such technologies as biofuels and solar power, and would increase infrastructure investment opportunities, said Adam Bernstein, a Boston-based managing director at $1.5 billion infrastructure money manager North Sky Capital LLC.

While the Build Back Better Act still faces heated debate in the Senate, the Infrastructure Investment and Jobs Act signed into law by President Joe Biden on Nov. 15 has the approval of managers who said it would greatly increase investment opportunities in the U.S., which has lagged Europe in deals for infrastructure managers. The new law includes $550 billion for everything from roads and bridges to electric vehicle infrastructure.

"We feel the impacts (from the law) will be positive for private capital mostly due to a healthy sentiment boost and this legislation making U.S. infrastructure renewal a top policy priority for the first time," Mr. Scaysbrook said.

The new infrastructure law's emphasis on hydrogen and electric vehicles "reflects this administration's plan for the ambitious evolution of the U.S. economy of tomorrow," he said. Meanwhile, nuclear, carbon capture and transmission network initiatives included in the law "are aimed at today's problems that pose roadblocks to achieving that ambition," he said.

"I'm optimistic on the outlook for private investments in U.S. infrastructure" following the passage of the Infrastructure Investment and Jobs Act, said Tom Osborne, New York-based executive director on the infrastructure team of IFM Investors with A$179 billion ($128.4 billion) in total assets under management."The bill doesn't go as far as it could to enable public-private partnerships, but it does contain some useful provisions."

What the new law does include are provisions that facilitate investment by infrastructure managers by way of private-public partnerships, Mr. Osborne said. For example, the law doubles the amount of tax-exempt private activity bonds that can be issued to finance privately developed and operated highway or surface freight transfer facilities to $30 billion from $15 billion. It also expands the use of these bonds to include broadband and carbon-capture projects.

These bonds provide low-cost debt including in private-public partnerships to finance construction of new facilities, Mr. Osborne said.

Karl Kuchel, New York-based senior managing director and head of infrastructure at Macquarie Asset Management, Americas, called the legislation "a welcome step forward" that will begin to address historic underinvestment in infrastructure in the U.S.

The increased federal funding creates a moment to re-examine the possibilities of using public-private partnerships for such projects as accelerating decarbonization of regulated utilities, improving port terminal productivity and expanding broadband access, Mr. Kuchel said.

Macquarie has $142.8 billion in infrastructure assets under management worldwide.

Quinbrook's Mr. Scaysbrook agreed that it's now all about implementation of the law at the state and local levels through "multiple public agencies working in tandem with private capital, which is where some skepticism remains," he said.

Keith Derman, a New York-based partner and co-head of $282 billion Ares Management Corp.'s infrastructure and power business, said he thinks the signed infrastructure law is a "landmark piece of legislation that we believe will encourage additional capital flows into the infrastructure industry."

Ares executives expect the law will promote continued investment in the renewable energy sector by upgrading the electricity grid as well as adding more dollars around electric vehicle infrastructure, Mr. Derman said.

Gordon Bajnai, a London-based partner and head of global infrastructure at Campbell Lutyens, an alternative investment placement agent and secondary market advisory firm, said the energy transition and decarbonization are big winners from the infrastructure law, which could drive allocations into the renewable infrastructure sector.

"The next concern is that public funding should not crowd out private capital, but multiply it instead," Mr. Bajnai said.

Investors are attracted to the asset class as an inflation hedge. However, infrastructure's performance has been "resilient," producing a 13.4% internal rate of return for the year ended March 31, according to Preqin's third-quarter 2021 infrastructure report. Overall, infrastructure funds raised a combined $38 billion in the third quarter, the third highest fundraising quarter in the past six years, Preqin said. However, this was after a slow fundraising year in 2020, when infrastructure funds raised a total of $54.6 billion, 17.6% less than in 2019, Preqin data shows.

Despite the law's November signing, managers said they don't anticipate the increased funding to create additional infrastructure investment projects for at least a year or more. The reason is that the additional money is being dispersed from the federal government to state and local governments. The money is not only being distributed to the states and local governments through existing structures such as the Clean Water State Revolving Fund, which provides communities low-cost financing for water quality infrastructure projects, but also through new mechanisms that need to be created for the projects now being funded by the infrastructure law such as electric vehicle infrastructure, North Sky's Mr. Bernstein said.

"The actual opportunity for an infrastructure investor, by and large, won't materialize for a year plus," Mr. Bernstein said.

Mr. Munger at Vision Ridge Partners said his team is "very enthusiastic about the infrastructure law" because it will smooth over road bumps that had been in the way of adoption of renewable initiatives.

One example, Mr. Munger said, is the creation of a federal Grid Deployment Authority to finance and encourage the development of high-voltage transmission lines, giving U.S. Energy Department final authority to create national transmission corridors for clean electricity initiatives, Mr. Munger said. A few years ago, many attempts to build out the transmission lines needed to transport energy produced by renewable energy were stopped at the state and local levels, he said.