Major deals hinting at rise of infrastructure in U.S.

Investment professionals believe infrastructure deals in the U.S. could finally be gaining ground after years of fits and starts, pushed along by stressed and distressed infrastructure assets coming to market.

That would signal a major shift in philosophy, as most infrastructure investments up to now have been made outside the U.S. Unlike most other countries, U.S. government entities have financed infrastructure projects with municipal bonds.

“The U.S. market is evolving ... and we are optimistic that the (U.S. infrastructure) market will continue to grow,” said Marietta Moshiashvili, managing director and group head of energy and infrastructure private markets at TIAA-CREF Asset Management, New York.

This year, TIAA-CREF has seen more sales of infrastructure projects weighed down by too much leverage or overly optimistic usage projections, she said.

“We will see more,” Ms. Moshiashvili added.

Nobody expects a flood of deals to suddenly materialize, although the growing number of states entertaining legislation to allow private investment in infrastructure is bolstering optimism, as is President Barack Obama's recently announced clean energy agenda.

But U.S. infrastructure deals are picking up.

In June, Macquarie Group and Ferrovial SA put the Chicago Skyway up for sale. Also in June, the $8.25 billion Global Infrastructure Partners II fund, run by New York-based Global Infrastructure Partners, agreed to acquire a 50% interest in Hess Corp.'s Hess Infrastructure Partners for $2.7 billion. Hess owns midstream crude oil and gas infrastructure assets primarily in the Bakken Shale, on the border between Montana and North Dakota and extending into Canada.

In May, a group that includes Meridiam Infrastructure, construction company Skanska USA and Vantage Airport Group sealed a deal to rebuild New York's La Guardia Airport main terminal, a $3.6 billion project.

Also in May, IFM Investors closed the largest transaction so far this year when it purchased the bankrupt Indiana Toll Road Concession Co., which operated the Indiana Toll Road, for $5.7 billion, funded with $3.2 billion of equity and $2.5 billion of debt.

Macquarie and Ferrovial decided to sell their right to operate the Chicago Skyway after seeing how much IFM paid for the Indiana Toll Road, industry insiders say. Macquarie Group, based in Sydney, led the consortium that had owned the Indiana Toll Road concession.

Including the toll road, Melbourne, Australia-based IFM — owned by 30 pension funds — has completed two multibillion-dollar U.S. infrastructure deals in the past 12 months, investing more than $5 billion in equity.

The U.S. has a long history of public infrastructure financing with municipal bonds, compared with other countries. More recently, the U.S. market has been opening up to private capital to fund infrastructure projects but “the rate of growth has been uneven,” said Michael Kulper, executive director-infrastructure in IFM's New York office.

However, the Indiana Toll Road deal could herald a change. “A transaction of this scale is a marker. It's the largest single infrastructure transaction in the U.S. that I am aware of,” Mr. Kulper said.

U.S. infrastructure investment is divided into transportation-related projects and energy development, said TIAA-CREF's Ms. Moshiashvili.

Most of the action now is from the energy infrastructure sector.

For example, the infrastructure investment consortium formed in April by the $191.4 billion California State Teachers' Retirement System, West Sacramento, and money manager APG Asset Management NV, Amsterdam, is expected initially to invest about $500 million in North American energy infrastructure.

And last year, IFM invested roughly $1.3 billion in Freeport LNG Development LP's natural gas liquefaction and liquefied natural gas loading facility on Quintana Island near Freeport, Texas.

Another bright spot is the president's renewable energy initiative, which could boost investment in renewable projects, Ms. Moshiashvili said.

In June, the Obama administration announced a clean-energy investment program that includes $4 billion in commitments from the private sector, including more than $1 billion from institutional investors.

“The new standards have the potential to encourage many opportunities for incremental investment in U.S. energy infrastructure in the renewables and electric and (natural) gas transmission sectors, among others,” IFM's Mr. Kulper said.

Investors are bullish on North America.

So far this year, seven funds raised a total of $12 billion as of Aug. 4, compared with seven funds that raised a combined $9.3 billion to invest in Europe, four funds that raised $2.4 billion for Asia and three funds with a total of $3 billion to invest elsewhere in the world, data from London-based alternatives investment research firm Preqin show.

Three of the five largest infrastructure funds raised in the second quarter will invest in the U.S. — I Squared Capital's $3 billion ISQ Global Infrastructure Fund; MC-Seamax Management Ltd.'s $300 million MC-Seamax Shipping Opportunities Fund; and CarVal Investors' $252 million CVI Shipping Opportunities Fund, according to Preqin data.

In 2013, only one of the 10 largest infrastructure funds closing that year had North America investment plans.

Even so, investors do not view all infrastructure investment in the same way.

“Our view is that there are desirable opportunities in the U.S., but like many other asset classes, you need to be more selective,” said Bob Jacksha, chief investment officer for the New Mexico Educational Retirement Board, in an e-mail. In July, the $11.4 billion Santa Fe-based pension fund committed $50 million to Stonepeak Infrastructure Fund II to invest in North America.

Because there is a lot of competition for larger infrastructure investments, there could be more return potential in smaller projects, Mr. Jacksha said.

Darin Turner, portfolio manager for Atlanta-based Invesco Ltd., said in a recent blog post that executives at his firm expect U.S. infrastructure investing to rise. Investors are being drawn to it for competitive returns and current yield, he said.

For the 10 years ended June 30, the Dow Jones Brookfield Global Infrastructure index produced a 10.4% annualized return, compared with the MSCI World index return of 6.4%, Mr. Turner wrote.