PPPs a 'wild card' in U.S.

Infrastructure managers have been wishing for public-private partnerships to catch on in the U.S. for so long that most no longer think of them as a vibrant investment opportunity.

That's why when the IRS released a regulation that made it easier for infrastructure projects to be financed with public-private partnerships, it was little noticed by the infrastructure management industry.

“We have an existing portfolio of PPP (public-private partnership) assets in our Australian fund, but we currently don't see many such opportunities with attractive risk and reward balances for our equity investments,” said Julio Garcia, the New York-based head of infrastructure, North America for infrastructure manager IFM Investors Pty. Ltd. “There are also limited numbers of PPP opportunities, they generally feature a highly leveraged capital structure, high bid costs and have long development timelines.”

Kathryn Leaf Wilmes, a San Francisco-based partner and head of the infrastructure and real assets business of alternative investment money manager Pantheon Ventures LLP called public-private partnerships “a wild card in terms of (U.S.)deal flow.”

“There's potential in terms of size, but the market has been slow to develop,” Ms. Wilmes said.

Between 2012 and 2015, there were 20 public-private partnership transactions that reached a financial close, “but the market still hasn't attained its full potential,” she said.

That is not to say that infrastructure managers were totally oblivious to the IRS rule changes.

Wilson Magee, New York-based director of money manager Franklin Templeton Institutional LLC's global real estate and infrastructure securities team, expects the new IRS regulation could help to increase the number of public-private partnership transactions in the water and wastewater sector.

The U.S. Environmental Protection Agency has estimated that there is roughly $400 billion of water and wastewater investment needed nationally, with $275 billion in wastewater alone, he noted.

“That's a good bit of money for municipal water districts that tend to be in charge of those assets,” Mr. Magee said.

He expects those districts to turn to private capital to fill in the gaps.

“We do believe that PPPs are a compelling procurement option for infrastructure development, and lending opportunities for such projects is of interest,” IFM's Mr. Garcia said.

What's more, institutional investors would love to see their money spent on public-private partnerships, or P3 projects, Ms. Wilmes said.

“The sentiment among many (limited partners) is that they would love the U.S. P3 market to open up. It is a strategy that fits the bill for infrastructure investing,” she said. “It really does have the risk/return profile that investors are looking for when they set up an allocation to the asset class.”

But it will take a lot more successful public-private partnerships before deal flow will increase, Ms. Wilmes said.

“We believe that deal flow will tick up,” she said. “As there are more examples of successful PPP projects, it will become easier for local governments and agencies to push new projects and get local support.”

Ms. Wilmes added: “Success will help unlock a deeper opportunity set over the long term.”