This Could Redefine Infrastructure Investing in the U.S.

The United States has traditionally lagged behind other countries when it comes to private investment in infrastructure, but the Biden administration is trying to change that.

(Ting Shen/Bloomberg)

(Ting Shen/Bloomberg)

Historically, road and bridge construction in the U.S. has been led by the government, at either the federal or state level. But that trend is likely to shift as the Biden administration encourages private capital to enter the infrastructure investing space.

According to the latest report by the global infrastructure provider IFM, private-public partnerships are reshaping the future of infrastructure investment. In 2021, the Biden administration introduced the $1.2 trillion Infrastructure Investment and Jobs Act, which authorized $550 billion in new infrastructure spending over the next five years. The act is so large and comprehensive that it provides the private sector with “many opportunities to participate in the buildout of this infrastructure,” according to the IFM report.

Long-term equity providers, such as pension plans, are “ideally placed to partner with governments” on such projects, according to IFM’s global head of infrastructure, Kyle Mangini. In a PPP agreement, private investors work with government agencies to fund, construct, and maintain infrastructure plans. The long-term nature of such projects tends to align with the investment horizon favored by most pension plans, according to the report.

IFM noted that the act would help bridge the gap between the U.S. and Europe when it comes to private capital investment in infrastructure. “Private investment in U.S. public infrastructure has lagged behind other countries,” the report said. But the act has introduced new measures to encourage government agencies to “consider alternative infrastructure procurement models” and “elevate the profile of PPPs.”

Infrastructure investors were already feeling the impact of the act by the end of 2021. In an investor survey conducted by Preqin in November 2021, 70 percent of investors said that their infrastructure assets were more expensive than they had been 12 months earlier. But they remain committed to the asset class, with 87 percent of the survey participants saying that they would continue to invest in infrastructure in 2022. According to Preqin’s projections, infrastructure will attract a total of $1.87 trillion from private investors by 2026, surpassing real estate as the second-largest real asset class.

Besides the PPP initiative from the government, the attractive risk and return profile of infrastructure assets is another reason why investors are drawn to the asset class. In 2021, investors in the U.S. earned an average of 14 percent from their infrastructure investments, which had a Sharpe ratio of 1.43, according to a March report by Boston Consulting Group. For pension plans in North America, infrastructure in 2021 generated an average of 14.4 percent return over a one-year horizon and 12 percent over a three-year horizon, according to BCG.

“Clearly, infrastructure’s resilience to economic upheaval has been felt, and this may feed additional allocations from current investors or tempt new institutions into the asset class,” the Preqin report said. Infrastructure investments have generally been “positively correlated to inflation,” which can protect investors from the macroeconomic uncertainties of 2022, according to the IFM report. “This typically is driven by a combination of factors, including inflation-linked rate-setting mechanisms and GDP-linkage,” the IFM report added.