Too Small to Move the Needle? Not So Fast, Managers Argue

Infrastructure projects are downsizing in scale, leading boutique managers to create alternative financing options and to bundle projects into funds.

The idea is to facilitate participation by major institutions, which often have high minimum thresholds to put money to work and rarely have the resources to vet myriad individual projects. 

“We’re on the cusp of changes in infrastructure, whether in energy or water. Under the old model, a municipality would build a waste water treatment plant and then build miles of pipes to get water where it’s needed,” said Rob Day, partner at private equity firm Spring Lane Capital, which finances projects in the energy, water, food, and waste industries. “Now a tractor-trailer size plant can be put exactly where it’s needed,” Day told Institutional Investor by phone.  

But the challenge is structure and financing.

Spring Lane’s technique is to bundle deals into a larger fund, creating a diversified pool of early stage investments and offering institutions a familiar vehicle. It’s a wholesale rethinking of infrastructure, which has historically been readily financed by banks and institutional investors on a one-off basis via big checks for stable 30-year projects.

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Hannon Armstrong — a provider of capital and services to sustainable infrastructure markets — gives institutional investors another route to exposure: its stock. Listed on the New York Stock Exchange, Hannon Armstrong holds upwards of 175 assets on its balance sheet and issues asset-back securities as another access option.

The company recently helped finance a revamp of the U.S. Marine Corps’ recruit depot on Parris Island, for example. The project included solar photovoltaic generation assets, a battery energy storage system, and a microgrid control system.

“This is distributed infrastructure that is reducing climate changing emissions, while allowing the base to adapt to more severe weather events," explained Jeff Eckel, Hannon Armstrong’s CEO. “The Marine Corps base can operate even in power outages. It’s the kind of thing you can’t do in a centralized model. By definition, it has to be decentralized if the lights are to stay on when the transmission and distribution system is affected by weather,” Eckel added. 

Distributed infrastructure is a new asset class for many institutions, sharing characteristics with growth-equity investments, which are small and untested, as well as other real assets. “We’re creating a financial instrument to own multiple projects, so that looks like real assets. Then you have to structure these deals to get rid of the risk, putting in place things to make sure projects will create revenues and profits. That looks like infrastructure,” says Day. “This is at the intersection of all of these asset classes.”

Once distributed infrastructure projects are proven to work, Wall Street will jump in and provide cheaper capital,  Day argued. In the meantime, however, investors can get attractive returns because capital is scarce for many projects, simply because big institutions aren’t familiar with them or think they’re too small individually.

“It’s a pretty ripe time for a lot of different investment models to emerge across infrastructure, real assets, and venture capital,” Day said.