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Biden’s new infrastructure plan has a strong message for PE

26 November 2021

First, the good news. The $1.2 trillion U.S. Infrastructure Investment and Jobs Act is now law. Billions of dollars will be flowing to roads, bridges and clean energy. The bad news? No one is 100 percent sure what the Act means for private equity.

While the run-up to the deal promised investment opportunities via public-private partnerships (the so-called ‘3Ps’), today there is still much uncertainty and little clarity about next steps. Despite the lack of details however, the new law sets a direction for how investors might deploy the mountain of dry powder on the sidelines – and that is a cause for optimism.

The bill that President Joe Biden signed into law is one of the largest infrastructure packages in U.S. history, including $550 billion in new investments for bridges, airports, waterways and roads. American banks are already preparing to help local governments issue municipal bonds and finance projects.

Public-private partnerships

Unfortunately, the Act leaves Private Equity (PE) a bit in limbo because it fails to offer concrete guidance on public-private partnerships. But it certainly leaves opportunity available for 3Ps and creates a framework that might help PE finance infrastructure. For example, it boosted the U.S. Department of Transportation’s Transportation Infrastructure Finance and Innovation initiative, which facilitates public-private partnerships for transit projects, making it easier for private capital to underwrite not only roads but airports, transit-oriented housing and other developments. Smart PE managers will be looking for additional investment opportunities, especially via infrastructure-focused funds, in the coming months.

But even before this law passed, big players like Blackstone were lobbying lawmakers for structural changes to enhance these partnerships. They are now reportedly seeking to strengthen regulations with the assistance of the Global Infrastructure Investor Association to make sure the new law encourages more public-private partnerships. The feds are likely to spell out more details on that in the near future.

Unknowns aside, the new plan is crystal clear in its ESG-focused direction and the opportunities it offers to fund managers – so long as they’re ESG-ready.

ESG bonanza

The Act includes a $108 billion investment for the nation’s electricity grid, with funds for environmentally friendly smart-grid technology. While many clean energy programs got cut from the original bill, the law also earmarks $7.5 billion for the nation’s first network of electric-vehicle chargers on highways, $5 billion for zero-emission buses – including electric school buses – and more than $50 billion for water infrastructure improvements including clean-up measures for areas polluted by industry.

The investment community has responded by making clean energy and climate change a priority as interest in ESG goals has grown. The natural disasters of the past year and the coronavirus pandemic have also heightened investor interest in channelling funds toward these types of investments.

Identifying ESG opportunities amid significant public spending, assessing whether ESG milestones are met, guarding against greenwashing and other tasks will be more important than ever in the next year.

Get on board

Managers are now in a position to either jump on 3Ps and the ESG train they’ve been anticipating or miss out on a big chunk of the boom that’s coming.

The question that private equity managers should be asking themselves at this moment is, are they ready? Do they possess the in-house expertise or external partners to evaluate public-private partnerships and ESG objectives, look for gaps and opportunities, and act on them?

Many in private equity have been on the fence about ESG investing and have done little to prepare. Some managers don’t have ESG protocols in place at all. They still believe that they won’t lose out on opportunities. But these folks are behind the curve. Ignoring ESG is not an option anymore if you want to stay competitive. Lacking ESG models will certainly make it harder to finance public projects.

Meanwhile, implementing ESG protocols correctly is harder than people think. It involves tracking mechanisms, the discipline of implementing processes to capture the data requirements and the assessments. It requires investment and also expertise to kickstart an ESG program. It takes time.

The message is clear

A new infrastructure law that envisions a greater though undefined role for 3Ps and sets a clear direction toward ESG-focused projects is an opportunity for PE. Even though there is a long road toward the definition of public-private partnerships and maybe even some reluctance among public stakeholders to engage with managers, there is no question that this long-term project to boost American infrastructure is going to need billions of PE’s stored dry powder.

The funds that have ESG plans in place now – or put them in place quickly enough to take advantage of the growing demand for ESG investing – are the funds that will come out on top as the Act’s investments continue. Private equity firms who have been resisting ESG strategies will have to change quickly to take advantage of these new opportunities.

To find out more about Apex Group’s ESG Reporting and Advisory services, contact the team at contact@apexgroup.com

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