Most of today’s infrastructure was built in the mid-20th-century, for another time, when cities looked and operated a lot differently.
And even though the roads and railways were created with a growing population in mind, they weren’t necessarily built for the boom the country experienced.
The United States population has nearly doubled since 1956, when President Eisenhower first signed the Federal-Aid Highway Act. As of this year, there are almost 330 million people living in the US—and more than 81% of them live in urban areas.
As a result, cities and their residents are facing the consequences of an antiquated infrastructure system: aging highways, bridges nearing dilapidation, and airports overloaded by thousands of flights a day, to name a few.
Last year, the American Society of Civil Engineers gave the US infrastructure a D+ rating based on sectors like energy, rail, roads, schools, transit and more. The group also estimated the cost to make the necessary improvements would be close to $4.6 trillion.
D+
US infrastructure rating, according to the ASCE
$3.8T
infrastructure gap by 2040, according to BoAML
In a different study, Bank of America Merrill Lynch projected the US will face a $3.8 trillion infrastructure gap by 2040. They also estimated that in a little more than ten years, the public infrastructure market will double in value to $8 trillion.
As the sector gains more value, and public finances continue to be stretched across other initiatives, private investors will have the opportunity to play a bigger part in financing public infrastructure.
Although public-private partnerships are nothing new, they might be key in solving the infrastructure gap. These types of partnerships lift the financial burden off the government to provide funding but, in exchange, private enterprises will often collect toll and usage fees.
There are several benefits that make infrastructure an alluring investment for PE firms, including:
- By nature, infrastructure deals are more stable than other asset classes because the sector isn't as dependent upon market volatility.
- Infrastructure investments can provide steady cash flows over time. For example, utilities contracts can end up spanning decades.
- Certain infrastructure companies have monopolies over their respective market, which means in the event of an economic downturn, they may be less affected.
But, if these benefits have largely been inherent infrastructure investments, why has fundraising only recently surged? The answer lies within the larger private market landscape. The companies PE firms would normally buyout have sky-high valuations and a good amount of risk associated with them.
Additionally, the need for updated infrastructure has become more pressing in the last few years—and with an infrastructure funding gap looming nonetheless.
This year alone, 13 infrastructure funds raised a combined $27.8 billion—likely to surpass last year’s total of just over $31 billion. Keep in mind, those numbers don’t include this quarter. Which, if enough funds close, could end up pushing the already high amount past the previous largest threshold set in 2016—a staggering $40 billion.
$7.4B
Closed fund - KKR Global Infrastructure Investors III
$7.2B
Closed fund - Stonepeak Infrastructure Fund III
Private equity isn’t the only sector pouring capital into infrastructure improvements though. While PE is funding the foundational physical layer (i.e. widening roads), venture capital is funding an overlaying ‘application layer’ of technology.
VC-backed companies in smart infrastructure are making the most out of current resources—no matter how flawed they may be—using the latest technology innovations. Together, VC and PE are acting as architects of smarter cities in guiding urban ecosystems to a more sustainable future.
For private equity firms, navigating partnerships with the public sector may be the biggest challenge of all.
In a recent interview, we asked Alex Darden, president of EQT Partners Inc. and head of US infrastructure, about the future of infrastructure in North America and the role PE would play.
To read the full Q&A, download our 4Q Private Market PlayBook, which features the article, as well as market trends and analyst insights.
