US infrastructure bill: Where are the secular opportunities?
US Senate majority leader Chuck Schumer (pictured) announced on Thursday that a procedural floor vote in the Senate on President Biden's USD1.2 trillion bipartisan infrastructure bill will take place next Wednesday. As Democrats are also asked to back a larger USD3.5 trillion budget blueprint, what will the much-debated upcoming US infrastructure bill – of which nearly USD600 billion would be new spending – mean for PE infrastructure mandates in the country?
“The most exciting thing happening now is that the state and federal policy is transitioning from supporting clean electrons to comprehensive zero emission targets,” Adam Bernstein, Boston-based partner at middle market infrastructure-focused private equity firm North Sky Capital told Private Equity Wire.
“For the past ten years, renewable portfolio standards and tax credits at the state federal level incentivise the growth of renewable electricity, which was very successful. The use of solar energy in the US increased greatly,” explained Bernstein.
He continued: “What’s happening now is a more holistic shift toward pressing issues like waste management, transportation; the closed loop economy, in order to really meet the emissions target above and beyond renewable electricity.”
If passed, the bi-partisan bill – which is currently a USD1.2 trillion legislation draft – could mean a half a trillion-dollar boost channeled into roads, bridges, ports, airports, and other infrastructure areas in the US.
“For our sector that would mean a lot of support for things like electric vehicles and electric vehicle charging stations. Right now that bipartisan agreement is being turned into actual legislative text to be voted on,” commented Bernstein.
“From our perspective in infrastructure, [the combined proposed legislature] would add things like additional tax credits, emissions regulations, and potentially national emissions legislation, which comprehensively supports the US to reach that zero target; as opposed to the more targeted transportation agreement in the bipartisan bill,” added Bernstein: “But they are both supportive of our sector. One is larger than the other and would address energy generation more directly, as opposed to things like vehicle charging.”
US-focused infrastructure deals have indeed been picking up lately. Swedish investment firm EQT's infrastructure division announced a green energy-focused deal in the US this week, as it agreed to acquire Covanta, a New Jersey-based business that focuses on sustainable waste processing and advancing transitions to a circular economy in North America. The deal follows on from EQT’s previous announcement on 3 July that it is buying renewable power generator Cypress Creek Renewables.
Bernstein says his firm will capitalise on favourable provisions in either bill, but he is reluctant to comment on the potential outcome of the infrastructure draft bill as North Sky’s investment strategy solely involves analysing existing legislation.
“For underwriting purposes, we don’t guess or hope for things to be passed in the future. At the moment our deal pipeline is supported by existing legislation; whether that’s federal tax credits, or renewable gas incentives,” he commented, and added that any policies which expand and support beyond electricity into broader environmental issues – such as sustainable wasted water systems – would be of particular benefit to his firm’s investment strategy.
According to Manoj Patel, Chicago-based co-head of Global Infrastructure Securities at German asset management company DWS Group – formerly part of Deutsche Bank until 2018 – there are three main opportunities from an investment standpoint.
“The first one being an increased focus toward renewable energy; the second is the move toward electrification and the infrastructure associated with that, which is primarily electric credits, transmission & distribution; and the third is on the communication front,” he commented.
The bipartisan bill is not only meant to sponsor the rebuilding of traditional infrastructure sectors like roads, bridges and similar infrastructure projects; it would also mean increasing broadband access to rural parts of the US that are currently without high-speed internet.
“It’s about making sure that parts of the country that don’t have access to broadband do get access, so that’s where the secular growth opportunities are,” said Patel.
“To the extent that companies are beneficiaries of either incentives that are part of the bill or there’s a smoother regulatory process for things to get done, that’s one aspect of it. [The latter] is probably going to be more in the utility space,” he added.
“This is something that could accelerate the growth rates of these companies over the next three to five years. If this bill has an impact on corporate tax rates or regulation, we need to be mindful of that,” concluded Patel.