During the coming decade, trillions of dollars will be plowed into repairing roads and bridges, updating water/sewage plants, modernizing the electric grid and expanding airport and rail systems.
Investors are already lining up to buy debt or take equity stakes in projects as Congress debates passage of a $1.2 trillion bill, a down payment on the $2 trillion McKinsey & Company says the U.S. needs to spend to update its aging infrastructure.
Globally, governments are grappling with how to pay for infrastructure projects. McKinsey said $4 trillion needs to be spent annually for the world economy to keep pace with economic growth.
The intense need for capital to finance these projects is likely to reshape the financial markets during the coming decade.
SHOOKtalks recently assembled a panel of experts to address how financial advisors can invest in infrastructure projects, reaping rewards for their clients.
The panel featured Brandon Dees, executive director, Morgan Stanley Wealth Management; Daniel Foley, senior vice president and associate portfolio manager, CBRE Clarion Securities; and Robert Burke, managing director MacKay Municipal Managers.
“This is going to be massive,” said Jac McLean, senior managing director with New York Life Investment Management, who moderated the session. “Investors need to capitalize on this multi-year vector.”
The ability of local, state and national governments to fund these projects will depend on Wall Street’s appetite for public debt.
“We think there is potentially $1 to $3 trillion worth of taxable municipal debt that is going to be issued to back a lot of these [U.S.] infrastructure projects,” MacKay’s Burke said. “Most the interest we have had in this space is from clients who are concerned about deterioration of credits in the investment grade corporate market.”
State and local governments typically finance infrastructure improvements by issuing debt and repaying it with project revenue, user fees or taxes.
Municipal bonds were once tax deductible. But changes in federal law enacted in 1986 restricted the tax deductibility of municipal bond debt. Other changes since then have mandated public projects be financed through the issuance of taxable debt.
Taxable municipal debt previously was 2-3% of the total market. But taxables now account for 25-30% of average annual issuance. “This has really spurred a lot of opportunity for taxable investments,” Burke said.
The growth in taxable debt has given rise to companies purchasing municipal debt. Because the interest is taxable, the issuer is forced to offer a higher interest rate.
Infrastructure assets like cell towers, data centers, airports, toll roads and pipelines provide investors with a very defensive risk profile that protects against inflation, CBRE’s Foley said.
“It is the kind of asset that matches well with long-duration liabilities. So, it comes as no surprise that we have seen a steady march upwards in terms of allocations to infrastructure as an asset class,” Foley said.
Green energy is particularly attractive given policymakers’ interest in spending money on projects related to climate change. Plus, many states have enacted regulations promoting renewables spurring growth in this market. State requirements are expected to significantly drive demand for renewables going forward.
McLean asked panelists how financial advisors could best help clients invest in infrastructure. There are a variety of ways this can be accomplished, the panelists said.
“Some investors pull funds from an existing global equities allocation and look to infrastructure as a low-volatility, longer-duration play,” Foley said.
Other investors have converted a fixed-income allocation and dedicated it to infrastructure-related investments. In this case, Foley said, the investment is viewed as stable but having better growth prospects than fixed income.
“We have seen it a little bit all over the place in terms of how investors are getting there,” Foley added. “The point is real asset allocations are growing and infrastructure is taking a part of that.”