Private Credit Eyes Gap in US Infrastructure as Federal Funding Dips

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(Bloomberg) — Private credit firms are seeing an opportunity to finance everything from public transit systems to local utilities as the federal government and banks pull back on funding.

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US state and local infrastructure is in need of alternative funding sources as pandemic-era stimulus funds wane and the Trump administration seeks to cut costs. As inflation drives up construction costs and government balance sheets are pressured by higher expenses, there are fewer dollars to be allocated to projects. 

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That’s created an opening for private lenders to snatch up more of the infrastructure market, which would normally be dominated by public funding, according to Andy Prindle, the head of origination at lending firm Foundation Infrastructure Opportunities, a strategy within Foundation Credit. 

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“There’s a lot of investors out there who would love to have more direct access to infrastructure in the US,” Prindle said, speaking at a conference in Atlanta earlier this month. The US infrastructure market is complex, with tens-of-thousands of entities and a highly local structure. 

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Projects like new airport terminals or highways are funded in the $4 trillion municipal-bond market, through which states and cities raise cash. Although muni-debt issuance is coming at a rapid clip, potential funding freezes and cost-cutting measures have pressured budgets. Pivoting to private credit provides a plentiful pool of capital. 

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“There are definitely situations where having access to a more private, stickier capital base that’s looking to hold this investment for the long term and never anticipates selling it, provides value to borrowers,” Prindle said.

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Many alternative asset managers have cited infrastructure as a way to grow their private credit shops beyond corporate direct lending. A boom in infrastructure deals — along with asset-backed finance — could swell the entire private debt market to as large as $40 trillion, as Apollo Global Management Inc. has estimated.

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“The whole concept of infrastructure is low default rates, high recovery — that’s what makes it so valuable but also in some ways stable,” said Brookfield Asset Management Chief Financial Officer Hadley Peer Marshall, who is also the co-head of the firm’s infrastructure debt and structured solutions business.

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In times of volatility, banks are also likely to pull bank from capital-intensive infrastructure projects, leaving an opening for private credit. Swooping in during these times has also become a tried and true maneuver for private credit firms, which often ramp up lending as other funding sources retreat or dwindle.

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“Volatility in the market pushes some traditional lenders to the sideline in periods of concern around the macro environment, and infrastructure as an asset class is very resilient,” said Brent Canada, a partner in Ares Management Corp.’s infrastructure debt business.