Land of infrastructure opportunity

This interview first appeared in Infrastructure Investor’s North America Report published on 1 December 2019.

Rapid urbanisation, the growth in energy exporting and changing consumer behaviour are all creating huge demand for infrastructure investment in the US, says MIRA’s Head of Americas David Fass.

What makes North America an attractive market for infrastructure investors right now?

There are a number of macro trends that are continuing to drive strong investor interest in the North American infrastructure market. Some of the key themes that we are observing are around demographics shifts and urbanisation. Even in a developed country like the United States, people are increasingly moving to city centres in pursuit of higher value jobs, education opportunities and a better connectivity. When you have that kind of rapid urban growth, that obviously creates huge demand for, and pressure on, the infrastructure of our major cities.

Anyone who has travelled around the US would be aware that there is a huge need for ongoing investment to maintain and upgrade the existing infrastructure in the country. When you think about this in the context of other macro trends such as urbanisation, an ageing population and climate change – the need for investment is only going to grow exponentially in the future.

How to fund the required investment in infrastructure is a key question. With government balance sheets stretched at federal, state and local levels, we continue to see an important role for private investors to help close that funding gap.

How would you describe LP appetite for North American infrastructure?

The fundamental appeal of North American infrastructure to LPs remains strong - it’s a growing market with a stable regulatory environment and transparent legal system. In addition, we are seeing increased allocations from US-based investors as well as new entrants making allocations for the first time.

In a low interest rate environment, institutional investors are also attracted to the stable and predictable cash flows that the asset class can offer over a long time horizon. This makes the sector particularly attractive to insurance companies, pension funds and sovereign wealth funds that need to “match” their long-term liabilities. As institutional investors become increasingly focused on ESG, they are also looking for ways to deploy capital in a way that will help stimulate economic growth and support communities – we believe infrastructure will continue to offer opportunities to do this.

Conventional power generation remains one of the most significant investment opportunities in the region. What does the future hold for this sector?

Natural gas is now, and we expect it to be for some time, a critical source of energy in North America and globally. It remains low cost, abundant in supply and is a cleaner, more sustainable energy source than coal. The shale gas revolution is also providing many opportunities to invest in related infrastructure – such as pipelines, rail, ports - that has enabled America’s shift to become a net exporter of energy.

Of course, as energy producers, investors and consumers look towards a future in which renewable energy sources become a larger part of our energy supply, natural gas and combined cycle power plants will provide important energy sources we need both now and during the long-term transition to a world in which renewable energy leads the way.

What about the renewables industry?

As renewable energy continues to evolve as an asset class and as technology brings the cost of production into parity with fossil fuels, we believe that there is significant opportunity for further investment in large scale renewable energy in the US. These opportunities are increasingly popular with investors, both from a sustainability perspective and on a purely commercial basis.

We believe that the size and diversity of North America creates numerous opportunities for wind and solar technologies – and we are also looking at investment opportunities in energy storage, waste to energy and hydrogen.

You mentioned that transport is a major US infrastructure theme at the moment. How do you see that sector developing?

As the US population grows and continues to consolidate in urban areas, infrastructure demands will grow. Congestion in our biggest cities is an issue today and we need to develop alternative ways to transport people, which will drive opportunities in both toll roads and public transit.

We also expect the supply chain to continue to evolve to meet the demands of e-commerce and two-day or even one-day shipping. This will require capital for new and enhanced infrastructure and across US ports, railroads and logistics assets.

Changing technology is also expected to create opportunities. Electric vehicles, autonomous vehicles will require different physical infrastructure than vehicles powered by combustion engines. There will be opportunities to provide infrastructure to support 3D printing and drone technology as well.

Where else are you seeing opportunity?

We’re seeing the definition of infrastructure evolve to include ‘non-traditional’ assets such as computer and data storage, fibre and 5G networks.

We think that technology is going to have a big part to play in solving the challenges of the future – particularly as we think about the impacts of urbanisation and climate change – so we are looking at what opportunities there may be as we move towards a reduction in internal combustion engine vehicles in the expectation that electric vehicles and autonomous vehicles will become the major transportation tools of the future.

How would you describe the competitive dynamics of the North American infrastructure industry?

Competition is always there – no matter where you are in the world. We have, however, seen the pool of competitors in North America grow quite significantly over the past decade. Macquarie is the largest infrastructure investor in the world and while there is a growing pool of capital that is looking at the alternatives universe and is attracted to the investment fundamentals of the infrastructure sector, we feel our decades of experience and leadership position gives us an advantage in continuing to source and execute on attractive opportunities.

How does the political backdrop impact infrastructure investment in America?

It is certainly something that you need to be aware of. It is complex. It can make investment difficult and sometimes it can make things move slowly.

Part of the complexity of operating in the US is that decision making doesn’t just happen in Washington – a lot of decisions around infrastructure spending get made at a state, municipal or even town level. So it’s very important to develop close working relationships with state and municipal stakeholders where we are or may be looking to invest capital.

What does the future hold for infrastructure in North America and what are MIRA's ambitions for the market?

The infrastructure spending gap is not going away. There will continue to be vast demand for capital and for well executed projects, carried out in a sustainable, safe, and climate friendly way. Meanwhile, the flow of institutional capital towards alternatives continues to grow. So we think these factors will bring significant growth from a North American infrastructure perspective in the coming decades. We are very excited to be in this dynamic market and, given our strong track record of investing in North American infrastructure, to be playing a leading role.