How Infrastructure Projects Raise Private Capital

Private capital funds a large share of infrastructure worldwide: energy generation and networks, transport, digital infrastructure, utilities and social infrastructure. The investors behind it, infrastructure funds, pension and insurance capital, sovereign investors and lenders, are attracted by a particular profile: essential services, long asset lives and cash flows that are contracted, regulated or otherwise predictable.

The investor categories

• Core infrastructure funds buy operating assets with contracted or regulated revenues, at lower target returns.
• Core plus and value add funds take construction, expansion, contract or merchant risk for higher returns.
• Opportunistic and development investors fund earlier stages and platforms.
• Pension, insurance and sovereign investors invest directly or alongside funds for long term yield.
• Banks and institutional lenders provide project and holdco debt.
• Strategic investors invest where the asset fits their operations.

The capital stack

A typical infrastructure project is funded with a combination of senior debt, sometimes mezzanine or holdco debt, and equity. Senior debt is repaid first and carries the lowest return. Equity takes the first loss and the residual return. The more predictable the revenue, the more debt the project can carry and the lower the overall cost of capital. Our capital raising page illustrates the stack.

Project finance

Most large infrastructure projects use project finance: debt raised by a special purpose project company and repaid from the project's own cash flows, with limited or no recourse to the sponsor. Lenders size debt on cash flow cover ratios under conservative cases and require robust contracts allocating construction and operating risk. Project finance is efficient, but it demands a level of contractual and technical evidence that many sponsors underestimate.

Capital changes as risk falls

Development is funded with expensive risk capital. Once consented and ready to build, the project can attract construction equity and debt. Once operating, it can be refinanced with cheaper long term debt and sold, wholly or partly, to core investors. Each transition is a capital raising event, with a different investor and a different checklist. Sponsors who plan the sequence from the start raise each round more efficiently.

What investors need to see

• The revenue basis, its counterparty and its duration relative to asset life
• How construction risk is contracted and allocated
• The regulatory or concession framework and its stability
• Lifecycle and maintenance capex over the full asset life
• A long horizon model with inflation linkage and debt sizing
• A committed sponsor with relevant delivery experience

For sector specific detail see infrastructure investment, and for the funding choice itself, equity vs debt.

This article is general information, not investment, legal, tax or financial advice. BriHel Capital introduces only and does not arrange transactions, provide advice, or carry out regulated activities.