President Donald Trump has called for increased infrastructure spending throughout his campaign and following his inauguration.
During a panel discussion hosted by Legg Mason in New York, Robert Amodeo of Western Asset, Derek Deutsch of ClearBridge Investments and Richard Elmslie of RARE Infrastructure discussed how investors might be able to capitalize on potential new legislation regarding infrastructure. (The firms are all affiliates of Legg Mason.)
All were fairly confident that infrastructure projects would move forward under Trump.
“My personal view is that Trump wants to be successful,” Elmslie said. “So the first big project he picks, he needs to pick a project where he’s going to get the support of the state government, because that’s crucial. He needs to pick a project that when they actually execute, construct or renovate … everyone looks like they’re a winner.”
At RARE Infrastructure – where Elmslie serves as founder, co-CEO and co-chief investment officer – the focus is exclusively on global listed infrastructure. Global infrastructure assets are long term developments or projects serving communities around the world. They are usually assets that communities and economies require to function and prosper, such as airports, gas, electricity, water and roads.
Trump’s focus is on similar types of infrastructure projects.
“I think you’ll find the infrastructure projects that [Trump’s] going to focus on are the big ones that the public want to see happen,” Elmslie said. “The public want to see better airports. They want to see better transportation on roads.”
In addition, Elmslie said Trump’s focus is largely on recycling existing infrastructure.
“What Trump is trying to do is really not a lot of new buildings; the vast majority is rebuilding your existing dilapidated infrastructure, which is actually a much lower risk proposition,” Elmslie said.
Elmslie also expects these projects will get up under Trump’s guidance.
“I think you’ll get a high profile [project] up that the public want to see, and he’ll make sure it’s successful,” Elmslie said. Adding later that, “I think Mr. Trump has a high opinion of what he wants to do. He wants to make sure he maintains that image in the market. So this needs to be successful. …
“He’s going to get some of these projects off. Because his ego is that he needs to say ‘I’ve done it.’”
Infrastructure Financing – Getting the Private Sector Involved
Amodeo, who is portfolio manager and head of municipals at Western Asset, discussed the financial challenges facing these projects. The problem is the governments don’t have a lot of money, so where does the money come from?
“Every level of government – federal, state, local – we all know they’re burdened by a large amount of debt,” he said. “And there’s a large number of unfunded liabilities as well in every level of government, and then as a backdrop we have a public that’s reluctant to privatize assets.”
Many of these projects will require private financing – and the private markets are ready, according to Amodeo. “Private capital is being raised,” he said. “There’s hundreds of billions of dollars sitting idle in private equity. There’s plenty of capital available for private debt. The bond market is excited about the opportunities coming their way.”
Elmslie agreed, saying if the framework for a project is there, the capital will also be there.
“Everybody’s been waiting for America to fix its infrastructure,” he said.
The challenge, though, is getting public support for using private capital, and there’s the debate between public good and private profit.
“The challenge is balancing a public good – delivering a service to the public – without necessarily privatizing that public good,” Amodeo said. “The public sector is fearful of the private sector coming in and just owning the public good. Like we saw in Chicago meters, the price of the meters doubled overnight. And the city entered into … poor negotiations, a poor deal.”
Wilbur Ross, who is Trump’s nominee for Commerce secretary, and Peter Navarro, a University of California at Irvine business professor and the head of Trump’s newly formed National Trade Council, have a proposal to achieve major private-sector revenue.
The Ross-Navarro proposal, unveiled in late October, suggests that the Trump administration should hand out tax credits to private businesses to cover 82% of the equity needed for new projects.
According to the proposal, financing a trillion dollars of infrastructure would necessitate an equity investment of $167 billion. To encourage investors to commit such large amounts, and to reduce the cost of the financing, the Trump administration would then hand out $137 billion worth of tax credits to private businesses, which is equal to 82% of the equity amount.
This would lower the cost of financing the project by 18% to 20%, the proposal suggests.
However, Amodeo called the Ross-Navarro plan “unnecessary.”
“The Ross-Navarro plan to us is unnecessary, [and] depending on how it’s executed could even prove unproductive,” he said. “The reason for that is there’s plenty of capital from the private sector. Just look at the amount of private equity firms that have raised capital for infrastructure projects. And a lot of capital is sitting idle. You don’t necessarily need to offer … tax credits.”
ESG Investing – Still in Play Under Trump
According to Deutsch, who is portfolio manager at ClearBridge Investments, there’s more at play than just Trump’s view on infrastructure.
“I’m not a pure-play infrastructure investor, but I look at how various changes in policy … will affect the industries that I invest in,” Deutsch said.
Deutsch, who manages a couple of different funds focused both on small mid-cap securities and also on environmental, social and governance investments, remains focused on renewable energy infrastructure despite Trump’s view on climate change and potential policy changes.
“The things that I’m focused on are the things that I have a high degree of confidence in happening, or where I think the risk/reward opportunities are attractive,” he said. “I have to take into consideration, of course, public policy changes and what may happen but there are so many different things happening that it’s beyond just what’s happening in infrastructure. Tax policies can be very impactful, regulatory changes can be impactful, and then just general economic conditions.”
Infrastructure that Deutsch is interested in includes technology infrastructure like cloud computing and cybersecurity, as well as renewable energy infrastructure like wind and solar companies.
“When we think about renewable energy, for instance, there’s a lot of policies that have been in place that have been beneficial to things like wind and solar and other clean energy types of projects,” Deutsch said. “Now we’re in a much more uncertain environment. What’s the new [world] going to look like? I don’t’ think we’re very clear on that at this point.”
However, Deutsch said there’s still a lot of attractive investment candidates within the renewable energy sector despite some “turbulence” in terms of policy.
“We have some utility holdings. The largest wind and solar company which is based in Florida is a holding. The largest hydroelectric provider based in Canada is a holding,” he said. “Believe it or not but some of the biggest manufacturers of wind are [in] blood red [states]. There’s a lot of momentum for some of these technologies that we don’t think will be easily reversed.”
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