Infralogic hosted its annual Infralogic Investors Forum (IIF) in New York City on 3 June and here are some of the biggest takeaways from the event.

Bubble trouble?

The AI revolution and the associated infrastructure buildout “sure doesn’t feel like a bubble to us,” KKR Partner and Head of North American Infrastructure Brandon Freiman said.

But a lack of discipline in some instances could lead to some bad investments around AI, in the data center space in particular.

Speaking on the panel ‘Thriving through turbulence – Infrastructure finance in a volatile political landscape,’ Freiman compared the current excitement around AI to the rush to invest in renewable generation over the past decade, where some reckless investments were made alongside a spate of responsible activity.

“You’re seeing that in data centers, just turbocharged given what’s at stake,” Freiman said. “You are seeing people building with looser contractual terms, building in places that maybe don’t have the same scarcity, people paying very high multiples for platforms.”

Data centers that have 15-year leases with companies like Alphabet, Amazon, Meta, or Microsoft, “all A-rated companies that in each case make tens of billions of dollars of free cash flow in their businesses that are totally unrelated to AI,” are not at significant risk of a potential AI bubble, Freiman noted.

“If you are building a training data center in the middle of nowhere, and you are captive to one of these foundation model companies, you better feel good about your contract and feel good about your counterparty,” he continued. “Because if you’ve got a 2 GW data center that’s not close to eyeballs, it may have a ton of value, but you’re pretty captive to them, and that’s a different dynamic than if you’ve got 50 MW in Virginia or Dallas or London that is fungible across AI inference and cloud, and that is valuable to everyone who might want that demand.”

Mid-Market predictions

Speakers on the panel ‘Where do mid-market managers win?’ ended their session by sharing how they think that sector is expected to grow by the end of the decade, and evolve with changing capital flows, increased specialization, and new investor pools.

Petya Nikolova, deputy CIO and head of infrastructure at the New York City Comptroller’s Office, shared her view as the sole LP on the panel: “I’m sure the [top of the] mid-market is going to be a larger number, the higher end of the market. I’m also sure that we are going to have a different generation of large caps.”

Not every firm is going to stay in the mid-market space and some will grow into the large-cap space, she added.

Cedric Lucas, partner for infrastructure funds at Goldman Sachs Asset Management, said that new pools of capital will enter the space.

“In the next couple of years, access to the wealth channel will be a key part of the mid-market story,” Lucas said, noting that wealth investors are getting access to mega-funds today and this fundraising avenue will have a growing impact on the mid-market moving forward. “I think we’re going to see that grow because, frankly, [of the] interest of wealth investors around the resiliency with access to the mega trends and the growth and the alpha from the mid-market.”

At the same time, the market is likely to become more segmented, with firms embracing specialization strategies further.

“I think we are going to see more stratification, and I think there’s good reason for it,” said Mac Bell, managing director and head of social and transportation investments at Fengate. “We continue to see people that are specialists… and that will continue to deepen in certain sectors, as well as the launch of energy-specific or digital-specific funds.”

On the other hand, Jeff Rodgers, managing director at Toronto-based Slate Asset Management, emphasized that there will be a rebalancing in the manager landscape after the wave of consolidation over the past five years.

“I think it’s just a matter of time before there’s a bit more rebalancing of capital between those top five or ten funds and the rest of us,” he added, referring to large-cap funds.

C. Ulises Flores, managing director at Stifel Eaton Partners, pointed out that the start of the decade could be just one fund vintage away. He notes that fundraising dynamics are also expected to tighten, with greater scrutiny on performance. Managers with early funds that have returned capital will be able to see funds three and four come to fruition.

“I think three and a half years from today, we’re probably going to have a better idea what the next decade will look like. So, probably, the question is more about how the world will look like in 2040 than 2030.”

Private credit and banks are best buds… for now

In the infrastructure sector, particularly the bustling environment for data center finance, commercial banks and private credit often make for natural partners, a dynamic that hasn’t always been the case in other sectors.

But that dynamic could be ripe for change, with the injection of significant insurance capital into private credit funds, attendees at the IIF heard.

While private credit and commercial banks may frequently find themselves to be natural competitors, the energy and infrastructure sector has provided more opportunities to collaborate than compete, members of both camps suggested Wednesday.

The fast blazing, and capital-hungry, buildout of US data centers in particular has largely provided room for lenders from each camp to play to their strengths,

Speaking on the ‘Private credit and securitizations fueling next gen infrastructure’ panel, Arun Varanasi, managing director at Stonepeak, attributed the tendency toward cooperation, rather than competition, to a less mature capital formation environment for infrastructure strategies, compared to other sectors of the private credit universe.

But, as that changes, private credit may see more opportunities to compete where commercial banks have traditionally excelled, he said.

“Capital formation [for infrastructure private credit] is at its inception, and I think over the next four or five years, you may see more of that combative nature in what [deals] private credit takes from banks,” Varanasi said.

That change may already be underway, as an infusion of insurance money into private credit has begun to broaden the variety of deals open to competition from both camps, Yaniv Cohen, managing director and head of infrastructure and energy coverage at Deutsche Bank said.

“We’re seeing some insurance capital actually come into the credit fund world and compete with bank capital products. So, that is a recent shift that we have seen. I don’t know how long that extends for, but that is a competitive element that has shifted,” Cohen said.

As an example, Cohen cited a data center project developer, who secured financing through a private credit partner, after becoming frustrated with the available options from commercial banks.

“They went to a private solution and got it fully financed through kind of what was effectively insurance capital,” he said.

One, presumably more durable factor that differentiates banks from private credit, is the incentives pursued by the lenders themselves Brittany Pinkerton, a principal for infrastructure credit at Eagle Point Credit Management said.

“What banks are ultimately deciding their lending opportunity around is the Christmas tree of fees. How quickly can I turn this lending opportunity into an IPO, DCM, any other sort of hedging fees that I can make off that opportunity? Whereas private credit takes a very different perspective,” Pinkerton said.

“We often don’t like quick return of capital. We have high mode prepayment penalties if that capital return is returned early. So that’s why I think you’re seeing this natural place for both the traditional capital providers in banks, as well as private credit, working together, because they really are after different components and different parts of the capital stack,” she added.

Some shining lights in the transport sector

On the panel ‘Transportation – Core Assets in a Turbulent World,’ panelists discussed how the sector remains resilient to macroeconomic volatility, supported by long-term demand and public necessity. Standout projects are also helping by renewing interest in the sector.

When asked if we will see more buildout of private airport projects in the US, Hari Rajan, managing partner at Investcorp Corsair Infrastructure Partners, said the success of the terminal remodeling projects of New York’s LaGuardia Terminal B and JFK Terminals 6 and 7 is begetting further successes.

“Our pipeline, with respect to airports and similar P3 [public private partnership] type transactions to what we’ve done with LaGuardia and JFK, is a larger and more actionable pipeline than we have ever seen,” said Rajan.

“There is nothing as vivid as seeing the ‘worst-to-best’ story that we collectively accomplished with our partners at LaGuardia,” Rajan added.

Jason Koenig, co-founder and managing partner of ITE Management, added that the critical nature of transportation assets has allowed them to ride out short-term issues, like tariffs and inflation.

“A presidential term is four years; our assets have seven‑year lease. You can just kind of ride through it,” said Koenig.

Edward Tsai, managing director and head of real assets and infrastructure at WAFRA, agreed. “Part of the reason we like [this sector] is that its asset heavy, low obsolescence, hard to replace,” he said.

Head of US and Canada project finance at BBVA, Miguel Peña, underlined the differences between the market in the US and Europe.

“Demand risk is always the Achilles’ heel of the industry,” Peña said. “The US is surely a better place than Europe… to take on the challenge of doing greenfield transactions with demand risk.”

For energy investors, demand growth optimism outweighs policy apprehensions

A variety of macroeconomic and policy factors have put strain on investment in development-stage renewables. But the broader trend of demand growth is keeping LPs engaged, and GPs bullish, on opportunities in the energy, power and renewables sector, panelists on the ‘Energy at a crossroads – investment strategies amid US policy shifts and surging power demand‘ session at the Forum said.

The rapidly approaching July deadline to safe harbor solar and wind projects under the Biden-era investment tax credit (ITC) regime has torpedoed interest in projects that are not ready to start construction, Glenn Jacobson, managing partner of Greenbelt Capital Partners said.

But the drop-off in investment activity in development stage renewables has been more than offset by surging appetite for in-construction and operating renewables, and conventional power, he said.

“To be candid, I’ve been doing this for over 20 years. This is the most amount of interest I have seen LPs have in the energy sector of my entire career. So, are they moving away? No, they’re not moving away,” Jacobson said.

But, he added, LPs have become more selective about where they invest, within the energy and renewables sectors.

“[LPs are] being very targeted in what can get done, backing project finance for projects that will hit the construction deadlines to receive ITCs, that do have offtake agreements, and then obviously on the non-renewable side, there’s been a massive uptick in interest in natural gas-fired generation,” he said.

Robert Birdsey, managing director of GreenFront Energy Partners, agreed.

Amid a broad-ranging discussion of the challenges for the renewables sector caused by elevated interest rates, US import tariff policies, and the accelerated sunset of renewable energy tax credits for wind and solar projects, Birdsey said overall investor interest remains strong.

“A lot of these things we’ve been talking about make our make our jobs harder, but it’s not really putting a dent in the activity levels that we are seeing. At least when we’ve brought project finance deals to the market, we’ve still been seeing a lot of receptivity and interest.”