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Groundbreaking U.S. energy policy generates wave of innovative M&A

Research shows the Biden Administration’s Inflation Reduction Act has already channelled hundreds of billions of dollars into new projects – and kick-started some surprising deal activity.

Infrastructure continues to be one of the few asset classes where M&A activity remains strong. With strategic and financial buyers typically able to fund all-equity deals, infra deal-making has been insulated from the recent collapse in the syndicated leveraged lending.

At the same time, operational infrastructure assets often have portable debt already in place, with many acquisitions structured in such a way that they don’t trigger a change in control that requires the package to be reset in a market where financing costs are rising steadily.

As well as these favorable factors, infrastructure investment has been boosted by some radical policy developments, including the U.S. Inflation Reduction Act, and the Infrastructure Investment and Jobs Act.

Our research shows that the IRA – which was signed into law in August 2022 and will channel more than $360bn into green infrastructure via a series of tax incentives, grants and other subsidies – has already provided a massive boost to U.S. infrastructure development.

What’s different about the Inflation Reduction Act?

The IRA provides tax credits for a wider range of projects than previous federal support schemes, which primarily supported solar and wind. Now, everything from electric vehicle infrastructure to nuclear power plants and green hydrogen facilities are in scope for financial support, subject to project developers meeting local content requirements, among other things.

The Act is more flexible in that it allows for certain tax credits to be paid directly to tax exempt parties such as publicly owned utilities. Historic schemes favoured tax equity structuring, which requires financing from a party with a large tax exposure, typically an investment bank or major corporate.

It’s also now possible for project owners and developers to sell their tax credits to other taxpayers, making the financing of green energy projects simpler and more efficient.

The consensus among infrastructure investors is that it has bolstered opportunities for private investment by increasing activity in the sector.

The Infrastructure Investment and Jobs Act meanwhile allocates an additional USD1.2 tn in spending, including USD110 bn for roads and bridges, USD73 bn for power infrastructure and USD 66bn for passenger and freight rail.

While some initially questioned whether it would replace private dollars rather than being additive, the consensus among infrastructure investors is that it has bolstered opportunities for private investment by increasing activity in the sector. This is desperately needed given the sums required are far beyond the federal funding available through the Act itself.

At the same time, the Department of Energy’s Title 17 and Advanced Technology Vehicles Manufacturing (AVTM) loan programs have made billions of dollars available (at a low cost of capital) for innovative clean energy projects and the electric vehicle supply chain respectively, with the Loan Programs Office extremely active in deploying this funding.

All this investment activity is having an impact on M&A, where private funds have significant dry powder to deploy into infrastructure to meet investors’ demands for exposure to energy transition and ESG-friendly opportunities.

Closed-ended funds have a deadline by which they need to exit their investments, which in turn is driving transactional activity. In addition to pure secondary trades on infra assets where activity remains robust, we are seeing financial sponsors teaming up with developers to access pipelines of greenfield projects, entering the market much earlier than in the past to take advantage of the significant uptick in value these incentives have put into play.

In many cases, investors and developers are entering into joint development agreements that see the investor funding development activity in exchange for preferential access to new projects. Once they break ground for construction or alternatively become operational, the assets are then transferred to the investor.

Fund managers are also acquiring project developers with strong long-term pipelines, bringing the development platform into their portfolio.

For any non-U.S. investors looking to enter the U.S. market, it should be noted that they will need to consider whether a review by the Committee of Foreign Investment in the United States is required or is advisable – a decision that turns on a number of factors, including the nature of the assets, whether they constitute “critical infrastructure”, the foreign investor’s proposed ownership levels and governance rights, and the nationality of the investor itself.

Non-U.S. investors should consult their legal counsel for guidance on navigating these considerations and their impact on auction dynamics and overall deal timing.

What impact has the IRA had on infrastructure investment in the U.S.?

In its first year, the IRA has kick-started an astonishing array of infrastructure development. According to figures from the American Clean Power Association:

  • USD150 billion of investment in domestic utility-scale clean energy projects has been announced since August 2022, exceeding the total investment in similar projects in the U.S. between 2017 and 2021. Together these projects will deliver 96,000 MW of new clean energy capacity.
  • 46 new or expanded utility-scale clean energy manufacturing facilities have also been announced, including 10 focused on wind power, 26 on solar and 10 on battery storage.

Bloomberg also reports that:

  • the North American battery supply chain received USD17 bn of investment in 2022. 45GWh of battery manufacturing capacity was added through the year, twice as much as in 2021. By the end of 2023, the U.S. is expected to reach 178GWh of battery manufacturing capacity;
  • record-breaking offshore wind auctions were concluded in states such as New York, the Carolinas and California; and
  • 92MW of hydrogen producing projects were commissioned last year, including the Angeles Link project, a green hydrogen production pipeline serving the LA region that is expected to be the nation’s largest.

Overall we remain bullish on the U.S. infrastructure market, both in terms of investment and M&A activity.

The measures introduced by the Biden Administration are likely to survive whatever the outcome of next year’s presidential election, with the need for infrastructure development acknowledged across the House and incentives that are already in play difficult to remove once they’ve been granted.

However taking full advantage of the opportunities on offer will require well-crafted strategies to mitigate risk.

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