The unprecedented opportunity for infrastructure investors

She begins by defending the size of her own claim. She volunteers that she sounds a little hyperbolic put that way, and then says it is that big: infrastructure is the fabric society is built on, and all three layers of it are being redone at the same time. What distinguishes this round from what she calls infrastructure 1.0, the municipal bonds that paid for roads, rails and bridges and which she describes as vanilla-ice-cream financing, is the sophistication now available in the structures themselves. Her worked example is the one she helped design, C-PACE, which she expands on air as commercial property assessed clean energy. It marries a municipal tax assessment mechanism to something like a commercial mortgage so that clean energy upgrades in real estate can be financed and repaid through the property tax rolls. It began using the securitization market to create rated notes and has since moved to a fund model in which mostly American insurers put pools of capital into rated note feeders. The point of the detour is not the plumbing but what it enables: structures that meet the needs of the builders and of the very large pools of money looking for a home at the same time.

The spine of her thinking is political durability, and her test is sharper than the usual one. Underwriting regulatory risk means asking two separate questions: is government a tailwind if the winds happen to blow your way, and is government intervention required for the business to exist at all. C-PACE passes because it only ever needed a law, not money. A state declares that energy upgrades are a public benefit and that the tax collection mechanism may secure repayment, and after that the government is not asked for a nickel; the laws passed in red states and blue states alike and she reports no rollbacks. Businesses built on a continuing subsidy or a feed-in tariff behave very differently, and the damage lands in the outer years of an underwriting, where a swing in government support can upend the assumptions a deal was struck on, over what the host, framing the question, calls the fifteen- and twenty-year timelines of infrastructure. The host extends this to tax credits, arguing they are durable precisely because they push the underwriting onto private investors and distance government from arbitrating individual capital decisions, a lesson he draws from being at the Treasury during the Solyndra period. Bailey takes it up from the fiscal side: foregoing future revenue is easier for a government than spending money already spoken for. That is also why she likes the hybrid partnership flip. The developer gets a step-up so credits are based on the project’s fair market value rather than what it cost to build, while an investor like hers keeps scheduled priority payments, seniority and downside protection and still takes the equity-like upside. Solving both sides of a transaction at once is rare, which is why the structure became dominant.

The limits are where the argument turns. Asked how much more room there is, she refuses the question: she keeps wanting to say there is a natural ceiling and cannot find anything that supports one, and declines to say it will never stop. What she will name are the governors, and she says they are not really going to be capital. Energy supply, water in places like Arizona that are already short of it, and people who no longer want these facilities near them. It is almost as though capital is not the constraint it normally is in a market like this, she says, so the brake on growth looks political rather than investor-driven. She thinks the industry brought much of that on itself, calling the decision to lead with mass job displacement and robots taking over a failure of messaging that managed to alienate everybody, from the high-school seniors of her children’s generation to her own parents’ generation. That leaves two problems rather than one: a messaging problem, which she assumes someone will eventually solve, and a structural one, which is that there is simply not enough energy. Set against that, she argues the political winds are being overtaken by economic ones. The technologies she feared would be shut down when the politics turned are still needed, because without them the supply gap cannot be closed, and the practical outcome is an all-of-the-above posture that will include hydrocarbons some on the far left will not like and wind some on the right will not like.

Where she is putting money follows from that reading, and speed is the common thread. She names storage first: the old objection to more solar and wind was that it could not be stored, and as advances continue there she sees new opportunities opening up for more renewables. Distributed generation solar is attractive partly because retail power prices are about double wholesale, and partly because smaller projects carry smaller permitting requirements and move on timelines of six months to two years rather than the multi-year interconnection wait she cites in Virginia, which matters when capital has to be deployed in real time. Energy as a service lets a customer capture the savings from efficiency without finding the upfront capital. And she returns to buildings: if the worry is that data centers are consuming the available power, then reducing what buildings consume is unavoidable, and the instrument she reaches for is C-PACE again rather than a mandate. What she does not resolve, and says so, is whether any of this is moving at the right speed with the right people making the decisions.