By Brian Ross
Around the world, public-private partnerships (P3s) play an increasingly critical role in meeting the need for investment in water infrastructure. However, P3s in the United States often fail to succeed due to political opposition, lack of transparency and public resistance to private control of critical water infrastructure. Moreover, direct investment in water infrastructure P3s is typically limited to institutional investors, creating limited markets for capital and reducing the economic impact of infrastructure investment to the local community.
However, recent changes to securities legislation under the 2012 Jumpstart Our Business Start-Ups (JOBS) Act have removed restrictions on general solicitation of securities to the public, allowing for “crowdfunding” of equity and debt investment in new projects (referred to in this article as “investment crowdfunding”). Investment crowdfunding is a way to source money for a project by asking a large number of backers to each invest a relatively small amount and receive equity shares, or debt, of the project. Because the “special purpose entity” established by the P3 developer is a new venture, it is able to take advantage of the new investment crowdfunding regulations.
The new legislation has fueled a growing investment crowdfunding industry. Forbes reported in March 2015 that crowdfunding investors injected $1 billion into the U.S. real estate market last year. Similar to commercial real estate projects, investment crowdfunding allows infrastructure developers to raise equity from local individual investors, which benefits a P3 in many ways including: Increased public and political support; increased transparency; and promotion of investment by individuals in locally-serving projects which keeps investment returns in the community. Furthermore, crowdfinancing creates opportunities to structure smaller P3s that, while financially viable, may not require investment amounts required to attract institutional investment.
Community Investment and Increased Transparency
One common complaint about P3s from elected officials and community members is concern over private ownership of critical infrastructure assets such as water and wastewater systems. However, allowing for public investment in a P3 through investment crowdfunding, especially from those served by the project, allows for some portion of local ownership in the SPV. Investment crowdfunding will also provide the opportunity to keep some of a P3 project’s investment returns within the community served by the project; thereby increasing the economic impact of the infrastructure development.
Having public investment also increases P3 transparency. Information related to the risks of investing in the P3 would be disclosed publicly, as required by the SEC, to interested investors performing their due diligence. Disclosure documents that would be publicly accessible on the crowdfunding platform for interested investors may include: the project risk register; all publicly available procurement documents; any available Public Offering Statement or Official Statement for bonds; contract agreement documents; and technical documents such as rate and feasibility studies. After an investment is made, updated documents, audited financial statements, quarterly progress reports or any other relevant documentation would also be provided to investors to give them necessary information to evaluate the performance of their investment.
How does it work?
Once the P3 project is awarded, the private developer works with an SEC registered online platform to develop and run an investment crowdfunding campaign. The developer will define the amount and type of securities, provide offering memos and determine the duration of the campaign. For 506(c) offerings, the amount that can be raised is unlimited but investors must be accredited; for Regulation A+ offerings, the current limit is $50 million from unaccredited investors but audited financials are required; and for Title III CF offerings, capital raises of up to $1 million from unaccredited investors are allowed with reduced reporting requirements. The type of capital is very flexible and can be equity, preferred equity, mezzanine debt, convertible notes and corporate notes. The model can also be used to provide medium-term crowdfunded loans in design-build-finance (DBF) structures for smaller projects that have an O&M component and need to be advanced ahead of funding availability.
One common complaint about P3s from elected officials and community members is concern over private ownership of critical infrastructure assets such as water and wastewater systems.
The investment crowdfunding campaign itself is run very similar to the model used by commercial real estate investment crowdfunding sites such as Fundrise, RealtyShares and RealtyMogul. Project information is posted on the site that can be viewed by potential investors that includes commercial terms, pro-forma financial models and a video describing the project (an NDA can be required if desired by the developer). Investors visiting the site can browse by project type, geography, security type, internal rate of return, etc., to find an offering that fits their investment objectives. The investor can post questions to the developer or the investment community in general in order to aid with performing due diligence. The site will also offer comparison and analysis tools to help investors determine which projects are right for them.
Following investment, the investment crowdfinancing platform acts as an ongoing engagement tool for the investors. The platform would distribute all financial statements, disclosures and construction/O&M updates issued by the SPV. The platform also facilitates all disbursements of returns to investors and allows investors to track the performance of their individual investments or portfolio of projects. Any secondary market for existing securities would also be facilitated by the platform, allowing investors to buy and sell securities as their individual liquidity needs require.
The goal of the crowd-financed P3 model is to facilitate involvement of the public, especially local community members, as a major partner in the current P3 model. Investment crowdfunding is a proven model for increasing public engagement and transparency in sophisticated development projects and new ventures. In addition, aligning the interests of the P3 developer, public agency and the crowd-financed investors, can act as a catalyst to facilitate smoother delivery of the project during construction and O&M. These benefits are achieved with little cost to the developer because of the technology and expertise leveraged by the InfraShares team.
Brian Ross has more than 15 years of experience in the development of major infrastructure projects. He is co-founder of InfraShares and a project director for Mott MacDonald’s Infrastructure Finance Advisory (IFA) practice, where he provides P3 and financial advisory services to both public and private sector clients. He has been involved with P3s in multiple sectors and at all stages of project delivery. Ross is based in Mott MacDonald’s San Francisco office and holds an MBA from the Haas School of Business at UC Berkeley and an MSE from Stanford University in Construction Engineering Management.