Navigating the complex capital stack for public-private partnerships (P3s)

A public-private capital stack is inherently complex

In a P3, the private investor is responsible for structuring the capital, but a P3 doesn’t have a typical capital stack. Many private investors pursuing such a partnership have legitimate questions about how to procure and execute the right capital structure. It is a highly nuanced conversation. 

“We see a lot more complexity in P3s and project financing than in other sectors,” says Thomas Mulvihill, Group Head of Infrastructure at KeyBanc Capital Markets. “In addition to bank debt and bonds, there is more to consider, like federal and state financing programs and funding from various public authorities. It requires a capital team that both understands how developers can privately finance these projects, but also incorporates other kinds of funding mechanisms.”

The conversation becomes even more nuanced when considering the type of P3. Infrastructure, higher education, transportation, and utility projects all have unique details and partnership structures that require a bespoke response from the financing team. These projects include everything from student housing and city halls to transit-oriented developments and managed lanes.

Key’s P3 team has expertise in each public-private sector to work through the nuances in every project and leverage the right capital tools to fully fund the development. “Our ultimate client is the public partner, but our immediate client is the private developer who is going to build and operate the project for the next 50-plus years,” says Stephen Hill, Managing Director at KeyBanc Capital Markets. “To successfully serve both, we are generalists by nature and experts in each specific focus area.”

Leaning into the partnership

When building the right capital structure, it is important to remember that a P3 is a partnership. While the onus is on the private sponsor to secure financing and other funding sources, the public entity remains an integral part of the conversation. The capital solution must also include the public organization because, in most cases, the private investor doesn’t actually own the asset. The public entity allows the private partner to control the asset so that they can manage it and earn revenue. That control of revenue generation is an important part of securing financing and is an essential component of the capital conversation. 

It is a symbiotic relationship, and the capital team is equally serving both entities of the partnership. “The public sector gives the private sector the mechanism through which it can produce cash flows, and through which the private party can then raise the financing to construct the project,” explains Mulvihill. “You really need the public sector working together with the private sector to put a financeable project together and build it.”

Often, that mechanism is some type of agreement from the public partner to provide a funding or revenue source. On a student housing development, for example, the university will often give the private developer a ground lease with the right to charge and collect rent from students. That ground lease will serve as the basis to raise financing for the development.

No two P3s look the same

Public-private projects typically have a unique blend of capital, which can include tax-exempt bonds sold in the public capital markets, privately placed notes with an institutional investor, commercial bank debt, state infrastructure bank loans, federal loans such as TIFIA or RRIF, plus equity. The SR 400 Project, the largest U.S. P3 ever constructed, included a combination of a federal TIFIA loan, tax-exempt bonds, and equity. The historic $11 billion managed lanes project is one of the largest highway developments ever in the U.S., and it required several significant capital sources.¹

The deal included a $3.9 billion TIFIA loan¹ — the largest ever secured — plus $3.4 billion in private equity bonds and a substantial equity contribution. Each piece played an important role in the success of the project. The TIFIA loan, which is a subsidized federal loan, allowed for structural subordination of the capital to improve the overall credit story. The tax-exempt bonds amortize over 35 years, a longer timeline to repay the bond holders based on the revenue generated by the highway’s toll lanes. The equity contribution not only rounded out the capital stack, but it provided significant comfort to the lenders that helped this large and complicated project achieve investment grade ratings.

“We were the financial advisor to the private sector consortium. In this deal, there were some unique elements for the project, and it is certainly a large deal, but we see this level of nuance and effort on every one of our public-private projects across sectors,” explains Casey Bush, Director, Infrastructure Finance at KeyBanc Capital Markets. KBCM worked alongside JPMorgan and RBC Bank on the transaction.

Experience makes the difference

As a large, regional bank, Key is able to provide both the sophistication of a Wall Street bank and the attention to detail which drives great outcomes for clients. That is why KeyBanc Capital Markets has been able to successfully finance massive projects like SR 400. The unique dynamic is garnering attention.