NEWS & ANALYSIS
Digital financial assets can help bridge
the infra funding gap
Increasing connectivity between banks and investors can solve the urgent need for capital, increase private capital participation and create a thriving secondary market for infrastructure debt, say Pontoro’s Antonio Vitti and Bob Dewing
Infrastructure investments are essential to support our current and future living standards. Balanced supply and demand for infrastructure investments generate economic growth and prosperity, improve health outcomes and drive job growth. To achieve this balance, access to significant capital flows is crucial, regardless of economic cycles.
A startling $94 trillion of global infrastructure financing is estimated to be required by 2040. Although public funding remains a critical source of this muchneeded financing, falling tax revenues and $20 trillion of costly pandemic responses have driven debt to a record 365 percent of global GDP.
In the US, failing roads, bridges and railways have become commonplace, while local governments face financial shortfalls that hinder publicly funded improvements.
Meanwhile, the private financing initiatives needed to support states, municipalities and privately owned infrastructure assets are not keeping pace. The bank loan syndication market, which is increasingly constrained by regulatory capital requirements versus growing project sizes, will be challenged to help meet the $15 trillion global capital shortfall, according to GI Hub estimates.
However, if banks can gain greater connectivity to investors, that would augment their financial asset generation capability, help solve the urgent need for capital, increase private capital participation and create a thriving secondary market for infrastructure debt.
Banks’ ability to support new lending capacity is currently limited by their distribution of infrastructure debt via syndication to known direct investors and other participating syndicate banks.
Many institutional investors seek debt assets with attractive risk-adjusted returns, low default rates and stable yields with built-in inflation protection. Infrastructure debt fits neatly into this classification.
Yet these investments are mostly inaccessible to the investors that cannot invest directly in illiquid private infrastructure loans or that lack the expertise to select and manage investments at the individual transaction level.
Connectivity and transparency
Following their successful deployment of technology across consumer business lines, banks are beginning to explore ways to use technology across their wholesale and commercial businesses.
One new development is the digital asset platform, which promises to bring new methods of raising capital to the infrastructure project finance space by creating digital financial assets built on
distributed financial technologies. This innovation can potentially bring new liquidity and greater transparency, expand capital sources, and accommodate a wider spectrum of loan sizes and tenors based on investor preferences.
Digital financial platforms can build new connectivity to a broader group of qualified institutional investors, transform risk and liquidity through the pooling of investments, and create efficient settlement technology. Importantly, these platforms can complement existing market participants.
Banks can focus on loan asset generation, augment their traditional syndication model with digital distribution, and help meet the significant capital shortfall in infrastructure by delevering their balance sheets.
This will also lower structural and regulatory barriers to access infrastructure loans, enhance price discovery and liquidity, and improve access for more participants.
How can we build this bridge?
Our financial technology company Pontoro sources infrastructure and energy project loans that leading underwriting banks originated. This provides investors with greater access to these assets through an innovative digital asset platform with an evergreen fund vehicle.
That allows qualified institutional investors the ability to hold a diverse portfolio of assets managed by us. We will also give each investor the opportunity to create a bespoke sub-portfolio of specific assets from the general asset pool from within the fund itself.
By transforming these loans’ attributes through our platform and facilitating secondary liquidity and price discovery, Pontoro intends to increase the universe of institutional investors that can access this important asset class while improving connectivity between infrastructure assets and investors.
Simultaneously, by expanding demand and distribution, our technology will provide banks with a powerful tool to manage their balance sheets and capital ratios in response to changing market conditions.
Unlike other digital asset platforms that simply focus on improving cost efficiency, Pontoro first solves for matching demand with existing supply. In addition, we recognise that having critical asset expertise, relationships with institutional investors and understanding the regulatory landscape – including settlement, assurance and taxation – are key. Our approach is to engage large, accredited investors, transact in institutional-grade infrastructure assets in which our team has direct expertise, and not underwrite assets.
In our view, competing to underwrite assets, as other digital platforms often do on an individual, non-connected basis and distributing to mostly retail investors, leads to lower quality asset flow and creates a conflict of interest with investors. Furthermore, funding projects is typically only possible after achieving a critical mass of investors. This approach can also inhibit the formation of secondary liquidity
Our objective is to create a new investment product to attract a broader range of qualified investors. We see appetite from institutional investors globally for these new digital assets. And some of the largest originating banks in Japan, Europe and the US are also interested in de-levering their balance sheets.
Benefits for key stakeholders
Pontoro and the emerging digital asset ecosystem have the potential to encourage banks to originate longer tenor loans, thereby better-matching loan duration to the lifespan of the underlying project and reducing refinancing risk for project sponsors.
Greater availability of longer tenor debt maturities would more closely match the preferences of large institutional investors, such as insurance companies and pension funds, which manage longduration businesses.
We believe that banks would be more willing to originate longer tenor loans with a mechanism to recycle more of their capital into contracted or hedged projects.
This approach may also help green technology, which has additional refinancing risk due to its rapid technology obsolescence.
Digital assets help to resolve issues relating to price discovery, asset transparency and liquidity for opaque infrastructure assets. These new asset types facilitate transactions between currently restricted buyers and sellers and create scalable access for more institutional investors within this durable asset class.
In addition to longer tenor assets that appeal to traditional investors in infrastructure, secondary liquidity will allow investors to craft their own duration with on-the-run issuances.
Technological innovation is transforming the world of investing, and the present inertia surrounding infrastructure financing can likewise be addressed by technology-driven solutions.
We are facing a critical time for global infrastructure. Worldwide initiatives for substantial changes will require massive, sustained investment. Emerging digital asset technology can be a catalyst to unlock this value.
By bringing together the key stakeholders and increasing efficiency, we can remove the existing barriers and help to grow this vital global asset class.
Antonio Vitti and Bob Dewing are co-founders of Pontoro, a financial technology company building a platform to transform infrastructure financing.
The Real Value In Asset Tokenization Platforms Has Arrived
Asset tokenization, through the use of blockchain technology, has long promised to open new ways for investors to access assets and transform their attributes. While the promise of liquidity, automation, and transparency are improvements over the current system, real financial engineering was not explored — until now.
Most tokenizations are digitizing pre-existing private and illiquid assets and securities. The ecosystem mainly thought that if enough issuers offered primary placements of digitally represented private securities, deep pools of secondary liquidity would spontaneously develop for these illiquid assets. Yet without any market makers or analysts, it has not happened, and the promised liquidity from digital alternative trading systems has not arrived.
“Existing digital platforms have not worked out financial intermediation, including necessary assurance and tax matters,” according to John Beccia, CEO of FS Vector, a leading Washington, D.C. based fintech and blockchain regulatory advisory firm. He went on to state, “There needs to be a dialogue between asset generators and investors, without which it is difficult to create value from financial engineering. The emergence of high quality real digital assets depends on this.”
Financial engineering is a critical driver of value in financial markets by taking illiquid real assets and placing them into a new structure that transforms the risk, liquidity, and returns of the original underlying assets. However, tokenization’s commonly articulated benefits are: lowering costs, fractional ownership, increasing liquidity, faster settlement, immutable ownership records, and automated compliance. All these benefits are significant but do not create new financial products or enhance demand. Notably, while early entrants have solved for access, there is no onward connectivity to perpetuate a chain of events beyond initial asset creation and purchase. Without connectivity, there is no flow, and it is the prospect of unlimited future transactions that creates demand as well as long-lasting value.
To understand the importance of financial engineering, we can look at recent history. Modern financial engineering began in the 1970s in the United States when capital available for homebuyers increased with the introduction of mortgage-backed-securities (MBS). These new securities allowed banks to sell off these loans to new investors, which, up to that point, were confined to bank balance sheets. The Government National Mortgage Association (Ginnie Mae) enabled these first MBS products’ success by guaranteeing the first mortgage pass-through securities.
Debt securitization started growing exponentially in 1983 with the introduction of the collateralized mortgage obligation (CMO). Investors could now choose specific tranches based on their financial return and risk requirements, overcoming the interest rate and prepayment risks innate to the original MBS structures due to the fixed income characteristics of the underlying 30-year mortgages in those earlier vehicles. Notwithstanding the 2008-2009 disruption caused by non-government sponsored private-label CMOs, modern financial products continue to provide critical liquidity, efficiency, and value to borrowers and investors today.
Digitization of private securities has not yet created equivalent value because early entrants have focused on the technology without meaningfully enhancing private assets’ investment attributes. Blockchain’s potential to introduce scalable synchronization of the asset-owners’ objectives with investors seeking investments is another critical innovation. According to Patrick South, the Vice President of Development at the Chamber of Digital Commerce, the leading Washington DC-based industry association advocating for digital assets, “The revolution will be true financial transformation, given the digital tools we have.” For instance, blockchain technology could give investors the ability to self-assemble bespoke investment products dynamically, specifying the assets, and creating tranches or other attributes best suited for their specific needs. Only the companies with the right structured finance expertise, coupled with deep experience in high-grade assets that support liquidity, will succeed in institutional-caliber digital assets.
According to Paul Atkins, former Commissioner of the U.S. Securities and Exchange Commission, and chief executive of financial services consultancy Patomak Global Partners, “There is a long history, in the securities industry, for the private sector to lead the way. Regulators find it more constructive to engage teams with deep expertise in an asset class and a focus on institutional finance.” However, often teams with little institutional financial domain expertise and mostly technology backgrounds are helming digital securities platforms. They also have correspondingly limited knowledge in structured finance regulatory and compliance matters and often focus on retail-grade assets.
As a result of this, retail asset and retail investor focus of early entrants anticipated secondary liquidity has yet to develop for tokenized financial assets. It is hard to value on a secondary basis the retail-type of securities typically being tokenized. Wide gaps in prices between buyers and sellers form, which leads to a disorderly market lacking critical mass, all of which is detrimental to secondary liquidity. Retail investors often do not have the asset valuation expertise or insight from analysts and market makers necessary to support sustainable secondary liquidity. Solving this problem requires in-depth asset domain knowledge to tokenize assets innately low in volatility and easy to value.
It also requires a deep understanding of the types of investors that would buy tokenized assets. Investors are quite varied, from large to mid-sized institutions, mutual funds, pension funds, (multi) family offices, registered investment advisors, ultra-high net worth investors, and retail investors. Improving asset liquidity requires opening access to an asset to a broader spectrum of investors. The considerable potential that blockchain can bring to real asset financial products is best served first to institutional investors where they have the expertise to evaluate these new vehicles and co-create new financial products with this technology. As these new products mature, then retail investors would have more information to act on.
Digitization platform companies need to have a deep understanding and appreciation of securities regulations and take a collaborative approach with regulators to address their concerns to create financial innovation successfully. Only a few digital securities fintech companies are beginning to show a critical understanding of the regulatory landscape, have asset expertise, and complementary proficiency across the investor ecosystem. Arca’s tokenized U.S. Treasury Fund is an example of creating a mutual fund-like structure on blockchain for existing Treasury bonds. INX’s recently securitized its future cash flow streams, which is equally groundbreaking in its compliance with the SEC regulations. These are both positive examples of combining financial engineering with blockchain technology that either creates a new type of investable asset or transforms the liquidity of underlying securities. While these are still relatively simple structures from a structured finance perspective and primarily are retail-focused, these are promising steps in the right direction.
Pontoro is taking digital financial innovation even further by creating a digitally native evolution to the asset-backed securitization structure. The company has a team of experts in large-scale infrastructure project finance, strong ties to asset generators and institutional investors, and deep regulatory and technical expertise. Recognizing the lack of flow needed to create durable value, Pontoro is solving for connectivity. Infrastructure debt is an asset class in high demand by institutional investors. However, in their current loan form, investor access to these assets is effectively limited to all but the largest investors. By solving for frictions to price discovery, inventory transparency, and liquidity - which are nearly non-existent for these opaque assets - Pontoro facilitates flow between buyers and sellers currently prevented from transacting. The company’s new approach will enable institutional investors to create custom portfolios of infrastructure assets within its tokenization platform and facilitate bi-lateral liquidity among participants, improving investor access, and price discovery. Pontoro’s founder and CEO, Antonio Vitti, noted that “There is an opportunity to use financial engineering to create immense value with illiquid infrastructure project loans, improve liquidity and enhance access for a broader spectrum of institutional investors. What Pontoro is doing is so bold and so audacious that we will massively expand investor access to private assets if we succeed.”
Bold visions are needed at a time when funding infrastructure has never been more critical. Time will tell if these next generation of platforms can unlock blockchain technology’s immense potential for financial assets.
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New Firm Touting Infrastructure-Debt Tokens
A New York startup is developing an auction and trading service that promises to make infrastructure loans available to a broader set of investors, including hedge fund operators.
The firm, Pontoro, aims to offer an initial loan pool in the vicinity of $300 million to $500 million during the first half of 2021. Its goal is to complete at least $20 billion of such trades within five years.
Infrastructure loans, which often total hundreds of millions of dollars and at times can surpass $1 billion, typically are syndicated by banks among narrow groups of large buyers including pension systems and sovereign wealth funds. Pontoro proposes to break them into smaller amounts that would allow participation by small and mid-size investors while preserving the banks’ roles as originators.
Here’s how: The firm would offer blockchain-based tokens that would represent exposures to pools of multiple loans with a minimum investment of perhaps $1 million. Some of the offerings would be broadly diversified. Others would be organized by underlying asset type, for example loans that finance solar- or wind-power projects.
Pontoro then would give the holders of the tokens the option to bid on specific loans in those pools via Dutch auctions, typically within a few weeks. The result would be the creation of an additional layer of potentially smaller tokens that would facilitate the creation of custom portfolios.
Pontoro believes an eventual outcome would be the creation of an active secondary market for infrastructure loans, which aren’t widely traded today. That process, likely taking a few years, would depend in large part on loan transparency.
Indeed, Pontoro is touting its tokenization plan as giving auction participants a clearer view into each loan while reducing settlement risk and transaction costs. The firm currently has access to more than $500 million of performing loans written against existing infrastructure assets. Eventually, it plans to expand into other illiquid asset types including private equity fund shares and private-company investments.
“There’s a large opportunity to unlock private markets to a broader spectrum of institutional and accredited investors,” Pontoro chief executive Antonio Vitti said. “That’s what we hope to do, starting with infrastructure loans and, over time, other high quality private equity assets and other sectors.”
Along with hedge fund firms, Pontoro is shopping the idea
to family offices, smaller pension plans and wealth managers. Currently, investors in those categories that want exposure to infrastructure debt in most cases must opt for funds with longterm lockups and large minimum contributions.
Infrastructure debt rarely defaults. And because the underlying payment streams are linked to assets including power plants, hospitals, telecommunication facilities, water and waste facilities, railways, roads and airports, there is little correlation to broader markets.
But infrastructure loans typically pay low interest rates, often about 300 bp over Libor. To that end, hedge fund operators taking part in Pontoro’s program likely would seek to juice their returns through the use of leverage.
The banks that would originate the loans, meanwhile, are showing interest in the service both as a means of expanding investor access and reducing their own exposures for regulatory risk-management purposes.
Part of Pontoro’s pitch is that it sees the need for $94 trillion of infrastructure financing globally by 2040, with government entities and banks only able to supply about $80 trillion of that amount. Banks, for instance, have been pulling back.
As it develops its business, Pontoro is negotiating to raise $3 million from venture capital investors. That capital would represent the firm’s first injection from outside backers while assigning a $15 million value to the business. It would use the money for technology, legal and operational matters.
Vitti leads Pontoro with chief investment officer Robert Dewing. Vitti previously was chief executive of Merchant Atlas, a sales-automation business he co-founded in 2009. His earlier employers include Franklin Templeton Investments, BlackRock and Lehman Brothers. Dewing’s background includes serving as a portfolio manager for a $1.7 billion infrastructure-debt fund at J.P. Morgan, where he worked from 2011 to 2016. He also has spent time at Global Geothermal and Citigroup.
On board as asset-operating partners are former GE Energy Financial executive Paul Naumann and Martin Rees, ex-chief financial officer of InterGen. Pontoro additionally is working with several advisors: Grasshopper Capital partner Nisa Amoils; former SEC commissioner Paul Atkins, via his Patomak Global; artificial-intelligence specialist Steven Gustafson; LMRKTS executive Hyung Kim; and Annemarie Tierney, who covers blockchaintechnology regulations via her Liquid Advisors.
Pontoro on Innovative Financing Solutions for Infrastructure Reform
The Biden Administration’s push for a large-scale infrastructure package has been met with unsurprising opposition, hampered by the two perennial concerns of infrastructure reform: Who will benefit, and how do we pay for it? Moreover, the need to encourage more sustainable infrastructure and green energy investment has become increasingly in focus. With institutional-grade fintech continuing to advance across asset spaces, the question has to be asked: is there not a tech-enabled horizon in view, that stands to benefit all parties, which can solve these questions in a new way?
Antonio Vitti and Bob Dewing are co-founders of Pontoro, a financial technology company focused on transforming infrastructure financing. Here they share their thoughts on innovative financing solutions for infrastructure reform.
Traditional infrastructure financing options provide seemingly limited choices: use public resources or use closed private financing silos. But what if current infrastructure debt originators (e.g., banks) and prospective long-term investor bases (e.g., public pensions, charitable foundations, and retail mutual funds) could adopt a means through which they all mutually benefit?
Fintech platforms have now reached a point where they enable tokenization and securitization of real-world assets. This allows diverse pools of assets to be curated and accessed securely by a far greater spectrum of accredited investors, and at a much greater velocity.
The platform our firm, Pontoro, is building is just one example as it brings connectivity between originators and institutional investors, using blockchain, to facilitate high-velocity distribution of infrastructure debt; as well as investor-led customization of debt portfolios around asset duration, segment, geography, and returns. This creates new options for financing infrastructure in a collaborative manner with current debt originators.
The sanguine aspect that digital platforms offer is a level of visibility, not possible with today’s paper-only processes, that allows synchronicity between parties of varying objectives. Namely, where Wall Street, Capitol Hill, and buy-in from local leaders may historically have been at odds over infrastructure, the digitization of financing channels creates new optionality and flexibility that benefits all sides.
Increased liquidity, pricing transparency, and access to a broader base of investors have become common outcomes for sectors successfully engaged by fintech. What is more recent, and highly compelling for infrastructure, are developments showing technology can embed regulatory, reporting, and oversight features. If employed, this final piece will make liquidity and scalability possible for the infrastructure asset class which, traditionally, requires an onerous private placement process to change hands. The outcome: for the first time, new sources of capital will be able to participate flexibly with Congress and Wall Street on infrastructure, and in an aligned way.
How so? Digitization of financing channels enables streamlined decision-making and customizable execution over real asset financing for multiple stakeholders simultaneously. Additionally, if leveraging distributed ledger technology, expensive ‘red tape’ can be automated through smart contracts. This previously unavailable optionality allows closer orientation between all involved, which will be a key factor in the success, or failure, of getting (or keeping) critically needed infrastructure projects off the ground.
More importantly, it means there will no longer be private-versus-public choices. Tokenization allows more private investors to profitably support government-led infrastructure initiatives, to a level where even those not on Capitol Hill or Wall Street can have a stake in infrastructure reform. And ‘multistory’ connectivity between parties leveraging smart contracts enables flexible synchronization of their objectives.
For example, banks may wish to underwrite new infrastructure projects but cannot feasibly hold these large loans long-term on their balance sheets as it hinders them supporting more projects in the future. Conversely, many institutional investors seek long-term debt assets with attractive risk-adjusted returns, low default rates, and stable yields with built-in inflation protection. Many of these investors lack direct access to infrastructure assets or the expertise to select and manage investments at the individual transaction level.
By leveraging fintech, individual infrastructure loans can be quickly pooled and distributed, much like taking a share in a mutual fund, to a wide range of investors. This offers banks the security they need to make longer tenure loans as they can quickly access off-takers who desire the non-correlated, long-term returns infrastructure projects deliver. On the other side, projects initially funded by public capital can be refinanced through the private market, allowing for the recycling of public money to new infrastructure initiatives.
Wouldn’t our public pensions, such as CalPERS or Local Government Pension Schemes, want scalable and cost-effective ways to own a slice of their own backyard? Shouldn’t pensioners, teachers, firefighters, and other local residents be given the opportunity to have an ownership stake and gain returns from local infrastructure projects, which underpin daily life, through mutual funds?
The creation of neutral, institutional-grade, digital financing channels reduces reliance on traditional concentrated pools of capital; whilst carrying implicit characteristics that enable local and global investors the opportunity to directly engage projects of varying sizes that meet federal demands. The critical conundrum of “How do we pay for it?” is suitably answered as public, private, and hybrid concessions, and many other structures, can be flexibly developed and distributed through these channels. The concern over “Who will benefit?” can be answered through a different lens: we can all benefit from it, and each of us has an opportunity to invest.
This new approach could also help green technology initiatives. The additional refinancing risk ESG carries, due to rapid technological obsolescence, currently limits availability of long-term capital. By improving institutional investors’ access to more desirable longer tenure loan assets, we can encourage bank underwriters to make correspondingly longer-dated loans, enabling the growth of the green energy space.
Lastly, the question of asset quality is implicitly answered. Any fintech team that desires professional investors, but then offers up long-term loans on sub-standard projects is, well… not going to last very long. Thus, the bar of new infrastructure builds for communities would likely also be raised; as democratized, or non-siloed access to infrastructure project financing will create a more competitive market, generating higher-and-higher demand for increasingly robust, 20-year-plus assets.
Regardless of its final form, the Biden Administration’s infrastructure program will require a huge debt component in order to allow society to repay the initial construction or reconstruction costs over the useful life of the projects. If our public officials want to move infrastructure from a punchline to a policy win and propel our country forward, they should look towards the innovation provided by fintech.
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