Financing expensive new infrastructure projects is a challenge for countries around the world. An American early-stage fintech named Pontoro recently pitched in Luxembourg its development of an innovative new digital assets platform that makes these investments more liquid, and thus less difficult to finance.
The Pontoro platform leverages ‘tokenisation’ – the creation of digital ‘tokens’ in a blockchain system to represent valuable digital or physical assets. Tokens are seen as all the rage in the digital assets realm and can “enable a greater spectrum of institutional investors to participate in private market infrastructure debt assets”, explained Antonio Vitti, the firm’s co-founder and CEO.
Vitti, with a background in private equity including serving as chief financial officer for Peloton Technology, said that every year, about 300 billion dollars in private market infrastructure debt assets are underwritten by the largest underwriting banks.
Only for major institutions
“We estimate that there’s about one and half to two trillion on the banks’ balance sheets collectively” at any given time. Vitti said. “It’s not uncommon to have these loans of being a half a billion to a billion each. These are private loans. They’re not rated. They’re not securities and they’re hard to access for all but the largest institutional investors.”
Last December, Pontoro announced it had raised over 6 million dollars in a preferred seed funding round for its infrastructure financing digital asset platform.
As a centre for private equity and alternative investments, Luxembourg has made a name for itself also as a global financial hub for infrastructure funds. According to advisory firm Atoz more than half of the 50 biggest infrastructure funds had a presence in the Grand Duchy in 2018.
Accounting firm PwC Luxembourg took the view that “in light of the potential consequences of Brexit, the change in the global tax landscape and the success of the Luxembourg limited partnership, the Grand Duchy is now the place to be for European and global infrastructure funds, leveraging the country’s vast experience and expertise in alternative investments and global fund distribution.”
15 trillion dollar funding gap
The Luxembourg infrastructure debt investment sector includes funds such as the Brookfield Infrastructure Debt Fund I-A (Europe) SCSP, the Sequoia Infrastructure Debt Fund SCSp and BNP Paribas European Infrastructure Debt Fund II (an Alternative Investment Fund structured as a Luxembourg SICAV-RAIF). Australia’s QIC also has used Luxembourg to raise funds for infrastructure investments.
Speaking of infrastructure, Vitti, speaking at the recent Finverse Forum event, shared his view: “We mean things from power plants, roads, bridges, tunnels, green energy, solar, wind, schools, hospitals, even sporting arenas worldwide, not just in developed economies, but also in developing economies.”
Unfortunately, Vitti declared, industry sources are forecasting that “there’ll be a 15 trillion dollar funding gap over the next 20 years if things continue at the current pace”, adding that the asset class will increase from 60 trillion to 94 trillion dollars in that time period.
Banks ‘increasingly challenged’
The reason for this funding gap? Banks are “increasingly challenged” in keeping up with the growing demand, said Vitti, because there are fewer banks due to consolidation in recent decades. On top of that, more stringent capital requirements have been placed on bank’s balance sheets since the 2008 financial crisis.
Vitti noted that the illiquidity, opacity and lack of external pricing of this asset class prevents many wealthy investors from accessing it. And what he called “the long tail of investors” – family offices, RIAs (registered investment advisors) and ultra-high net worth investors, that together “represent a greater quantum of capital” than even the big institutional investors – are often “comparatively limited in terms of their access to private market assets.”
Pontoro is seeking to bring “greater price discovery, access and liquidity to these assets,” for institutional and ultra-accredited investors, said Vitti, noting that it’s not for retail investors. He said it also wants to help the banks to free up their balance sheets so they can make new loans and “hopefully encourage investment into greater infrastructure projects globally.”
Cherry-picking loans
To do this, the company has created what it called a “digital asset enhancement platform” that sources loans from banks – “we select loans based on our asset acceptance criteria,” said Vitti.
These loans are then pooled into an investment vehicle. The firm issues a securitised participating interest in the form of a general asset token that “enables investors to hold a token that represents a diversified ownership interest in all of the assets in the pool”.
In order to enable investors to be able to customize their portfolio, Pontoro has also developed an auction mechanism that allows investors to use their general asset token to bid for an individual slice of a specific asset” from within the pool. “If they’re successful, they now own a specific asset token against that asset,” said Vitti. “It is competitive by design.”