Infrastructure assets have provided stability and protection for investors, helping to sustain private equity (PE) deal activity and fundraising through a period of macroeconomic uncertainty. We examine what is driving growth in the PE infrastructure space and how fund managers are expanding beyond the traditional infrastructure categories to unlock new opportunities.
These are challenging times for PE, as rising inflation and interest rates dampen deal flow and fundraising. Global buyout deal value slid 41% year-over-year in 2022, according to Mergermarket data, and this trend is continuing in Q1 2023, with global buyout deal value having contracted by 57% since Q1 2022. Buyout fundraising was down 16% during the same period, as reported by Bain & Company.1
One area that has held firm, however, is infrastructure. The long-term revenue streams of infrastructure assets have provided a natural hedge against inflation and positioned the sector as a haven in times of uncertainty.
Increasingly risk-averse investors have pivoted their allocations decisively toward infrastructure strategies, which are typically less cyclical. A Nuveen survey of investors found that 58% plan to increase their allocations to infrastructure strategies over the next two years.2 These investors have continued to deploy capital into infrastructure funds, even though fundraising for buyout and venture capital strategies has contracted.
Bain & Company analysis of Preqin data shows that, in 2022, year-over-year infrastructure fundraising climbed by 22% (as compared to a 16% fall in buyout fundraising and a 14% drop in venture capital fundraising).3 Infrastructure fundraising highlights included Stonepeak closing its fourth infrastructure fund on US$14 billion,4 I Squared Capital raising US$15 billion for its third and largest ever global infrastructure fund5 and KKR raising US$17 billion for its fourth global infrastructure vehicle.6
Returns have also been impressive. Infrastructure was the second strongest performing private markets asset class in 2022, according to McKinsey, with only the cyclical natural resources space showing stronger performance.7 Between 2008 and 2021, infrastructure delivered a track record of steady long-term returns relative to other private markets strategies.8
"Infrastructure is in the spotlight and is likely to remain center stage," says Ropes & Gray asset management partner Amanda Persaud. "There is huge demand to improve not just brick and mortar assets, but also digital connectivity. This is turbocharging infrastructure investment globally."
Infrastructure's resilient characteristics and robust investor support have given fund managers the confidence to continue deploying capital despite the uncertainty and dislocation in wider M&A markets— global M&A deal value (excluding global PE deal value) contracted by 27% year-over-year in 2022, according to Mergermarket data, and it is down by 38% in Q1 2023 as compared to Q1 2022.
Big-ticket infrastructure transactions in the past 12 months include Carlyle Group's US$1 billion investment in cell tower platform business Tillman Infrastructure,9 UBS's acquisition of a portfolio of Texas energy storage assets from Black Mountain Energy Storage10 and Blackstone's investment in Italian infrastructure group Atlantia.11
These deals have underscored the sector's resilience, with infrastructure's predictable, non-discretionary revenue streams giving dealmakers the confidence to invest despite wider macroeconomic uncertainty.
"Infrastructure-linked M&A has held up strongly in the past year. Strategics and PE investors have remained active, and auction processes have been competitive. The buyer universe has expanded, and there have been attractive opportunities on the sellside to secure good multiples for assets," says Ropes & Gray M&A partner Marko Zatylny.
Debt for deals
The stability of the infrastructure sector through recent market dislocation has also meant that lenders remain willing to finance infrastructure deals, even as overall financing for M&A deals (including PE deals) has contracted steeply in the face of rising interest rates. According to Debtwire data, high-yield and leveraged loan financing for corporate and buyout M&A in the United States slid approximately 40% in 2022 year-over-year, from US$541.64 billion in 2021 to US$328.17 billion in 2022.
According to Fitch, infrastructure and project finance assets recorded the lowest proportion of deteriorating outlooks when compared to other global industries, with only 13.3% of the assets tracked by Fitch showing a deteriorating outlook.12
The essential nature of infrastructure has shielded the sector from drops in demand, and lenders have taken comfort in the protection offered by high levels of contract-based, inflation-linked revenues. According to S&P, this has seen infrastructure default rates come in materially below the default levels recorded by other corporates.13
"Infrastructure dealmakers can access different pools of capital, backed by lenders and institutions with long-term investment horizons. Lenders in the leveraged buyout space have hit the brakes due to choppier markets, but we continue to see banks willing to underwrite with a view to syndicating multibillion-dollar infrastructure debt packages," says Ropes & Gray finance partner Michael Kazakevich.
This has allowed infrastructure dealmakers to continue tapping loan and bond markets for financing at reasonable rates, with limited syndication risk. In Germany, for example, joint venture partners Vodafone and Altice were able to place a €4.6 billion loan to invest in fiber-to-the-home broadband infrastructure in March 2023 with little trouble.14
Sponsors investing in infrastructure have also benefitted from the emergence of infrastructure financing in the private debt space, which has provided yet another source of capital for deals. Although still relatively new, private infrastructure debt strategies have gained traction in the market and secured increasing levels of investor support. Ares Management, for example, closed is fifth infrastructure debt fund on US$5 billion at the start of 2023.15
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Footnotes
1. https://www.bain.com/insights/private-equity-outlook-global-private-equity-report-2023/. See page 20, par 4.
2. https://www.nuveen.com/global/insights/equilibrium. See page 13 of PDF.
3. https://www.bain.com/insights/private-equity-outlook-global-private-equity-report-2023/. See fig. 21.
7. https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/mckinseys-private-markets-annual-review. See Section 5, par 3.
8. https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/infrastructure-investing-will-never-be-the-same. See final par and Exhibit 1 diagram.
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