Infrastructure: Capital At Scale

While the buy-and-build model has long been an important aspect of private equity’s value creation toolbox, platform building has become a fundamental component of infrastructure investors’ strategies to drive value and optimise returns in high-growth segments of the infrastructure market.

Digitisation and the energy transition are two of the most significant macro-economic trends shaping infrastructure investment. The ability to develop digital infrastructure and energy transition assets at scale and pace is a key factor in generating value for investors, particularly in the context of ongoing constraints relating to securing (green/er) access to power. 

Platform strategies are well-suited to enabling investors to capture this value. As well as providing an operating base with contracted cashflows, which can be recycled into further asset development, well-managed platforms provide a deep pipeline and a robust delivery model. This helps mitigate system-level constraints to allocate capital efficiently in the conversion of development opportunities into contracted cashflows.

In recent years, we have therefore seen a marked increase in the number of financial sponsor-backed platforms operating across a broad spectrum of infrastructure sectors, but most notably in data centres and renewables. As these platforms continue to mature, an increasing number are coming to market, creating unique and complex challenges for both buyers and sellers to navigate. 

Valuation challenges 

The valuation of infrastructure platforms presents inherent difficulties due to their varied nature. Such platforms commonly comprise more than one type of asset, often spread across geographies, and at different stages of development. As a result, a straightforward, one-size-fits-all approach to valuation is rarely appropriate. Instead, a nuanced and flexible methodology is often required to reflect accurately the diverse characteristics and risks involved.

In many instances, the fact that a substantial portion of a platform’s value might be attributed to a development pipeline adds further complexity. Valuing a development pipeline involves making numerous assumptions, both as to asset-specific development risk (such as permitting, construction and offtake execution), but also system-level constraint risk (such as grid congestion, power pricing volatility, land access and supply chain bottlenecks or regulatory change risk). Reliance on these assumptions and distinguishing between the different types of risks introduces significant complexity and subjectivity into the valuation process. That complexity and subjectivity can also be amplified by the nature of the platform (eg, development track record) and the jurisdiction(s) in which it operates (eg, local government policy and approach of local regulators).

Given these challenges, achieving consensus on value between buyers and sellers can be difficult, as evidenced by a number of high-profile global platform transactions in renewable energy having been abandoned, delayed or restructured over the last year. This underscores the importance of approaching negotiations well-prepared and equipped with a broad range of tools to bridge valuation gaps, and associated risk assessments, in a manner that is acceptable to both parties. This may include adopting bespoke contingent consideration or true-up structures that are linked to the achievement of specific asset-related or broader platform-related development milestones. Alternatively, it might involve sellers retaining an ownership interest in some or all of the platform to ensure they have ‘skin in the game’ when it comes to delivery of the development pipeline.

Digitisation and the energy transition are two of the most significant macro‑economic trends shaping infrastructure investment.

Execution challenges 

Challenges that may have to be overcome in executing a deal include the following:

Due diligence

The size and complexity of infrastructure platforms means that it is often not practical to apply the same level of scrutiny in due diligence across every asset within the platform. It is therefore essential to have a clear view from the outset as to what is material from a valuation perspective and what should therefore be the focus of due diligence (which will often be undertaken on a sample basis, particularly for large renewables platforms or significant towers portfolios). It is also important to appreciate that there may be differences between the seller's and the buyer's perspectives on what is material. Identifying any resulting misalignments or gaps in the sell-side due diligence materials at an early stage is vital. Early detection allows the parties to agree on how best to address these gaps without causing delays to the transaction timetable or introducing unnecessary execution risk. 

Risk allocation and recourse

Clear alignment from the outset on risk allocation is important, as it is how recourse will be provided to the buyer (particularly in the context of primary transactions where the counterparty is the investee company itself). Whilst warranty and indemnity insurance (W&I) will often be an important tool in providing comfort to a buyer, it is rarely a complete solution. W&I coverage is typically only available to the extent of due diligence and even then, the level of coverage may differ depending on the jurisdiction where the assets are located. In platform deals it is therefore important to engage early with insurers to ascertain the extent to which they can cover warranties on a 'whole portfolio' basis with a sampling approach to due diligence. Identifying potential coverage gaps early in the process enables diligence to be targeted appropriately to maximise W&I coverage or to allow early discussion of risk allocation between parties in respect of areas which fall outside W&I coverage. 

Regulatory risk

Executing transactions involving infrastructure platforms presents a range of regulatory hurdles that investors must carefully navigate. The multi-jurisdictional footprint of these platforms, especially those operating within sectors considered sensitive from a national security perspective (so-called 'critical infrastructure’), often necessitates multiple concurrent foreign direct investment (FDI) filings across multiple jurisdictions.

Increased information sharing and cooperation between national regulators (eg, as encouraged under the EU FDI screening framework) compounds this complexity, as do timing uncertainty, discretionary approvals and sequencing risk across multiple sectoral regulators (particularly relevant in parts of Asia). Given that development platforms are dynamic and legislation governing these areas is frequently updated, investors should regularly refresh their regulatory playbooks when involved in complex or protracted transactions to ensure ongoing compliance.

Furthermore, over recent years, private equity roll-up strategies have come under increased scrutiny from competition authorities on account of their potential to distort competition in the market without triggering traditional merger control thresholds. So, despite strong policy drivers supporting investment in critical infrastructure sectors like digital infrastructure and renewable energy, investors must remain vigilant regarding the increasing regulatory interest in serial acquisition models. It is essential for investors to execute their platform strategies in a manner that does not attract undue attention from competition authorities, especially when competition for vital inputs such as land, power and grid connections is particularly fierce.

Disciplined preparation is the key to success

Platform strategies have become central to infrastructure investing because they offer the most effective way to deploy capital at scale into high‑growth sectors like digital infrastructure and renewable energy. But with that opportunity comes greater complexity. Valuing multi‑stage portfolios, conducting due diligence on large and diverse asset pools, and navigating increasingly interventionist competition and FDI regimes all create meaningful execution risk.

Success therefore turns on disciplined preparation – clear valuation frameworks and realistic valuation narratives, focused due diligence, constructive risk allocation and proactive regulatory strategy. Investors who approach platform transactions with this level of rigour and willingness to be flexible will be best positioned to capture the upside of the energy transition and digitisation. They will also be better placed to manage the heightened scrutiny and structural challenges that accompany these deals.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.