Infrastructure: the appeal of smaller assets

The recent macro shocks and the aftermath of the pandemic have highlighted the attractiveness of infrastructure as an asset class. Infrastructure assets span multiple sectors, frequently with high barriers to entry and strong market positions. They often provide essential public services that are underpinned by regulation or long-term contracts. This supports their defensive characteristics and lends them to attractive long-term yields, compared with other alternative assets. We are seeing significant appetite for core infrastructure as the asset class begins to mature. The risks and strategies of infrastructure are now better understood by investors and that adds to its appeal.

The benefits of smaller assets

Increased investor demand for infrastructure has resulted in large amounts of capital flowing into the asset class in recent years. Managers have been following the market trends and are now raising larger funds to accommodate the demand. This is leading to a crowded top-end of the market, which is focused on larger assets (over €1 billion in value). We prefer infrastructure projects in the small- and mid-market area, with valuations of up to €500 million. There is less competition in this space as the transactions are typically more complex.

There are many stakeholders that need to be considered when completing a transaction in the small- and mid-market space, such as local governments, end users and employees. Given we take a long-term view, where we can assess and ride-out economic cycles, we are positioned to understand and deliver the needs of our various stakeholders.

We are positioned to understand and deliver the needs of our various stakeholders.

Small assets work well in core infrastructure

The majority of core infrastructure assets are not large. For example, utilities, fibre networks and renewable energy plants can be managed by investors with a small- and mid-market strategy.

Our long-term strategy has allowed us to become an attractive partner for local governments. Two examples include our investments in a Finnish district heating company (Riihimäen Kaukolämpö Oy) and a Finnish regional utility (Outokummun Energia Oy). They demonstrate that working with local governments can improve the wider area and local communities. We have been able to do this by connecting with the networks’ customers, and by ensuring sustainable power and heat are available to end-users. Our flexible approach to governance, where we can be both a majority and minority partner, offers governments greater choice when selecting a partner to work with over the long term.

Hands-on asset management

Core infrastructure assets can have an impact on local governments and stakeholders, given how intertwined the projects are in local communities. These assets also tend to have more attractive risk-adjusted returns for investors as they require more significant hands-on asset management. For example, we are able to facilitate operational improvements, such as reporting processes and implementing our ESG and sustainability framework. We can do this in smaller businesses by working closely with the management teams, local stakeholders and our local senior partners. Hands-on asset management can also support management teams in growing their businesses. By deploying capital, we can help businesses achieve their long-term goals through organic and inorganic growth. Our investment in Auris Energy in Finland is a good example of this partnership. To date, it has completed 13 value-accretive bolt-ons in the energy space (including heat pumps, regulated gas distribution and retail businesses) that have helped shape and define the long-term strategy of the company and ensure it is well-positioned for the future.

In it for the long term

Recent trends have shown that most funds have switched their strategies to shorter ones and are selling assets within a few years. A more long-term approach to asset management means that we can hold our investments for a longer period of time – at least 10 years. Our deal team is involved in the transactions and they then transition to the asset management side of the business. This allows for continuity and clear visibility on the lifecycle of an investment, while allowing us to implement our goals and strategies.

Demand for core infrastructure will remain strong and we will continue to look at opportunities across a range of different sectors in the small- and mid-market space. Our experience will enable us to assess opportunities in a thoughtful manner and to improve our focus.

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