Infrastructure – How to bridge the gap?

2024 was a steady, if not spectacular, year for infrastructure M&A, with the asset class showing some welcome signs of revival after a challenging 2023. Figures compiled by Infralogic reveal that the value of global private infrastructure M&A transactions closed in 2024 increased 12.1% year-on-year (albeit from 14.1% fewer transactions), buoyed by a number of very high value transaction in the extremely active digital infrastructure space, with the renewables and energy sub-sectors also bolstering performance.

Carve-out transactions

There was a notable increase in the number of large infrastructure carve-outs in 2024, in particular in the telecoms and digital infrastructure sub-sectors, including Rakuten Group's sale and leaseback arrangement with Macquarie in respect of a portion of its mobile network assets in Japan for up to $2 billion, and financial close of Telecom Italia's disposal of its fixed line network (NetCo) to a KKR-led consortium for up to €22 billion. 

This increased carve-out activity can be attributed to a number of macroeconomic factors:

• Higher interest rates have encouraged traditional asset owners to raise capital from disposals of existing infrastructure assets in order to reduce leverage and associated borrowing costs (and retain investment grade rating on their retained debt, where applicable).
• Tightening liquidity in both the debt and equity markets has also made it more difficult for utilities, telecoms companies and other traditional asset owners to access the capital required to fund major infrastructure projects such as network build-outs and greenfield developments; carve-outs and partial disposals of capital-intensive passive infrastructure assets have been an efficient way for such owners to continue to benefit from the underlying infrastructure without the burdensome capital requirements.
• There is also increasing scrutiny in corporates and financial sponsor-backed portfolio companies on capital allocation, with corporates seeking to recycle capital into higher growth operational aspects of businesses and portfolio companies needing to align their businesses with their financial sponsors' investment objectives and ESG requirements.

Whilst the above factors may make the prospect of a carve-out or partial disposal appealing to some infrastructure investors in the current market, carve-out transactions can be significantly more complex than traditional exits. This can be especially true in the case of carve-outs of infrastructure assets from utilities, energy companies, telecoms companies and transport groups, where the target business is likely to be highly integrated within the seller's group, and may share regulatory approvals, benefit from shared intragroup services and be heavily reliant (post-completion) on the seller for a significant portion of its revenue (which has the potential to create conflicts, particularly in the context of a joint venture with a legacy owner of the underlying assets which will remain the principal customer / tenant of the infrastructure). Notwithstanding such complexity, we expect the current trend of increased carve-out activity to continue into 2025 whilst the macroeconomic drivers persist.

Bridging the value gap

Market dynamics suggest an increased appetite for dealmaking in 2025. Private equity and infrastructure funds are sitting on record amounts of 'dry powder' and are coming under increasing pressure to realise investments and provide distributions to LPs (including for the purposes of their own fundraising efforts). Over the course of 2023 and for much of 2024, these deal-drivers were tempered by a wide bid-ask spread caused by the higher-for-longer rates environment and the downward pressure of increased borrowing costs on deal multiples.