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Unlocking Incentives for Above-Ground Infrastructure M&A

Infrastructure has long had a reputation as a solid bet for investors, but new legislation could further incentivize private equity to help fill the infrastructure gap

Unlocking Incentives for Above-Ground Infrastructure M&A

The $1.2 trillion bipartisan Infrastructure Investment and Jobs Act passed two years ago to invest in America’s crumbling above-ground infrastructure by rebuilding roads and bridges, providing high-speed internet and delivering cleaner energy.

But even with federal funding, experts say the investment needed to fill the infrastructure gap globally is massive.

A report by the Global Infrastructure Hub found the global cost of providing infrastructure to support global economic growth and to close infrastructure gaps is expected to reach $94 trillion by 2040. An additional $3.5 trillion is needed to meet UN Sustainable Development Goals for universal access to water and electricity by 2030, bringing the total of $97 trillion. Road and electricity infrastructure require the greatest spend, the report noted.

Glenn Mincey, head of Private Equity at KPMG, says filling the gap cannot happen without private investment. “Governments can’t pay for it themselves,” he says. “It has to come from private industry, and incentives certainly help to attract that investment.”

But thanks to infrastructure’s longstanding reputation as a solid investment, coupled with new government incentives for private investors, above-ground infrastructure is embracing private equity interest—particularly in non-traditional categories like renewable energy and data centers.

An Expanding Landscape

Even before the new legislation, infrastructure has had a longstanding reputation as a solid bet for private investors.

“If you go back to 1991, infrastructure (investment) was probably less than 1% of private markets, in terms of exposure,” says Pete Larsen, managing director for the Real Assets Investment Team at alternative investment manager Hamilton Lane. “Now, according to our data, it’s around 9%. That’s a really large growth rate compared to other asset classes.”

Over the years, however, the definition of above-ground infrastructure has expanded beyond the traditional assets of road and bridges, notes Margaret Xu, deal advisory partner at KPMG. “If you go back ten or 15 years, roads, ports, regulated utilities, power generation—what I call core infrastructure—that’s what people invested in,” she says.

Today, she notes, above-ground infrastructure includes digital infrastructure such as fiber, data centers and towers; clean energy including wind, solar, geothermal, energy storage and energy efficiency; EV infrastructure; and the circular economy which involves the reuse or regeneration of materials or products.

Companies offering technologies and products that support infrastructure are where James Bardenwerper, vice president of investment bank Configure Partners, sees opportunities being seized.

The investment bank recently assisted in Greenbelt Capital Partners’ acquisition of CTC Global Corporation, an Irvine, Calif.-based company that specializes in engineering and manufacturing advanced conductor cores for high-voltage transmission cables.

Consistency Is Key

Experts say infrastructure offers plenty of investment targets with ongoing work to drive consistent revenue, rather than businesses that rely on one-off projects.

A company like CTC Global offers on-going stability, says Bardenwerper, who expects the company to have a steady flow of work stemming from the need for increased grid capacity, rising energy efficiency and the replacement of aging infrastructure.

In another deal, Hamilton Lane recently co-invested in water reuse platform (whose name remains under wraps) that has developed proprietary technologies for cleaning industrial wastewater. After water is pulled from the ground, the company treats and makes it suitable for other uses, reducing stress on aquifers.

Related content: Investors Dig Deep for Underground Infrastructure Opportunity

When weighing deals, Larsen says Hamilton Lane looks for companies that have durability on the top line of sales and revenue, provide an essential service and have long-term contracts with credit-worthy counterparties. “This (water reuse) company is basically essential and becoming more essential over time given increased water scarcity,” he says. “It also operates on long-term contracts.”

The features that private equity looks for are recurring relationships, multiple projects over a period of time and a meaningful component of a company’s revenue stream coming from maintenance and repair because that’s a recurring revenue stream.

Stan Bailey

Ironline Advisors

On-going, reliable work is also a priority in transactions with which Stan Bailey, chairman and founder of Alabama-based Ironline Advisors, assists. Ironline recently represented Massey Asphalt Paving, a third-generation, family-owned and operated asphalt paving company, in its sale to Atlantic Southern Paving & Sealcoating, a portfolio company of Harbor Beach Capital.

Bailey says its reliance on local, ongoing work such as repaving municipal and county parking lots added to the company’s appeal. “The features that private equity looks for are recurring relationships, multiple projects over a period of time and a meaningful component of a company’s revenue stream coming from maintenance and repair because that’s a recurring revenue stream,” he explains.

Incentivizing a Deal 

In the U.S., federal incentives under the new infrastructure law, as well as the Inflation Reduction Act of 2022, are enticing for investors who see opportunities to support public projects and target companies that will have on-going work, rather than one-off projects.

“Transport, energy, broadband and water are four categories that are seeing incentives that are meant to leverage private capital,” says Paul Epstein, partner at global law firm Shearman & Sterling. “We believe investment will continue to grow as long as there are no changes to the law and there aren’t exogenous factors coming into play, given that 2024 is an election year.”

Related content: Water and Electricity Are a Safe Mix in Infrastructure PE Portfolios

He adds that while this is “a complex web of tax incentives,” developers are educating themselves and applying for benefits like tax credits that can minimize capital costs—for themselves, and for outside investors.

Not everyone is convinced the legislation will have its desired effect, however. Ironline’s Bailey finds investors in the lower middle market are not motivated by federal incentives. “Generally, what we find is that private investors are nervous about any business that’s heavily reliant on government funding of short-term programs,” he says.

Still, as the impact from the Infrastructure Investment and Jobs Act kicks in, experts agree that target companies that receive government funding would be well-advised to turn into those windfalls into the sort of long-term growth that appeals to investors.

“The infrastructure law is kind of a shot in the arm,” Bardenwerper says. “A company works on initial construction or installation and then it is better positioned to retain maintenance of that roadway, bridge or other structure going forward.”


Annemarie Mannion is a former reporter for the Chicago Tribune and a freelance writer who covers business.


Middle Market Growth is produced by the Association for Corporate Growth. To learn more about the organization and how to become a member, visit www.acg.org.