What Holds the World Together – Investing in Infrastructure
with Private Equity

Road and rail networks need to be expanded and upgraded, city centres should become less car-dependent, and efficient data centres are crucial for the future viability of an economic area. In addition, there is a growing need for senior housing, nursing homes, and significant investments are required in the education system, such as schools and kindergartens. Clearly, substantial investments in infrastructure will be necessary over the coming years, as the energy transition also requires solid and long-term financing. To achieve the European Union’s goal of making Europe greenhouse gas-neutral by 2050, private funds must supplement public investments in building and expanding infrastructure.

Institutional investors have been fulfilling this role for many years, bridging the gap between urgent needs and the public sector’s capabilities. Pension schemes and pension funds, insurance companies, and corporate pension schemes invest in alternatives – both in equity and debt structures. This versatile asset class is here to stay.

Integrating ESG into the Portfolio Mix through Infrastructure Investments

Data from the Universal Investment platform confirms this trend: as of March 31, 2024, over EUR 100 billion were invested in alternatives, with over two-thirds in private equity and more than 20% in the infrastructure. Notably, renewables projects now account for the largest share of infrastructure investments by major investors in Germany. The demand for equity investments remains high, with private equity investments increasing by around 25% since 2022.

The reasons for this increase are manifold. Infrastructure, as an asset class, offers a long-term investment horizon with regular and stable returns. It is also suitable for diversification and risk management. In addition, infrastructure investments often benefit from a state-backed base and carry relatively low geopolitical risks due to their focus on industrialised countries.

Many infrastructure financings are allocated to public or social projects. The expansion of renewable energy is also at the top of the priority list. These investments allow institutional investors to align their portfolios with ESG criteria, either by investing entirely in ESG-compliant projects or by incorporating sustainability and social aspects into their investment conditions.

Thinking of private equity in (infra-)structures: success begins at the start

The foundation of a successful investment is selecting good target investments, requiring fundamental knowledge of markets, trends, and smart forms of financing. Liquidity management, portfolio management, risk management, reporting and fund structure are also critical factors to consider from the outset.

A comprehensive analysis of the initial situation, conditions, potential influencing factors, experience, and internal resources is therefore essential. This includes questions about the investment objective and timeframe, regulatory frameworks or requirements, any existing vehicles in use, or efficient governance.

Accurate valuation of the infrastructure investment is crucial for proper implementation of the analysis results. Transparency and accuracy of information are essential to validate and verify valuations. In some cases, like for wind turbines, comparable values are publicly available. In most cases, information must be requested directly from companies or asset managers.

The investor's liquidity management is also crucial for success. If optimised for private equity, it will ensure sufficient cash reserves to respond to capital calls at any time, while allowing for clear categorisation of returns. To match the specific characteristics of private equity investments, reporting must include detailed information on target investments and their structure, their regulatory categorisation, cash balances, capital calls, and ESG qualities, if any. This includes reporting to investors and regulators, post-trade compliance and ongoing monitoring of the portfolio from a risk perspective.

Besides all other (success) factors, a well-designed transaction management system is crucial. This must include technical and organisational interfaces that enable targeted approval of transactions, ensuring the transaction processing, including valuation and accounting.

To ensure that the infrastructure investment aligns optimally with the institutional investor’s investment goals and internal control processes, precise structuring and implementation are essential.

Infrastructure investments require long-term and intensive maintenance

Infrastructure projects are long-term endeavours that require careful planning and structural flexibility. The likelihood of needing restructuring during their long lifespan is nearly 100%. They involve ongoing, intensive tasks such as administration, controlling, reporting, and risk and liquidity management, which not only need to be optimally coordinated but also carefully executed.

Infrastructure investments offer opportunities for stable returns, strong diversification effects, and ESG-compliant investments. They not only benefit investors but also offer a societal benefit in terms of funding for transformation and sustainability,

It takes a great deal of experience and expertise to offer institutional investors tailored structures for infrastructure investments and to support them throughout the investment cycle.

Competent and experienced partners can effectively support investors, significantly reducing the maintenance effort for this complex asset class – a capital management company that is always up to date with regulatory requirements, provides technical expertise for innovative solutions, and meets the investment requirements of its institutional investors.

There is a great need for intact infrastructure, and private equity investors will continue to play an important role as financiers and promoters of infrastructure projects, helping to hold the world together.