After the rain…? Sponsor activity in infra in 2023

After the banner year for M&A in 2021, 2022 was always going to be more challenged. But in many sectors those challenges have come from unexpected quarters and been more difficult to ride than expected. As we enter the holiday season, we consider the outlook for financial sponsor investment into European infrastructure in 2023.

The global downturn in M&A in 2022 – a 30% drop from 2021 – has not hit infrastructure as sharply as some other sectors. Reasons for the resilience of infrastructure M&A include:

• traditional/core infrastructure is often price-controlled by regulation, tracking inflation;
• debt is still available to finance infrastructure deals (albeit pricing has moved quite considerably in some sub-sectors, like fibre, while pressure to divert financing from carbon-intensive businesses continues);
• many financial sponsors who play in the infrastructure space can finance acquisitions solely with equity, with target debt sometimes being portable, or transactions (such as stake sales) not triggering mandatory prepayment of target debt; and
• financial sponsors continue to allocate more funds to infrastructure, meaning there is a continued pressure to source new investments.

As a result, we expect there to be a good amount of activity in 2023 both from traditional players as well as others who are looking for different ways to deploy capital when their traditional investment sectors and geographies are quieter. North American-originated capital investing into Europe will continue to be key – with brownfield transactions in Europe in 2022 outstripping the equivalent in North America by more than USD30bn.

Three key themes we expect to shape activity in 2023: 

• Sustainability-focused investments – there is an increasing number of opportunities for sponsors to add sustainability-focused assets of scale to their portfolio, and an increasing number of sponsors with dedicated climate funds. Available assets include traditional renewables, something of a resurgence in nuclear (in part driven by the focus on domestic energy security), and transition-related technologies such as CCUS, hydrogen, battery storage and EV charging. We’re also seeing an increase in appetite for greenfield investments or vertical collaborations, with sponsors partnering with developers or strategic players to develop large projects in proven technologies, build ‘platform’ businesses or gain exposure to inelastic supply chains for crucial commodities or components. 
• Regulators shaking things up – financial resilience, the growth agenda and operational and environmental targets are top of mind for regulators in Europe, and this focus will drive activity. For example, in the UK this month, Ofwat published its final methodology for the 2024 Price Review which will set returns for investors in water companies from 2025 to 2030, and Ofgem launched its Accelerated Strategic Transmission Investment framework to streamline regulatory and funding decisions for onshore transmission, both of which we expect to stimulate equity injections, refinancings and M&A ahead.  
• Digital diversification – telecommunications was the second largest sub-sector in European brownfield activity in 2022, behind transport. However, lots of sponsors end the year disappointed to have missed out on a relatively small number of very large European telco towers deals. Those without significant towers or fibre assets will be on the hunt in 2023. And as incumbent telcos remain under pressure from activists to break up or sell off their infrastructure assets, there should be more to come across Europe.

And so with that, best wishes for the holidays from all of the Freshfields team.  We are looking forward to plenty of interesting transactions in the year ahead!