2023 was generally a challenging year for M&A globally as dealmakers battled inflation, rising interest rates and political uncertainty throughout Europe and the United States. As we enter the new year, we consider the outlook for financial sponsor investment into European real assets in 2024.
- The downturn in M&A across Europe in 2023 represented a 35% drop compared to 20221. That climate impacted real assets transactions, but not as sharply as some other sectors. Reasons for the resilience of real assets 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 – for example in fibre);
- many financial sponsors who play in the real assets 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 real assets, meaning there is a continued pressure to source new investments.
- In the real estate space, transactions in 2023 have been constrained by bid-ask spreads and cost/availability of debt. But there is a lot of dry powder ready to deploy into the bottom of the cycle: USD 110bn for private equity real estate strategies in Europe alone2.
- As a result, we expect there to be a good amount of activity into 2024 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. We can expect North American-originated capital investing into Europe to be key once again this year: North-American led deals in Europe were responsible for over 13% of global M&A deals3 – with brownfield infrastructure transactions in Europe in 2023 being worth a combined total of USD160.43bn, falling just behind equivalent deals in North America which generated USD165.03bn4.
- Three key themes we expect to shape activity in 2024:
- Sustainability-focused investments – there is an ever-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, the resurgence in nuclear (in part driven by the focus on domestic energy security) and developing technologies such as CCUS, battery storage and EV charging infrastructure, alongside adjacent technology and services businesses for the core-plus players. Despite headwinds from inflationary cost pressures, deals in the renewables sector accounted for a quarter of all infrastructure deals throughout Europe in 2023, demonstrating sponsors’ resilient focus on sustainability-linked projects5. We’re also seeing an increase in appetite for greenfield investments – with sponsors often partnering with strategic players to build ‘platform’ businesses. This has led to an increase in the sector of greenfield deals with combined values increasing by c. USD15bn compared with 20226. The impact of sustainability-focus is seen across real estate markets too, the most pronounced being a bifurcation of the office sector into (i) modern buildings with high ESG credentials, which are in short supply and experiencing high rental growth, and (ii) everything else, which is experiencing significant distress.
- Digital diversification – telecommunications was the second largest sector in European infrastructure deals in 2023, with 23.5% of all deals done, sitting just behind renewables7. Telecommunications was also the largest sub-sector in European brownfield infrastructure activity in 20238, overtaking transport compared to 2022. We saw an increased number of data centre deals across Europe at the back end of 2023 and we expect that to continue into 2024. And as incumbent telcos are still under pressure from activists to break up or sell off their infrastructure assets, there should be more towers and fibre assets coming to market across Europe.
- Private capital focusing on the infra space – private capital firms have fuelled the growth in infrastructure M&A transactions over the past few years and have continued to raise money for dedicated infrastructure funds as well as acquiring infrastructure managers. Examples include Brookfield raising a record USD28bn at the end of 2023, making it the world’s largest ever infrastructure fund9, CVC’s acquisition of DIF in H2 2023, Keppel’s acquisition of Aermont, and Blackrock’s acquisition of Global Infrastructure Partners and General Atlantic’s acquisition of Actis, both earlier this month. These moves and the characteristics of many infra assets should instil confidence in dealmakers across Europe that there is money in the market and deals to be done, despite the unpredictable macroeconomic and geopolitical outlook.
And so, with that, Happy New Year from all of the Freshfields team. We are looking forward to plenty of interesting transactions in the year ahead!
1 Source: MergerMarket. EMEA region saw USD676bn in deal activity, a 35% drop compared to 2022. U.S. companies led the most in-bound acquisitions, with deals valued at USD89bn.
2 Source: Green Street.
3 Source: MergerMarket.
4 Source: Inframation Analytics. This is compared with brownfield transactions in 2022 in Europe of USD239bn and in North America of USD234bn.
5 Source: Inframation Analytics. Renewables represented 27% of all 2023 deals followed by telecommunications with 23.5% and energy with 18.8%.
6 Source: Inframation Analytics. Greenfield deal value in 2023 was USD74.6bn compared with USD59.7bn in 2022.
7 See n5.
8 Source: Inframation analytics. 2023 brownfield telecommunications transactions in Europe valued at USD49bn. The next two sub-sectors after telecommunications are energy (USD32bn) and renewables (USD29bn). Telecommunications was actually the largest sub-sector by value in each of 2020 and 2021, and even though it has fallen behind transport in 2022 and renewables in 2023 the value of telecommunications transactions remains reasonably stable across 2020, 2021 and 2022 (USD39bn-47bn per year) with an increase in 2023 to around USD70bn.
9 Source: Financial Times.