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Dry powder to spark M&A boom
Dry powder to spark M&A boom
Cash rich private infrastructure managers are on the acquisition trail.

The amount of dry powder in the hands of private infrastructure managers will lead to increased acquisition activity in the listed space, as funds hunt for attractive assets to spend their money on, according to Cohen & Steers’ Thuy Quynh Dang.

Unlisted infrastructure fundraising is expected to reach $182bn (£161bn) globally by the end of the year, according to Preqin. KKR, for example, amassed $17bn for its biggest infrastructure fund earlier this year.

‘There haven’t been that many assets on the private side, so we’ve seen that flow of cash coming to the listed side,’ the global infrastructure portfolio manager said.

‘There haven’t been that many assets on the private side, so we’ve seen that flow of cash coming to the listed side.’
Thuy Quynh Dang, Cohen & Steers

Funds have either been buying listed infrastructure companies as a whole or purchasing assets that are run by these firms, with deals typically closing at higher multiples than what the companies are trading at on the stock exchange.

‘As this trend continues and private equity is forced to deploy cash into the listed space, we’ll see a greater convergence. Trading multiples are being pushed up, which should support valuations for infrastructure,’ Dang said.

There have already been examples of such deals, such as Blackstone and Benetton’s €54.3bn (£46bn) takeover of Italian airport and motorway operator Atlantia.

But while expected M&A activity for infrastructure pushes valuations up in some sub-sectors, other parts of the market have suffered, first from the pandemic, and then from rising inflation and macroeconomic uncertainty.

Opportunities in sectors under stress

For Dang, freight rail is becoming attractive again as some of the concerns around the sector are nearing their peak.

The Cohen & Steers global listed infrastructure team had an overweight positioning to freight rail but has since gone underweight. However, the team is now adding more to those positions as valuations have come down.

‘It’s true that in terms of the transport of goods, especially across the US, they are a bit more economically sensitive, and we’ve seen that they’re more in the cyclical end. They’ve been pretty weak over the past few months, but now that their valuation has reached more attractive levels, we’re turning positive,’ she said.

She added that management of companies have also put in a lot of effort to optimise processes and refocus cash flow generation.

‘So, we believe that once we pass the peak of concerns over volumes, these more structural advantages and the good pricing power they have will shine through. In the longer term you have secular trends of reshoring and ecommerce which will continue to be supportive for volumes.’

For Thilo Tecklenburg, managing director and co-head of infrastructure at Golding Capital Partners, the re-rating of transportation assets, particularly those related to freight transport, have resulted in these being considered less risky. And with the rise in ecommerce driving a lot of investment needs, logistics related investments continue to be attractive.

Another sub-sector that has come under stress, due to rising rates, has been communication towers. But because of their recent underperformance, Dang is now looking at potentially investing more into this area as valuations have re-rated.

‘Fundamentally it’s still an interesting subsector, it’s the best way to play the theme of 5G connectivity. The need for more towers and more space in towers is well underpinned. In Europe you also have the additional driver of market consolidation and potential M&A activity that would add to sector growth,’ she added.


The one area both Dang and Tecklenburg are staying away from is airports. Although annual spending on airport projects was previously estimated to rise by 12% this year from 2021 after the pandemic, according to GlobalData, the recovery has been quite slow.

‘They will just have a longer recovery period after the Covid crisis and its impacts,’ Tecklenburg said. ‘We’re certainly cautious with GDP-linked assets given that we might be heading into a recession or may already be in one. GDP can be an issue, and supply chain issues may impact assets differently. It’s really important to analyse how management is positioning the company and what relationships they have with suppliers.’

He also pointed out that it is important what kind of travellers airports are serving, as those with a higher number of tourism passengers could recover faster than ones for business travellers.

Dang is particularly negative on European airports, as governments have kept their borders shut longer than other countries, the recovery has been slower on the continent, she said.

Although the gap has now narrowed, with traffic in Spain for example almost back to pre-Covid levels, Dang still expects growth to be slow due to pressures on consumer spending and high inflation.

‘People are worried about paying their utility bills, so we’re going to see some more pressure from traffic and demand on leisure travel. But also from a business trip perspective, corporates will start retightening their belts and looking at their budgets for business travel, which will put pressure on traffic,’ she explained.

Structurally, it is also the one area in infrastructure where regulation is the least transparent, she said.

‘You don’t have a multi-year framework where you have visibility on tariffs. It’s a year-by-year negotiation with airlines – and they’re still in a difficult financial situation so there is definitely less clarity on pricing power, tariff evolution and inflation pass through than we can see elsewhere, that’s why we remain negative on airports.’

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