Historically overlooked, mid-market infrastructure investing is now gaining traction due to its resilient returns and potential for value creation, writes Karen Dolenec
Mid-market infrastructure investing has historically been overlooked. However, when delivered correctly by an experienced manager, the resilient return profile, consistent cash yield and opportunities to create value are making the segment increasingly difficult to ignore for institutional investors across the world.
The mid-market is attracting more interest from LPs. As they continue to build their infrastructure portfolios, they are looking to expand beyond their large cap exposure.
The growth of the mid-market
Why is the mid-market so attractive?
The mid-market offers the same portfolio benefits of any infrastructure holding, including the marquee draws of stable cash yield and inflation protection. But it has distinct benefits for LPs in terms of allocation strategy and portfolio performance.
The mid-market often presents a steadier deal flow, and simply more assets to invest in. This increases opportunity at a time when investors may be under-allocated in infrastructure as an asset class but face higher pricing at the larger end of the market due to the great competition for a smaller number of investments. It also offers the opportunity for greater diversity across sectors with a similar commitment.
Between 2020 and 2023, almost 2,000 mid-market transactions were completed globally (€50m- €1bn), compared to just under 350 at the very top of the scale (€1bn+).
From a performance perspective, when supported by the right manager, mid-market assets also carry more latitude to add value, simply by virtue of their size, position in the growth cycle and opportunity to professionalise.
In addition, mid-market assets are typically less exposed to geopolitical headwinds than their larger counterparts. It’s this benefit that many institutional investors in the mid-market will have been grateful for in recent years. It’s something that could draw more investors to the mid-market as volatility persists; driven by global political and economic uncertainty.
However, the value of assets is not going to rise simply due to market dynamics.
Steps for success
Just as more LP interest is directed to the mid-market, the approach of infrastructure managers is going to be even more important to delivering performance.
From our perspective, there are three key elements that institutional investors should be looking for when scrutinising an infrastructure manager’s approach.
The first is proprietary sourcing. Any strategy should be focused on having a deep understanding of the market, the drive and ability to find those investments that others overlook and then unlock those opportunities. This approach creates the greatest upside potential. In our view, the best opportunities are typically secured through bilateral approaches.
Downside protection is the next key element. A thorough approach must be taken to assess each opportunity and conservative underwriting is critical to properly minimise downside exposure that an asset may hold. If there is significant potential downside then bespoke structuring can be used to mitigate this downside risk or the investment should be avoided entirely.
Leverage – or rather the lack of it – also contributes to robust down protection. Strategies that feature conservative leverage give management teams more flexibility to invest in measures that strengthen their resilience during challenging times or capitalise on new opportunities.
In times of volatility and uncertainty, this financial agility really comes into its own while also protecting cash yield for investors. It’s why we deliberately deploy appropriate leverage across our portfolio.
Finally, there’s active management. This is critical to ensure that upside potential is turned into reality. The best managers will have a strong active component, leveraging real experts and networks in the sectors in question to build market-leading companies.
At Ancala, we work day-to-day with our portfolio businesses to create and protect value. We deliver a highly collaborative and proactive approach to asset management through our expert asset management team and our industry partners – highly experienced former CEOs and chairs of leading companies in key industries – who are fully integrated into the team. This has helped us to increase revenues of our portfolio firms by an average of 65% since we first invested, whilst also enhancing the defensive properties of our assets.
Beyond financial value, active management can enhance social and environmental benefits too – increasing the positive contribution assets have on their communities or improving their sustainability over time.
The road ahead
The mid-market’s distinct advantages mean we’re optimistic for its future. But, institutional investors won’t see its full potential if assets aren’t supported with the right team and management approach.
Investors are rightly assessing this approach and given the current political and economic outlook this will be more important now than ever.
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