Harvesting the middle: The alpha in mid-market infrastructure

Infrastructure has traditionally been associated with large-scale assets essential for any well-functioning society including airports, roads, ports, and utilities. These crown jewel assets attract significant sums of capital from large infrastructure funds, however, there exists opportunities for investment beyond the mega assets. Deals within the mid-market can offer a comparative advantage over their larger peers.

The Mid-Market

The definition of the infrastructure mid-market is a subjective one, with classifications varying between investors, and ever-evolving as average transaction sizes increase due to larger pools of investible capital, inflation, and multiple expansion.

PATRIZIA considers the mid-market of infrastructure as deals of less than €1 billion in enterprise value at entry, or funds of less than €3 billion in equity.

“PATRIZIA has been investing in the mid-market for over two decades,” said Justin Webb, Managing Director of Investment Solutions. changing landscape, we see the midmarket as a space where we have expertise, and one where we can continue to deliver attractive returns for our investors.”

A Strong Performer

Performance data on infrastructure funds shows mid-market core and core-plus deals, paving the way for mid-market managers to discover attractive investment opportunities. connections, an increase in the district heating production cap, and an increase in the maximum load factor.

On the back of this success, PATRIZIA extended the capacity of the existing incinerators and added a new incinerator in order to increase capacity by 67% to 256GWh from a previous level of 153GWh. In 2022, PATRIZIA successfully merged KVAS with SAREN Energy AS, another district heating operator in Tromsø. The valuation of KVAS almost doubled in 2022, as a result of the merger and the expansion project.

Opportunity Sets

Allocating to mid-market funds can unlock a diverse set of investment sectors. Mid-market and large-cap infrastructure investors cannot practically access the same opportunity set, which is likely to be contributing to mid-market alpha.

Over the last 12 months, most deals within the infrastructure mid-market were in the renewable energy space, particularly solar and wind, whereas large-cap infrastructure focused largely on the telecommunications, gas and oil industries.

PATRIZIA has identified four key macro trends for infrastructure in the long term: decarbonisation and the energy transition, digitisation, demographic change and urbanisation, and climate change. The alignment of these trends with the opportunity set available to mid-market investors paints a favourable outlook for mid-market strategies.

Lower Entry Multiples

Mid-market transactions are cheaper, with lower entry multiples than their large-cap peers. As part of its strategy, PATRIZIA works to transition assets from mid-market to large-cap assets.

coverage arrangement.

After the purchase, a PATRIZIA employee was appointed as an interim CEO until a new management team was in place. In further active management decisions to move the mid-market company towards large-cap, both in terms of asset size and operational characteristics, PATRIZIA grew the asset from 172 properties to more than 317 units, creating substantial value.

ability to moderate the downside risk of the investment.

When asked whether investors should pursue large-cap or mid-market infrastructure strategies, Webb responded, “Mid-market funds deserve a seat at the table. The inclusion of a proven mid-market manager alongside a large-cap manager can provide greater diversification benefits and improved risk-adjusted returns.”