Mid-market infrastructure investment: the sweet spot for value creation

The mid-market space in infrastructure is the sweet spot. Assets between $200mn and $2bn are large enough to be impactful while still offering unique opportunities for value creation.

To put it in perspective, the mid-market accounts for less than half of infrastructure transaction value globally, and yet more than 80% of the deals closed in 2023. The total market value of this is around $1tn. The opportunity set here is vast, and for alternative asset managers and infrastructure investors, it’s where real potential lies.

In recent years, the infrastructure investment landscape has evolved significantly. Large funds are raising record amounts. In 2023, well over half of the $109bn raised for global infrastructure funds went into just five funds that were $4bn or larger, according to Preqin Pro. This has created a crowded playing field in the upper market, with intense competition for large-scale deals driving up prices and limiting the opportunity for value creation.

The mid-market offers more deals and at attractive entry valuations. According to American alternative investment management and advisory company Hamilton Lane, on average, mid-market transactions are priced at a 23% discount compared to large-scale deals. This means ample opportunity to create significant value for infrastructure clients and investors.

Value creation is central to Fengate Asset Management’s approach, and the mid-market provides greater avenues for generating returns. Transactions are often at a stage where development, bolt-on acquisitions, operational improvements, and strategic management can have a transformative impact.

The mid-market also provides opportunities that large funds cannot easily pursue. Think about platform build-outs, roll-up strategies, and aggregation plays – these approaches don’t work at the scale demanded by mega-funds. But in the mid-market, they are highly effective and enable meaningful growth where large funds might stagnate.

Demand for data center capacity grows

One example of value creation is Fengate’s decision to transition Canadian data center platform eStruxture Data Centers (eStruxture). It was acquired in June 2024 for $1.8bn initially, incubated in its private equity group, and was moved into its infrastructure portfolio as it matured.

The global data center market is forecast to grow at a compound annual growth rate of over 10% through 2028. Mid-market investors are well positioned to seize that growth. Fengate’s agility allows it to identify niche opportunities, enhance operations, and scale businesses efficiently. This move highlights the unique value creation opportunities available in the mid-market as AI and machine learning become more ubiquitous and integral to business operations.

Answering the power demand with the energy transition

Economic growth and technological advancements, including the rise of electrification, population growth, cloud computing, and AI, are driving unprecedented demand for power. The integration of renewable energy and stabilization of the energy grid is critical, especially for assets like data centers.

As Fengate works to meet this increasing demand for power, the ongoing transition to renewable energy adds another layer of complexity. Renewable energy sources like wind and solar are essential for achieving the firm’s long-term decarbonization goals, but come with one key challenge – intermittency. Solutions to intermittency include battery energy storage that can store large amounts of renewable energy for extended periods, and baseload co-generation.

About
Fengate manages more than 100 assets across its three business units – infrastructure, real estate, and private equity – with capital commitments of more than CAD 10bn. George Theodoropoulos is the Managing Partner responsible for the strategy, investment, and asset management of Fengate’s infrastructure funds. George is also a member of the Investment Committees for Fengate’s infrastructure, private equity, and real estate funds. He has over 25 years of experience in infrastructure and project finance.

_{This article originally appeared in Infrastructure Q3 2024: Preqin Quarterly Update. The opinions and facts included in the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin and Fengate Asset Management accept no liability for any decisions taken in relation to the above.}