Private Equity Investment in Infrastructure Companies: Opportunities, Risks

Infrastructure is the backbone of any economy, encompassing essential services such as transportation, energy, water, and telecommunications. As governments worldwide grapple with budget constraints and the need for modernization, private equity (PE) firms are increasingly stepping in to fill the investment gap.

Explore investment opportunities for infrastructure companies, including key opportunities, risks, and strategies for post-close value creation.

Key opportunities for investing in infrastructure companies

Stable cash flows and long-term contracts

Infrastructure assets typically generate stable and predictable cash flows due to long-term contracts and regulated revenue models. This stability is particularly attractive to PE investors seeking reliable returns.

Growing demand for modernization

Aging infrastructure in the United States and the need for new infrastructure present significant investment opportunities. Sectors such as renewable energy, smart grids, and digital infrastructure are poised for substantial growth.

Public-private partnerships (PPPs)

Governments are increasingly turning to PPPs to fund large-scale infrastructure projects. These alliances allow PE firms to invest in critical infrastructure while sharing risks with the public sector.

Sustainability and ESG focus

There is a growing emphasis on sustainable and environmentally friendly infrastructure projects. PE firms prioritizing environmental, social, and governance (ESG) criteria can tap into new funding sources and meet the rising demand for green investments.

Risks for investing in infrastructure companies

Regulatory and political risks

Infrastructure investments are often subject to regulatory changes and political decisions. Changes in government policies, tariffs, or regulations can significantly impact profitability.

Capital intensity and long payback periods

Infrastructure projects require substantial capital investment and have long payback periods. This can tie up significant amounts of capital for extended periods, posing liquidity risks.

Operational risks

The complexity of infrastructure projects can lead to operational challenges, including construction delays, cost overruns, and maintenance issues. Effective project management is crucial to mitigate risks.

Market and economic risks

Economic downturns can affect infrastructure usage and revenue. For example, reduced travel during economic recessions can impact toll roads and airports.

Post-close value creation for investing in infrastructure companies

Operational improvements

Post-acquisition, PE firms can drive value by implementing operational improvements. This includes improving processes, reducing costs, and enhancing efficiency. For instance, upgrading technology and improving maintenance practices can lead to significant cost savings.

Strategic repositioning

PE firms can reposition infrastructure assets to align with market demands. This might involve expanding service offerings, entering new markets, or pivoting towards more sustainable practices.

Revenue enhancement

Increasing revenue through strategic initiatives such as pricing analysis, expanding customer base, and enhancing service quality can significantly boost infrastructure assets value.

Governance and management

Strengthening governance and management practices is essential for long-term success. PE firms can bring in experienced management teams, establish robust governance frameworks, and provide alignment between management and shareholders.

How CLA can help with investing in infrastructure companies

Investing in infrastructure companies offers PE firms both stable returns and growth opportunities. At CLA, we have industry experience to help you navigate the risks and opportunities. We can also work with you on post-close value creation through operational improvements, strategic repositioning, revenue enhancement, and strong governance to help unlock significant value.