MARKETING

COMMUNICATION

HYBRID INFRASTRUCTURES
IN EUROPE: A NEW
PROMISING INVESTMENT
HORIZON
INTERVIEW
François-Xavier
VUCEKOVIC
CIO, Edmond de
Rothschild Private
Equity

Filipe
RODRIGUES
Partner, TIIC

Manuel CARY
Partner, Managing
Director, TIIC

In today’s uncertain and complex Infrastructures offer the best risk/return ratio
within alternative assets
economic climate, infrastructure is IRR over 1 sliding year divided by standard deviation of IRR over
an essential asset class. Their ability 1 sliding year. World, 2021 – 2021.

to withstand the ups and downs of 2.30 INFRASTRUCTURES

economic cycles, combined with 2.11 Buy-out
the predictability of their cash flows,
1.96 Mezzanine
makes them an undeniable attraction
1.89 Private Equity
for investors seeking solid protection
against inflation. 1.72 Real Estate

1.38 Growth capital

It is worth noting that infrastructure Distressed Private
1.31 Equity
recorded the best risk-adjusted per-
1.27 Distressed debt
formance among alternative assets
between 2012 and 2022. Each unit of 1.26 Private Debt

risk, expressed as a percentage point 0.89 Venture Capital

of the standard deviation of returns, 0.87 Natural resources
generated an average of 2.3 percent-
age points of return. Source: Preqin, Edmond de Rothschild, TIIC
REDEFINING EUROPEAN TOWARDS INCREASING HYBRIDIZATION2
INFRASTRUCTURES THROUGH OF INFRASTRUCTURES
SUSTAINABILITY OBJECTIVES These significant developments have contributed to the
emergence of more decentralized, digitalized and ser-
Infrastructure investments have enjoyed strong momen-
vice-based infrastructures. In our view, this hybridization
tum over the past five years, growing twice as fast as all
is redefining the nature and essence of some traditional
alternative assets on the European continent. In the face
infrastructure projects, which are now integrating a va-
of various systemic shocks, such as the Covid-19 pan-
riety of sectors, such as mobility, technology and green
demic, the conflict in Ukraine and the intensification of
energy, and are better designed to address multi-dimen-
economic rivalry between the USA and China, the appeal sional issues ranging from climate change to new user
of infrastructure has grown. These events have under- habits.
scored the resilience of infrastructure as a «safe haven»,
Take mobility infrastructures, for example, which are
offering in many cases a protection against volatility and
evolving to incorporate intelligent transport systems.
geopolitical uncertainty.
These sophisticated systems harness
all kinds of connected devices, sensors
Alternative assets under management and cameras for green energy rechar-
Europe (dry powder + latent value) ging facilities - which are set to increase
20-fold by 20303. They also integrate
2 720 $bn «mobility as a service» platforms.
AuM We need to move away from obsolete
TCAC infrastructure models and develop sys-
tems that are both connected and sus-
Infrastructures +30 % tainable, which we believe are essential
Natural Resources +3 % if we are to effectively manage changes
Growth Capital +9 % in consumer demand and achieve our
Fund of funds +9 % climate objectives.
It is important to note, however, that
1 360 $bn Real Estate +10 % these new opportunities, particularly
AuM those linked to connected infrastruc-
tures, bring with them new complexities,
Private Debt +28 % and by extension, new risks. Greenfield
projects4, while offering the potential
Hedge funds +9 % for high returns thanks to significant
Venture capital +8 % capital appreciation, require in-depth
operational expertise and the ability to
carry out concrete transformations.
Buy-out +12 % The changing infrastructure landscape
requires substantial funding. However,
public investment has contracted, due
to increasing budgetary constraints.
2017 2022 Against this backdrop, private capital is
needed more than ever to make up the
Source: Preqin, Edmond de Rothschild, TIIC shortfall and help finance infrastructure
conversion.

Today, macroeconomic, demographic and climatic

challenges are shaking up Europe’s infrastructure sys- SEIZING MID-CAP MARKET
tem. The latter is forced to accelerate its modernization OPPORTUNITIES TO FINANCE
in order to adapt to three megatrends, offering investors INFRASTRUCTURE TRANSFORMATION
opportunities for sustainable value creation.
The mid-cap segment is a fertile ground for financing
The first of these trends is decarbonization: this requires
infrastructure transformation and modernization. Less
an estimated annual investment of almost 1,000 billion
subject to the stiff competition from large-caps5, this
euros to ensure the rapid transformation of mobility, en-
market offers excellent prospects thanks to attractive
ergy and public infrastructure networks, and thus meet entry prices, combining quality and accessibility. The
the ambitious climate targets set by the European Union market is brimming with opportunities, and stands out
for 2050. for its strong flow of medium-sized transactions (under
Europe is also seeking to establish more localized €1 billion). By 2022, they accounted for 88% of the total
supply chains and more autonomous energy networks. volume in Europe.
This trend, accentuated by the Covid-19 pandemic and Over the past five years, entry multiples have been
escalating geopolitical tensions, means that infrastruc- particularly attractive in the mid-market, and even more
tures must be adapted and modified to meet these new so in the transport, energy and social infrastructure
demands. sub-sectors.
Finally, the third megatrend driving demand for in- It’s also crucial to emphasize that medium-sized projects
frastructure is the rapid and increasing digitization respond directly to consumer expectations and are at the
and large-scale processing of data, which requires the very heart of economic growth and the energy transition.
creation of new digital infrastructures. For example, We also favor the European infrastructure market, which
«smart cities»1 are using technology to optimize the way is dynamic, large and diversified, and which has histori-
services are delivered, such as intelligent video and traf- cally generated better risk-adjusted returns than unlisted
fic systems or real-time information on air quality. infrastructure in Asia-Pacific or America.
The mid-cap market accounts for the vast This market also requires significant local knowledge
majority of transactions by number and experience. We believe that an approach focused
on risk management, backed by operational investment
European transactions in 2022, by number and value
expertise, is essential. Management teams need to be
able to support company management, both financially
and operationally. This includes setting up solidly struc-
tured partnerships and regular exchanges with company
Mid-Cap Number of
directors.
(transactions < transactions
1 €bn) This active strategy, coupled with an operational ap-
88% Transactions proach, enables us to exert concrete influence and take
30%
Large-Cap value advantage of the many sources of value creation in this
(transactions > market.
1 €bn)
Infrastructure represents a key asset class for success-
fully navigating the current economic environment. To
take advantage of the opportunities and trends currently
Very large infrastructure funds emerging in this constantly evolving market, it is essential
to have an active strategy, based on a detailed unders-
Average capital raised by European infrastructure funds
($bn) tanding of the trends at work, the current constraints, but
also the innovations likely to transform the infrastructure
landscape in the years to come, especially as investments
1 200
made today will undoubtedly have an impact on Europe’s
x3
1 200 economy and energy transition in the medium and long
800
term.
400
400 1. Smart cities refer to urban policies that use information and communication technologies
(ICTs) to accelerate a city’s ecological transition while enhancing its international
- competitiveness.
2. Hybridization refers to the convergence of three structural trends: decarbonization,
regionalization and digitalization.
Source: Preqin, Edmond de Rothschild, TIIC
3. «How much investment do we need to reach net zero?», Lenaerts, K., S. Tagliapietra&
G.B. Wolff, Bruegel, 2021.
So, making the European mid-market6 our area of choice
4. A “greenfield” project is a project in a previously undeveloped area.
is not just a question of returns, it’s first and foremost a re-
solutely forward-looking vision. In our view, it’s a question 5. A company is classified as “large cap” if its market capitalization exceeds 10 billion euros.
of investing early to transform infrastructures and bridge 6. The mid-cap (middle capitalization) market is made up of mid-cap companies with
the current financing gap. market capitalizations of between €2 and €10 billion.

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September 2024.
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