Our best Ideas: Unlocking value in mid-market infrastructure investment

By Julia Schiffer, CFA, CAIA , Europe Head of Infrastructure, David Beamish , North America Head of Infrastructure Investments

This edition of Brick by Brick is the first of our new 'Best Ideas' format, which aims to highlight various opportunities across different sectors, as identified by our asset class heads. In this edition, we will explore the opportunities in infrastructure investment.

The growth and maturation of the infrastructure market and many investors’ preference for the most established groups in the space has led to the emergence of large-cap and mega-cap funds in recent years. As this trend plays out alongside an expanding universe of investable opportunities in infrastructure, it has also created a potential opportunity in the infrastructure middle-market that may be worth exploring further.

The growth of mid-market infrastructure managers

While there is no generally accepted definition of the mid-market, Mercer generally considers it to include infrastructure investments with enterprise values ranging from $200M to $2B. Transactions of this nature are typically targeted by strategies operating in the $1B to $8B fund size range. Many of the more established infrastructure managers that previously invested in the mid-market have grown and raised continually larger funds in recent years, shifting their focus to large-cap deals to efficiently deploy growing pools of capital. Capital raising has increasingly concentrated at this top end of the size spectrum, with a handful of large managers accounting for a larger share of total funds raised.

At the same time, the opportunity set in infrastructure has broadened beyond its traditional focus on large capital projects (such as toll roads, airports and regulated utilities). The universe of opportunities is larger and includes segments such as fiber and broadband, waste management and distributed generation, many of which are fragmented and may potentially provide for a rich set of transaction opportunities in the mid-market.

Together this dynamic has created an attractive opportunity to invest in a large universe of mid-sized assets and companies that we believe are underserved and too small to warrant attention from the largest investors.

To potentially capitalize on this opportunity, new managers backed by experienced investment professionals are launching their own funds targeting mid-sized transactions. Some managers with longer histories in the mid-market are keeping true to their roots. These managers often bring regional and / or sector-specific expertise, particularly in areas like digital infrastructure and renewable energy, where smaller-scale projects are abundant. Several large-cap managers have also launched dedicated funds investing in the mid-market.

Why mid-market infrastructure matters

Mid-market strategies can offer several distinct advantages that may present opportunities to help generate outsized returns compared to their large-cap counterparts. Given the larger universe of potential targets and lower competition, there is greater opportunity for bilateral engagement, structuring bespoke transactions, and lower entry valuations. Managers can take a hands-on approach, driving strategic growth, operational efficiencies and de-risking in less sophisticated or under-managed businesses, such as those that are founder-owned or receiving their first injection of institutional capital.

Another key consideration is the investment lifecycle. Many mid-market infrastructure investment strategies follow a "build-to-core" approach, using private equity-style value creation toolkits to help develop and scale projects and companies before selling them to long-term core infrastructure investors at a lower cost of capital. In addition, mid-market investors benefit from greater optionality at exit and a wider pool of buyers, including other mid-market funds, strategic investors and larger funds, as compared to large-/mega-cap funds where the end buyer pool is narrower. This dynamic creates potential for strong capital appreciation while still aligning with long-term infrastructure investment principles.

Manager selection is key in the mid-market

In addition to the potential to generate outsized returns, investing with emerging and mid-market managers often allows investors to develop strong long-term partnerships with their GPs and potentially benefit from preferred terms and fee discounts, access to information, and co-investment deal flow. However, mid-market funds tend to see a greater dispersion of returns than larger ones. Manager selection is therefore key.

A robust due diligence and manager selection process is crucial to help ensure investors are allocating to only quality investment partners among a large (and fast growing) universe of managers. Expertise, a strong network and significant time and resources are needed. For investors without a sizeable, dedicated infrastructure team, it may be beneficial to work with advisors and asset managers who understand the space and can help to identify and invest alongside high-potential investment partners.

As infrastructure continues to evolve, those who successfully identify and execute on mid-market opportunities may gain access to innovative projects that drive both financial returns and broader economic development. With the right expertise and strategic partnerships, investors may capitalize on the next wave of infrastructure growth.

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