The Case for European Infrastructure

Infrastructure is attracting capital from investors around the world, drawn by its ability  to deliver returns across the cycle. This capital flow is creating opportunities to invest in an increasingly diverse opportunity set, both with respect to sectors and geographies.  We believe that the European infrastructure market continues to present an attractive exposure for investors,  even when compared to markets offering attractive financial incentives, such as those available under the Inflation Reduction Act  in the United States of America. Europe, as a region for infrastructure investment, offers a range of compelling investment drivers:

A more mature and stable regulatory landscape.

Since the 1980s, the European Union (EU) has provided funding, set regulatory standards, and streamlined key areas (such as a procurement) across member states to help build the single market. This centralized, coordinated approach has led to solid structural investment frameworks across the region, creating an attractive environment for private capital from around the world. Crucially, much of the EU's financial support is intended to de-risk assets to allow private investors to invest. While the EU acts as centralized body, directives (EU legislative acts) are implemented at the national level through country-specific laws, which  results in alternative opportunities across the bloc. 

In addition to this long track record, we would note the benefits of the European infrastructure market given its foundation based on consensus-driven policy making. Given the diversity of economies and societies in Europe, consensus around topics may take time to achieve; however, when policy has been agreed, it is very difficult to change this consensus, making any amendment or reversal of policy unlikely. Thus, while on an individual market level we may see electoral success for candidates looking to diverge from current policies – such as those stating their intention to rollback support for the energy transition – it is unlikely that the European Union, which ultimately is the political level at which much of European energy and transportation policy is set, would shift away from the energy transition. Conversely, a change in administration in markets such as the US or Australia is more likely to result in swings in policy. 

A broader opportunity set to help achieve diversification.

Europe also allows for greater geographical diversification, with each market able to pursue its own fiscal expenditure and reforms to attract private capital, while also implementing centrally agree EU directives. Thus, assets in the same sector can still perform differently depending on the specific national regime under which they operate. In addition to geographic diversification, Europe also offers a greater breath of infrastructure sectors open to private involvement. While the U.S. is a market heavily dominated by the energy sector - which the Inflation Reduction Act will likely exacerbate further - Europe has significantly more assets in the transportation, social infrastructure, telecommunications, and water infrastructure sectors. Europe also has a higher number of opportunities in the renewables and power sectors, meaning investors are also able to tap into the energy sectors. 

Better value assets.

Europe presents a compelling investment case from a value perspective, with average European deal values consistently below those seen in North America and benefitting from lower EV/EBITDA multiple entry points. This is partly driven by the diversity offered in the region in terms of geographies and languages, which makes it more challenging to find opportunities and increases the likelihood of finding smaller, localised, family-owned business which need capital to scale. With smaller, localised businesses able to grow their offering to become pan-European, European assets are more able to benefit from the EV/EBITDA multiple scale that exists between mid-cap and large-cap businesses, with large cap infrastructure businesses on average transacting at higher multiples.

Note: Aggregated EV/EBITDA averages above are derived from over 900+ transactions with data available.
Source: Infralogic, January 2024.

Strategic vs. Financial Incentives.

Through ongoing fiscal packages, the EU is looking to transform the competitiveness of its economy in order to remain globally competitive. The Covid-19 pandemic, supply chain disruptions and the 2022 energy crisis added further need to create long-term policy support for investment into infrastructure. This strategic requirement to invest in infrastructure is arguably a stronger and more resilient policy-driver than seen elsewhere. Often, infrastructure policy is seen as an opportunity to support investment into the wider economy, stimulate growth and create jobs, as is the case with the IRA. While all outcomes are positive, we note that strategic policy making creates the long-term investment climate more aligned with infrastructure investors.

Access to funding a key issue:

• US: The IRA is unprecedented in two regards; first and foremost, the 10 years’ visibility that investors have on the regime they will be operating in; and secondly, that the tax credit system is comparatively simple to access. The key provisions of the IRA include generous tax credits, grants, loans and other incentives for production of and investment in clean energy (including renewables, nuclear and hydrogen), clean vehicles and clean fuel production, energy efficiency measures, and development of carbon capture and direct air capture projects. The IRA also contains provisions for government investment in low-carbon materials procurement, biomass, carbon removal and forest management, a programme for advanced emissions reduction from energy-intensive industries, and research. 
• Europe: In comparison, the European infrastructure funding landscape is more complex to navigate, given the multiple funding streams that are offered across national governments as well as from different initiatives within the EU. That said, EU funding is supportive of a much broader infrastructure universe than the IRA, meaning that the EU’s multi-annual financial framework (EUR1.2trn), the NextGenerationEU (EUR806.9bn) recovery fund and REPowerEU (an additional EUR25bn to NGEU) all offer billions of euros to businesses across the infrastructure spectrum, with the focus being on developing low carbon, digital sectors. 

Source: Infralogic, January 2024.