Move from traditional to technology
As the world moves further into an age of digitalization, the infrastructure investor focus has continued to move to the world of smart and digital infrastructure. Often viewed as an add-on to more traditional offerings, the incremental emergence of persisting digital transformation has resulted in a number of visible trends.
2021 vs 2020
A surge in deal value in H1 2021 saw global M&A figures hit an all-time high [4]. Technology-related transactions led the way, exhibiting an increase of more than 161% in deal value compared with the pre-pandemic average [5]. This trend was reflected in the more established areas of digital infrastructure, as well as in the emerging asset classes like smart applications in energy, healthcare and logistics e.g., smart metering [6].
This trend was driven by several key factors, including:
- ESG benefits – funds that were looking to factor in ESG considerations to their strategy sought to invest in digitisation to achieve energy efficiencies and power management [7]
- Cost efficiencies – with the pandemic revealing significant holes in global supply chains, technology provided much-needed efficiencies across the whole system [8]
- 5G rollouts – as this technology is implemented across countries, the need for larger-scale networks to support this became apparent [9]
2022 and beyond
Looking ahead, as momentum continues to build behind digital transformation, there are several considerations for M&A activity in this area:
Regulatory pressures: Established policies and regulations are coming into effect across the world, including various National Broadband Plans (NBP) [10], Kenya’s National ICT Masterplan (IMP) [11] and the ITU Broadband Commission 2025 Targets [12]. Such initiatives will likely fuel investment and financing opportunities in digital infrastructure, as governments seek to facilitate expansion across key digital areas such as fibre. Additionally, the introduction of funds and strategies will incentivize investment in these areas, exemplified in the UK’s industrial strategy – a long-term plan for how Britain can boost the earning potential of people across the UK by embracing technological transformation [13].
Incumbents against challengers: In recent years, incumbent players in the industry have seen their position threatened by fresh competition. Smaller and more agile companies that focus on innovative technologies are bridging the gap between the established and the new, e.g. smart metering. For smart infrastructure, this will likely mean an increase in acquisitions. Incumbents will move to significantly reprioritise their focus points – particularly across digital offerings – to match their competition’s technological capabilities [14]. Conversely, challenger companies will likely see an increase in consolidation as they look to strengthen their position and diversify their offering.
Risk and reward: The unpredictability of technological advancement, coupled with rigid contract structures, means that digital infrastructure is not without risk [15] even in more established areas. For example, fibre operates simultaneously as a risky and safe asset depending on the market. In the UK, the Government’s approach to full-fibre networks is to encourage private sector investment through a competitive market. Here, fibre still carries potential risk as competition in urban areas is aggressive and overbuild is an increasing possibility [16]. Meanwhile in Germany, regulatory hurdles may hamper certain investment activities – the risk is lesser as the market is less saturated [17].
As we look toward the future for digital infrastructure, we believe that the combination of continued development of governmental regulations, further changes in associated risk, and growing competition between established players and the new, will all play a particular part in driving activity.
Environmental movement
Throughout 2021, the continuing implications of sustainability have proven that environmental considerations are key to the deal-making process across all verticals in infrastructure. As we look back on a year decorated with strong investment and financing activity, two notable shifts in key sectors are apparent.
Transportation shift
2021 vs 2020
In 2021, the transportation sector saw a return in investment activity, with deal value rising by 46% compared to 2020 [18]. This was in part due to the shift towards intermodal transportation, as governments and companies wanted to make their supply chains more sustainable by diversifying their transportation platform [19]. The other reason for this renewed activity was the continued growth of the EV sector – we saw a sustained increase in activity across 2021 with EV charging investment activity multiplying almost six times from 2019 [20].
This shift was demonstrated by the fact that the two largest automotive transactions in the first three quarters of 2021 were for electric vehicles [21]. It is clear that sustainable transports have established their position as a top commodity in the sector.
2022 and beyond
The pledges made at COP26 have given this transportation shift a much-deserved boost. In particular, the declaration to accelerate the transition to 100% zero-emission cars and vans by 2035 in leading markets (and by 2040 globally) [22] will place great demand on the infrastructure sector, with considerable scaling up of EVs required to deliver the pledge.
As this market accelerates there are some factors to consider:
The causality dilemma: As the industry gains momentum, it has been vulnerable to initial teething problems. In order to develop capital-intensive assets, there needs to be demand, however, the infrastructure needs to exist to create demand.This is being counteracted by governments stepping in to implement regulations and incentives. Government support presents a unique opportunity for investors to be early movers in a growing asset class [23].
Fragmentation in the market: As the market moves out of its infancy, we can expect to see the start of consolidation as well as insolvency for some. We believe that this will lead to increased M&A activity as investors and companies look to grow and become key players in this market.
Energy shift
2021 vs 2020
Energy transactions have remained largely consistent from 2020 to 2021, with an 8% increase in value across completed deals compared to 2020 [24]. There was a clear shift towards liquefied natural gas (LNG) investment as traditional energy providers look to decarbonise their existing asset portfolios [25] – the UK saw regasification rates come close to 100 million cu m/d in 2021 [26]. Such regasification efforts reflect the larger energy shift seen across the entire industry. At the start of 2020, only a few oil and gas companies had announced 2050 net-zero emissions targets, but by mid-2021, this number had quadrupled [27].
2022 and beyond
As more and more companies and governments commit to significant targets, we see an increasing demand for alternative sustainable energies. In particular:
Hydrogen networks – In March 2021, the Energy Networks Association (ENA) published the Gas Goes Green programme, with the aim of transitioning Britain’s £24bn gas network infrastructure to hydrogen and biomethane [28. In East Asia, hydrogen has been touted as a key factor in realising ASEAN and East Asia’s goal of carbon neutrality, with ERIA initiating the EAS Hydrogen Working Group back in 2019 [29]. We believe that this focus on decarbonising the gas network will lead to increased M&A activity, as investors’ appetite for sustainable investment continues to grow.
Solar – By 2024, the world’s solar capacity is expected to grow by 600 gigawatts (GW) - almost double the current installed electricity capacity of Japan [30]. By the same year, it is predicted that the cost of solar power will decline by 15% to 35% [31]. Considering these proposed figures as well as an IEA report surmising that solar power energy will account for 60% of the predicted renewable growth [32] by 2024, solar is clearly positioned as one of the predominant leaders in the energy transition.
Conclusion
As we move into 2022 and beyond, it is evident that infrastructure is consistently innovating and developing. With digital infrastructure and ESG at the forefront, the emphasis now falls to the investors to decide how best to capitalise on the continued evolution of the sector: adopt new and innovative technologies, push through on the new wave of alternative energies, or take the plunge into riskier assets for higher returns.
