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The UK infrastructure industry has faced a slowdown in M&A activity in 2024. The challenging climate of both high inflation and interest rates has put pressure on the M&A landscape. As such, buyers are experiencing increasing debt costs alongside a lack of dry powder, which in turn is hindering their ability to meet valuation expectations. Comparing the periods of Q1-Q3 in 2023 and 2024, the overall M&A activity has declined by 17% and 12% in value and volume, respectively.

Significantly, renewable/energy transition M&A activity remains the most active within the subsectors, accounting for 47% of the deal volume and 31% of the deal value from Q1-Q3 of 2024. Notably, this represents a 16% increase in volume relative to the previous period. Considering the adverse macro conditions, this demonstrates the appetite for renewable assets as both companies and investors pursue opportunities to achieve their decarbonisation targets.

In the renewables/energy transition subsectors, we are seeing buyers focused on strategic transactions that provide not just access to operating or ready-to-build assets but also opportunities with an additional development pipeline. This presents an interesting opportunity for developers and mid-market infrastructure or similar businesses looking for capital, which typically are still in the growth phase of their development.

What are the key value drivers for your infrastructure business?

When it comes to raising capital or divesting part or all of your asset or business, it is important to address the valuation drivers to show buyers and investors you are in a strong position. Whether you have a business with a low risk profile (core infrastructure) or one that has more risk (eg energy developers) but provides an adjusted return to compensate (core plus), understanding these drivers is crucial.

Stable long-term cashflows

Whether your buyers or investors have a core or core plus investment requirement, there continues to be demand for the “trifecta” which provides comfort on stable long-term cash flows. These are:

• Offtake: Income from regulated services or provided under long-term offtake contracts with creditworthy counterparties. Vendors or businesses raising capital need to be clear on the length and robustness of these revenue streams.
• Inputs: They need to ensure that the key inputs (eg power) to their business are secured under similar long-term contracts.
• Technology: Any critical technology must demonstrate strong efficacy with a long project lifespan or well-understood replacement costs.

In addition, when looking at core plus or perhaps a development stage opportunity, buyers are very keen to see ancillary revenue streams that provide multiple routes to market. This can be seen by the current shift in investor appetite in the Battery Energy Storage Systems (BESS) market towards co-location, where generation assets such as solar, onshore wind or renewable gas-fired generators are built on the same site with BESS.

This allows the investor to optimise their returns by selling energy from a generation asset into the energy grid at peak prices. Recent market transactions show that buyers are prepared to pay a strategic premium for access to these multiple routes to market.

Defendable industry

Investors continue to seek opportunities that provide a high barrier to entry. While traditional core infrastructure is asset-intensive, requiring significant CAPEX investment to compete, some core plus investment may be asset-light. As such, being able to demonstrate the defensible nature of the business or asset is key. This may be contractual or in the stickiness of the customer base. This provides assurance to investors or buyers that the business is protected and an attractive investment opportunity.

How our deal services team can help support your infrastructure business

Considered planning and strategic positioning are essential to maximise the value, mitigate the risk of disruption to your business or value erosion, and ensure the long-term success of the transaction.

As a full-service firm, we guide clients through the entire sale, fundraising or acquisition lifecycle – helping them prepare the necessary information and maximise value throughout the process.

For more information on how we can help you enhance and protect value, please see our guide.

If you would like to discuss your options, please contact Terence Amako.