Article - February 23, 2023
Infrastructure Investors: Creating New Opportunities Across a Diverse Range of Industries
Learn more about the Harris Williams senior professionals featured in this article.
Key Takeaways
Infrastructure investors are taking an increasingly expansive view of assets that fit their investment parameters.
These investors are expanding the universe of potential buyers for a wider variety of businesses, often bringing unique advantages for sellers.
To maximize engagement with infrastructure buyers, sellers should consider how best to highlight strengths in a handful of key areas.
The success of many infrastructure funds over the last several years and the long-term outlook for infrastructure spending have created a proliferation of funds with an infrastructure-oriented strategy. In addition, established firms with a proven track record in this space have continued to raise larger infrastructure funds and now have significant capital available for deployment.
Historically, infrastructure investors have prioritized assets like airports, toll roads, and utilities. These revenue-generating assets combine earnings visibility, defensibility, and stable long-term demand. As attractive investment opportunities within core infrastructure have become more scarce, certain groups are aggressively pursuing assets that were historically considered to be outside the purview of “core infrastructure” but still have characteristics of the asset class.
“In recent years, infrastructure investors have been taking a more expansive view of assets that fit within their investment parameters,” says Chris Smith. “In doing so, these infrastructure buyers are expanding the universe of financial buyers for a widening variety of businesses. And they often bring unique advantages to help them prevail in competitive situations.”
“We are in regular dialogue with infrastructure funds as their investment strategies continue to evolve,” notes Greg Waller. “And Harris Williams is seeing heightened activity by infrastructure investors across many of its Industry Groups."
Here, Harris Williams senior bankers share their perspectives on how infrastructure investors are expanding their investment aperture, which companies across an array of sectors are attractive to infrastructure funds, and what company sellers should consider.
Aerospace and Defense
Infrastructure investors have long been active in select areas of commercial aerospace, including significant investments in airports and fixed base operators (FBOs). Now the scope of investment in this sector is expanding.
“FBOs are a great case study in what infrastructure investors find appealing,” says Mike Rohman. “They are seeking high barriers to entry, predictable revenue, and multiple opportunities for capital deployment with a clearly calculable ROI.”
A network of FBO locations with long-term ground leases, contractual hangar revenue, and fuel sales underpinned by growing general aviation operations fits these characteristics, says Smith. “We saw this thesis validated in our recent transactions for Lynx FBO and Ross Aviation with infrastructure-backed Atlantic Aviation.”
In recent years, more infrastructure investors have begun looking elsewhere around the airfield and within the airport for what constitutes infrastructure. An example is aircraft equipment leasing provider ACL Airshop, which was acquired in 2021 by an infrastructure investor due to its asset-based recurring revenue and its favorable position in the air cargo unit load device market.
“Now we're starting to see infrastructure investors stretch even further into services,” says Smith. “This includes maintenance and repair and other outsourced services around the airport that are considered mission-critical and have high switching costs. From our perspective, there’s a large ecosystem of infrastructure opportunities within commercial aerospace.”
Business Services
Infrastructure investors have shown interest in business services for several years, particularly for businesses with contractual revenue, strong barriers to entry, and steady cash flows.
“When Harris Williams assisted Restaurant Technologies in its 2018 sale, infrastructure fund interest was strong,” says Brian Lucas. The company has an installed base of oil tanks located outside of restaurants to provide cooking oil. Customers are under multi-year contracts and, once tanks are installed, customer retention is very high.
In its 2022 sale, more of Restaurant Technologies' earnings were driven by recycling used cooking oil, which is a more variable and therefore higher-risk business. “This could have depressed infrastructure fund interest in the sale, but that was ultimately not the case,” says Lucas. “It’s a great example of how much infrastructure investors have shifted their perspectives on services businesses.”
Infrastructure-adjacent businesses such as companies that clean or manage ISO tank containers and other industrial assets are also appealing to infrastructure investors. “Boasso is a good example. These are stable, very predictable businesses with good cash flow dynamics,” says Lucas.
USIC, an underground locating business, also drew infrastructure fund interest in its recent sale. The company is infrastructure-adjacent in the sense that infrastructure spending drives the need for underground locating. In addition, the service is contract-driven and has highly predictable demand drivers in any economy, both of which fit infrastructure investment criteria.
Energy, Power and Infrastructure (EP&I)
Given the inclusion of traditional infrastructure subsectors in the Group’s purview, it’s no surprise that many of its client engagements have attracted infrastructure investor interest. However, this interest is steadily becoming more diversified.
Infrastructure investors are now pursuing areas that historically might not have fit within their investment mandate to see if they can find opportunities that qualify, especially service-based businesses with strong revenue visibility.
“We have seen more and more interest across investor classes around critical infrastructure services,” says Matt White. He notes significant infrastructure fund interest in companies serving water, utility, and telecom end markets, including Riggs Distler, USIC, ESG Operations, and Inframark. “Anything with an asset enablement, like water operations and maintenance, seems to be within the fairway for them now.”
“All of our vertical segments have seen an uplift in engagement as the infrastructure bill rollout, decarbonization, and energy efficiency efforts have ramped up,” adds Luke Semple.
Healthcare and Life Sciences
Despite its perceived distance from traditional infrastructure opportunities, infrastructure investors are steadily gaining interest in healthcare M&A, particularly in healthcare services.
"The sector’s scale and economic breadth make it similar to infrastructure in many ways,” notes Geoff Smith. “Subsectors of healthcare have large and enduring demand with limited disruption, and their importance to consumers will only continue to increase. Also, many subsectors have stable and predictable organic growth profiles similar to core infrastructure subsectors, with incremental growth available.”
Infrastructure investors also tend to prefer highly distributed customer bases, which are present in many areas of healthcare. Smith says most infrastructure investor activity to date has been within segments with lower reimbursement risk, such as veterinary. Dental is another interest area due to its large commercial or cash-pay component. These subsectors are relatively more appealing to infrastructure buyers than those that are more government reimbursement-heavy due to the profitability risk associated with changes in reimbursement policies.
Industrials
As infrastructure funds expand their aperture, they are looking at a range of industrial businesses with highly utilized assets, steady revenue, and solid returns. For example, says Tim Webb, industrial technology to support smart cities is an area of significant interest and growth. “We are seeing operators using technology to drive efficiencies across a variety of assets,” he says.
“Industrial technology is an area with infrastructure characteristics such as hard assets and recurring revenue potential,” says Eric Logue. “Increasingly we are seeing advanced hardware and software applied to areas like traffic management or parking to drive efficiency and monetization opportunities.”
Webb notes the convergence of traditional infrastructure themes with industrial technology trends. “The conversation about investing in traditional infrastructure, like a warehouse, is also a conversation about ecommerce and automation,” he says. “Conversely, technology trends like data proliferation and electrification will require significant infrastructure investment to be realized. It is a fascinating topic that we spend a lot of time on, and one that will create substantial investment opportunities.”
Webb says chemical and mineral companies are gaining interest as well. “When we recently represented NSC, a Canadian road de-icing business, infrastructure investors liked its asset base and long-term contracted revenue. We’ve also seen interest in other chemical and mineral companies that serve infrastructure end-markets. These are typically stable businesses that perform through economic cycles.”
Transportation and Logistics
“Within the T&L space, we have traditionally seen infrastructure investors focus on asset-oriented companies such as rail or marine operators,” says Jeff Kidd. “Now, given recognition of the supply chain as a critical component of the global economy, we’re seeing more interest in a wider range of outsourced logistics services across transportation modes.”
Kidd says the most attractive logistics businesses can prove revenue resiliency across economic cycles and attractive returns on invested capital through efficient deployment of owned equipment. However, revenue does not have to be driven by long-term contracts for infrastructure funds to take an interest. These investors also favor certain specializations and end-market expertise in logistics companies. “For example, there will likely be more interest in the healthcare, food supply chain, or consumer staples end markets,” he says. “Those products are critical to the functioning of the U.S. economy.”
Ports, port terminals, and nearby warehousing and transload capacity are also gaining interest. In these areas, real estate strategy is critical to customer service levels and provides attractive barriers to entry from potential competitors. That supports revenue defensibility and resiliency, core themes in infrastructure services investing.
Kidd cites two recent Harris Williams client examples: STG Logistics and Carolina Marine Terminal. STG Logistics saw infrastructure fund Oaktree Capital Management partner with Wind Point Partners to acquire XPO Logistics’ Intermodal Division, creating a port-centric provider of end-to-end domestic containerized logistics solutions. The recent buyer of Carolina Marine Terminal, which owns a marine port terminal and surrounding real estate, is a joint venture between infrastructure investor Ridgewood Infrastructure and Savage, a global transportation and materials handling company.
Tapping Into Infrastructure Interest
“Infrastructure can provide distinct advantages for certain types of sellers,” says Chris Smith. “Their strategy around capital deployment can be a big differentiator, such as how they think about using additional capital expenditures during their hold period to drive returns.” In addition, says Smith, infrastructure investment professionals bring different perspectives and expertise, which can help management teams shape and accelerate their long-term growth strategies.
Like other classes of private equity, infrastructure investors represent a large pool of capital seeking investment in high-quality companies characterized by visibility, defensibility, and stable demand. To maximize engagement with infrastructure buyers, sellers should consider how best to highlight strength in these attributes.
Overall, infrastructure buyers’ increasing involvement in a growing variety of Harris Williams transactions creates stronger competition and, in the end, better outcomes for our clients.
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Contacts
Jeff Kidd
Managing Director
Transportation & Logistics
Eric Logue
Managing Director
Industrials
Brian Lucas
Managing Director
Business Services
Luke Semple
Managing Director
Energy, Power & Infrastructure
Chris Smith
Managing Director
Aerospace, Defense & Government Services
Geoff Smith
Group Head, Managing Director
Healthcare & Life Sciences
Tim Webb
Managing Director
Industrials
Matt White
Managing Director
Energy, Power & Infrastructure
Mike Rohman
Managing Director
Aerospace, Defense & Government Services
Greg Waller
Managing Director
Energy, Power & Infrastructure
