As private investments navigate a high interest rate environment and shifting definitions of infrastructure, investors must find creative ways to adapt. This report explores key trends and strategies for 2025 to help private infrastructure investors unlock new value and mitigate risks.
It’s no secret that the shift to a higher-interest-rate environment and greater macro and political uncertainty has significantly impacted private investments. While interest rates are now on a downward trend it is unlikely that we go back to a long-term, ultra-low rate environment. We can also continue to expect higher interest rate volatility in funding markets. What are investors in private markets doing to mitigate risks and capitalize on opportunities? We recently spoke to key industry players and found that Private Infrastructure investors, in particular, are taking some creative steps to drive value that can help you stay ahead in 2025.
Private Markets have used the traditional tools of changing funding structures, using less leverage, shifting the portfolio to newer assets, diversifying geographically and extending investment horizons. Private Infrastructure investors have gone a step further: for the past few years, firms have expanded the definition of ‘infrastructure’ in the search for returns. This shift has exposed infrastructure investors to greater operational, commercial and people risks, which require robust strategies to address these additional challenges. In many cases, they are borrowing from the Private Equity playbook and taking a more holistic view of the levers they can utilize to boost returns. Read below on three potential ways an Infrastructure investor can potentially increase returns:
Rigorous operational and financial due diligence is well understood in the infrastructure space, and surprises from these areas are relatively rare. However, as the definition of infrastructure broadens to include areas like social infrastructure and as investment horizons lengthen, people risks have become more critical in shaping the success of value creation plans. Effective assessment of people risks during due diligence can help mitigate these impacts, ensuring more accurate valuations and laying the groundwork for robust value creation plans.
One investor group a-connect supports faced a significant people-related challenge after acquiring a majority stake in a distribution network in rural Southern Europe. A strategic review revealed that the average age of employees was just shy of 50, combined with a very low voluntary turnover rate. This meant the organization was at risk of a future wave of retirements, with few entry and mid-level employees in line to take their place. To manage this risk, the investor had to implement a costly downsizing exercise, and a recruitment drive to attract talent to a region with a shallow talent pool. These measures reduced the impending retirement wave but came with a high price tag that was not contemplated in the acquisition case.
Traditional infrastructure investments often require light-touch management, such as toll roads, wind farms, sewage systems, and railroads. However, significant value can still be unlocked by having clear objectives and a well-structured plan to achieve them. This goes double for some of the sectors now also considered as Infrastructure such as education and healthcare platform investments.
A leading northern European private infrastructure investor exemplifies this approach. As part of its disciplined governance framework, it rigorously applies a value creation toolbox, including management and organizational health assessments, digital transformation initiatives, impact-focused sustainability projects, and regular performance evaluations. This systematic approach has ensured over time that each asset under management can reach its full potential, driving sustained value creation.
For example, consider a network of private schools they invested in. The operator team develop a holistic commercial and operational Value Creation Plan that 1) leverages educational technologies to reduce costs and drive parental demand; 2) creates a talent pool of educators and administrators to rotate across schools, maximizing investments in people development and 3) they unify the school network under a single brand and invest in brand recognition in aspirational markets which provided umbrella benefits to other locations.
Infrastructure investors have traditionally focused on entry valuations and managing financial, regulatory, and operational risks. However, the evolving definition of “infrastructure” creates opportunities to adopt holistic value creation strategies inspired by private equity. This broader approach can offset the impact of rate volatility and drive significant added value, particularly at exit.
Private Equity is particularly adept at preparing assets for exit. In the case of one very successful IPO exit this year, the investor boosted the valuation with a disciplined approach by ensuring the right team was in place. To prepare for the exit, the company made several strategic team changes: it hired a Chief Strategy Officer (CSO) to align with long-term growth objectives and elevated the CFO’s role to ensure financial transparency and readiness for due diligence. The investor prioritized operational improvements by making key hires in supply chain, upskilling project management through best-in-class support and implementing advanced data analytics and ERP systems to improve decision-making. The governance structure was enhanced with independent board members experienced in M&A, and the legal and compliance teams were strengthened to address regulatory requirements. These changes improved the company’s operational and financial performance, making it a more attractive acquisition or IPO candidate, ultimately helping achieve a higher exit multiple.
In the new world definition of Infrastructure and with the impact of the changed macro environment, Private Infrastructure investors can generate significant value by implementing a similar approach.
Barring a time machine, there’s little that can be done about entry valuations for pre-2022 investments. Even acquisitions that are happening now will continue to be affected by ongoing economic and political volatility, even in traditionally “safe” markets like OECD countries. However, there are more levers available to drive value in infrastructure investments than might initially appear. By applying a holistic view, adopting a disciplined approach, and conducting rigorous due diligence, infrastructure investors can significantly reduce risks and unlock greater value for their portfolios.
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