The demand for infrastructure is at an all-time high. Whether it is generating greener energy, meeting the evolving demands of society or enhancing resource efficiency, governments, companies and societies at large recognise the need to build for the future.
The demand is being backed up by investors, too, and then Infrastructure Investor reported that the asset class’s invested value reached more than $1 trillion in 2024.
With larger allocations to infrastructure, investors are increasingly looking to diversify beyond large-cap investments towards the mid-market. The mid-market offers a greater number of opportunities and a wider range of assets. Between 2020 and 2023, nearly 2,000 mid-market investments (€50 million-€1 billion) were completed globally, compared with just under 350 at the top end (€1 billion-plus).
Mid-market infrastructure investments, when managed correctly, can offer higher risk-adjusted returns than large-cap investments due to their size and the greater opportunities to create value and professionalise. However, unlocking appropriate opportunities in the mid-market is challenging and complex.
Ancala’s track record and proven approach since it was founded in 2010 has contributed to our most recent flagship fund closing above target. I believe there are certain critical components to successful sourcing and how approaches to origination will continue to evolve, such as…
1
Focusing on bilateral opportunities
Bilateral investments involve agreeing to a transaction exclusively without it being offered to other buyers or taken to auction. This approach allows direct collaboration with the management team and vendor to identify transaction drivers, understand pricing and create bespoke solutions to complete the investment.
Tim Power
In these situations, you are often working with overlooked assets that have more opportunity to add value. You can build a much better understanding of the business, the personalities behind the vendor and the management team, along with their objectives for the future of the business.
The process also gives both parties a clear understanding of ways to work together and of the scope to start developing future growth plans well before any ink has been put to paper. This approach enables a manager to develop a much higher conviction on the final price they pay and ultimately the future potential value for its investors.
Any infrastructure manager will need to find opportunities for investment, but many will only assess prospective assets when they come to the open market. This can mean they are only scratching the surface of truly understanding the business and working with valuations and prices that are already being shaped by market competition.
A robust and tenacious approach to sourcing is crucial to developing a more conservative business plan, a more sensible entry price and ultimately offer greater downside protection to investors. For these reasons, we prioritise bilateral sourcing wherever possible, uncovering hidden value and avoiding market competition.
2
Creating investment opportunities
The first step to sourcing bilateral opportunities is identification, or as I like to refer to it ‘spotting the assets in the mid-market wild’. This involves finding opportunities that may have either been overlooked or that others struggled to unlock due to the complexity of the transaction. Many managers will not look at an asset which requires less than a €100 million equity investment, especially if executing the investment is not straight forward.
As a result of mid-market companies being less developed, and in some cases, unknown beyond their local market, the transaction processes are often less formal and institutional.
This requires a tenacious approach because opportunities aren’t overtly ‘on offer’, and therefore frequently aren’t publicised. A manager needs to be aware of everything that is happening in the market at any one time to help identify these opportunities.
This means constantly mapping sectors of interest to actively search for opportunities that meet our criteria. This includes exploring family-owned or privately held assets. It is often the case that assets may have infrastructure characteristics but that it is not immediately clear, and so it is our job, through the support of our network and experience, to spot this potential.
3
Building relationships
In the mid-market, you are having to work with individuals – often in family-owned businesses – with high emotional attachments to their businesses. A manager needs to have the ability to develop relationships to understand potential triggers which create an opportunity, navigate these delicate situations and identify how to deliver a bespoke solution to meet the needs of the relevant stakeholders. This requires flexibility, patience and resilience to best co-ordinate a successful investment and at a price and under a structure which works for all parties.
Once a potential investment has been identified, the focus is on building the relationship to unlock the opportunity. Here, a manager needs to be able to demonstrate how they will add value beyond just capital. They need to show that they are a safe pair of hands that will nurture the business, and ultimately be a party that any existing stakeholders staying with the business will want to work with long into the future.
From our experience, asset owners will want to see a real understanding of – and a track record in – their industry. This is something we demonstrate not only through our investment history, but also through the intrinsic role our team plays in creating value through our proactive approach to asset management.
We have constructed a team with deep industry experience and an extensive network to support a business’ growth plans, most notably industry partners – former CEOs and chairs of major infrastructure businesses. They speak to potential vendors and management teams as peers, having been there and done it in previous roles.
Part of this process involves demonstrating how we understand the management team or asset owner’s experience and journey in growing the business. Ancala was once a start-up itself and we often find that this shared experience helps build rapport, and crucially trust, in the relationships we foster with vendors and management teams. We know what it takes to live and breathe a business, and what it might take to offer up equity.
4
Structuring the investment
Once the vendor is ready to proceed and agrees to entering into exclusive discussions, the focus shifts to validating the valuation proposal and the downside protection characteristics of the business to progress structuring the transaction ahead of finalising the investment.
“A manager needs to be able to demonstrate how they will add value beyond just capital”
At its heart, this is underpinned by thorough due diligence – mapping out all the controllable and uncontrollable risks so these can be priced into the transaction and managed as best as possible. Done well, this is as much about assessing how the business runs – its IT systems and its commercial processes – for example, as it is about its financial fundamentals and the sector it operates within.
Each opportunity must then be underwritten conservatively to minimise downside exposure. This includes not pricing in speculative growth on entry but considering methods to incentivise that growth, typically through an earnout or a similar structure.
We find that vendors often have specific requirements which could prevent an investment. A manager needs to be highly flexibly throughout the process and diligent in understanding what the requirements are and be capable of delivering a bespoke solution.
5
Remaining flexible
Looking ahead, while the principles of good sourcing will remain unchanged, some of the tactical elements of how it is conducted will evolve.
We are already seeing the increasing use of technology in sourcing activity, including the use of AI-powered tools. These are proving their value in helping with ‘always-on’ market scanning – helping to flag and pull financial information from corporate filings, for example, from markets around the world, and then present the findings for instant analysis. They also have real potential to also help manage the significant data flows of the due diligence process, saving time in what can be highly resource-intensive work.
While these unlock efficiencies and can support good outcomes, they don’t replace the human skill and strategy that fundamentally underpin a good sourcing approach. Often it will be those that are still able to spot the hidden infrastructure characteristics which the data may not show at face value that will benefit the most.
As we consider the future of infrastructure, we anticipate a growing appetite for mid-market infrastructure investments. When investors review their allocations, and consider potential managers, it is essential they also assess their respective approaches to sourcing attractive mid-market investment opportunities. A successful and comprehensive approach to sourcing distinguishes a strong mid-market manager and will significantly impact a fund’s performance.
Plugging into the opportunity: Ancala has invested into the largest independent smart meter platform in Germany
Case study: German smart metering
Our focus on bilateral approaches unlocked the opportunity to invest in German smart metering operators Hausheld and Solandeo in 2024
The two investments provide us with the largest independent smart metering offering in Germany that covers all key customer segments.
The idea to explore the sector came from our company-wide idea-generation sessions. In these meetings, all Ancala team members are encouraged to share perspectives on sectors and companies that fit within its investment criteria.
The German government has mandated that smart meters be rolled out nationally to commercial and residential customers, starting from 2025, as part of its wider strategy to achieve climate neutrality by 2045.
Encouraged by these regulatory tailwinds, we assessed the market in more detail. We identified Hausheld and Solandeo as leading and complementary operators in the smart meter market due to their portfolios of installed smart meters, advanced technology and systems, significant order books with energy suppliers and extent of customer relationships.
Our work in assessing the opportunities led us to develop relationships with key customers pre-investment, to the point where the customers committed to increasing their orders upon Ancala’s investment. This ultimately gave the vendors the conviction to complete the transaction on a bilateral basis, provided additional downside protection and created the largest independent smart metering offering in the German market.
