Europe as much as any other jurisdiction needs the infrastructure of tomorrow. The fact that this demand for investment in transition infrastructure, particularly in the energy and digital sectors, is married with high population density and stable regulatory regimes makes Europe a particularly attractive market for infrastructure investors.
Stable regulatory regimes are a critical enabler of infrastructure investment. The combination of large-capital investment upfront with long-term cashflow expectations makes infrastructure particularly sensitive to regulatory risk. Stable, sensible, long-term minded regulatory regimes provide managers with the confidence to invest.
"Fundamentally the mid-market is attractive because it provides the opportunity to achieve higher returns while improving diversification," says Tom Maher, Managing Director at PATRIZIA.
"A key contributor to the mid-market return premium is entry pricing. We can enter on a three to five, and sometimes even 10 times earnings before interest, taxes, depreciation, and amortisation (EBITDA) multiple lower than the comparable large cap transaction. Attractive entry pricing lays the foundation for strong returns," he says.
The second component is the potential for valuation creation through active asset management. Being hands-on in the mid-market is critical because it allows us to grow and add value.
"Our goal is to invest in platform businesses that are scalable, increasing reach and efficiency. EV charging is a good example: we have done a ring-fenced deal of 200 sites with Tegut. We see huge potential to do that three or four more times and create a much larger and more attractive pool of assets," he says.
Mid-market infrastructure allows investors to access opportunities that are differentiated relative to the investment set available for large-cap managers. PATRIZIA's analysis highlights that the addition of a mid-market manager to a portfolio of large-cap infrastructure managers can increase the median return per unit of risk by up to circa 30%.
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