Given the incredible amount of investment needed to maintain and update the nation’s aging infrastructure, private equity investors have been building their exposure to that sector for the past few years, long before President Biden’s infrastructure plan came to fruition. But now it’s in overdrive.
“We’ve seen valuations ratcheting up for a while—a market I’d describe as in a rapid boil,” says Paul Majeski, William Blair investment banker with the services team who leads its utility & infrastructure services practice. “It went to completely boiling over once Biden introduced his plan.”
William Blair data shows valuations of midcap companies in the utility/infrastructure private equity space are up as much as 80%-90% today from about two years ago.
One of the elements that made the Biden plan so interesting, says Majeski, is its focus on core maintenance initiatives rather than on building big, fancy airports or huge new bridges, which are more typical of infrastructure bill projects. Instead, it proposes:
- Expanding and upgrading 20,000 miles of roadway.
- Improving 60,000 miles of underground infrastructure—the “unseen” water, waste, electric, and gas systems below ground.
- Embracing sustainable/environmental initiatives that fall under the theme of ESG investments, including the switch to renewables; modernizing the electrical grid; accommodating an electric fleet of cars and trucks; and building the infrastructure needed to support electric vehicles.
“So all and all it’s going to be lots of little projects that comprise that trillion-dollar-plus plan not several marquee projects,” says Majeski. “That means it’s going to be spread across the country, thousands of businesses will be impacted, and lots of people will get to participate in that maintenance and upgrade cycle.”
Macro Trends Driving Infra Investing
Majeski says there are a few key macro trends driving the change in thinking. First and foremost is the chronic condition of underinvesting in the country’s electric power, water and wastewater, communications, transportation, and buildings.
“A trillion-dollar plan sounds like a lot but essentially it’s like spitting on a fire,” he adds.
Second, all these assets are critical to human safety, environmental health, and economic productivity. There’s also a huge evolution underway in how the world creates power, consumes power, and travels. Then add to the mix an aging workforce, requiring more outsourced services to meet the changing economy.
“Put all that together we’ve seen a huge influx of private equity investors looking to gain some sort of leverage to those macro trends.” Majeski says. “Increasingly they are more interested in being exposed to infrastructure broadly rather than a specific market segment, like HVAC for example, which we typically saw in the past.”
One of the most recent infrastructure deals on which William Blair advised was the sale of RoadSafe Traffic Systems to private equity investors Trilantic North America and Investcorp. Chicago-based RoadSafe is the nation’s largest provider of traffic control and pavement marking services to road, construction, railway, state transportation, and utility customers across the U.S.
Investors said RoadSafe represented an attractive growth opportunity, driven by several macroeconomic tailwinds, including the need to upgrade the U.S.’s aging infrastructure, the rollout of 5G systems, and the re-marking of roads to support future technologies.
“Over the last several years we’ve been homing in on the opportunity to invest in infrastructure, U.S. infrastructure in particular. And although we’ve seen consistent growth in expenditure in U.S. infrastructure over many years now—the reality is that there has been a consistent underspend relative to what the needs of the economy are,” Rishi Kapoor, co-CEO of Bahrain-based Investcorp, said on CNBC at the time of the acquisition. “We decided to go down the path, being midmarket specialists, of investing in infrastructure enablers. And RoadSafe is one perfect such opportunity.”
Embracing Environmental, Social, Governance (ESG) Initiatives
Investors across all markets, including the infrastructure sector, have been increasingly embracing initiatives that fall under the ESG theme: evaluating companies through the lens of sustainability, social impact, and quality of governance.
“This growing awareness of ESG issues is underscored by the expanded definition of ‘infrastructure’ in Biden’s plan to include many ESG-related improvements,” says Jo Trahms, an investment banker on William Blair’s services team with Majeski. Trahms also leads ESG positioning for the firm’s IB clients.
“The investors in public companies that have been strongly advancing the ESG agenda for the last few years are the same investors in private equity funds,” Trahms adds, “and they are now pushing a similar agenda on the private side. Europe has been at the forefront of ESG-focused investing and regulation, but the U.S. is quickly progressing along the same lines.”
Within the deal-transaction process, Trahms looks at two components for ESG integration. The first is within the framework of due diligence, which applies to all businesses, although the areas of materiality vary by sector. Often this is through the view of risk mitigation and overall corporate governance, i.e., does a company have strong business practices? Does it do well in terms of social metrics such as diversity and inclusion? What initiatives is a company taking to reduce its energy costs or strengthen its supply chain?
The second is related to value creation for companies whose business models have a positive impact on the environment and on society as a whole. While traditionally a strategy owned by impact investment funds, a broad swath of investors is embracing this approach, recognizing ESG and sustainability trends often offer stronger growth prospects and reduced risks long-term.
“If ESG 1.0 is making sure you have a strong governance, this is taking it to the next level,” she adds.
An example of a company that falls into the better-for-the-world business model is Montrose Environmental, an environmental services company. Based in Irvine, California, Montrose offers clients in the energy, industrial, chemical, and real estate industries a broad range of services from water treatment and soil remediation to testing and lab services to regulatory consulting.
Since its IPO in July 2020 and its follow-on offering in November, shares have gained 130%, delivering a market valuation of $1.3 billion. William Blair was a lead underwriter on the IPO and its follow-on offering.
“Montrose’s focus is protecting the environment,” Trahms says. “Its capabilities are aligned with emerging political and regulatory priorities, and they are well poised to continue growing as the regulations around safety, the environment, and related infrastructure grow and change in the coming years.”