The Australian M&A Outlook: Infrastructure Industry Insights

Market outlook for 2022

Despite current geopolitical tensions abroad, there is still plenty of activity among dealmakers in Australia’s infrastructure sector. With a scarce supply of traditional infrastructure deals from government capital recycling, this is pushing investors to explore new territory. With low interest rates and capital to deploy, there are no shortage of potential buyers vying for acquisitions – but the rewards are still there for creative and flexible dealmakers.

Historically, fund mandates were clearly defined around core areas of infrastructure and the ability to diversify was limited, but all that is changing. A lack of traditional opportunities has rewritten the rules of engagement for buyers. Globally and locally, there is an abundance of capital to deploy, and Australia has a proliferation of potential infrastructure buyers participating in sale processes. Funds are expanding their criteria and moving up the risk and return curve. They are casting their net more widely to include new asset ‘quasi-infrastructure’ classes, often described as ‘Core Plus’, that promise longevity through provision of essential services over the next 10-30 years. Think: land registries and IT infrastructure. Think also: health infrastructure and telco infrastructure.

Increasingly, funds are prepared to do more complex deals, and have recently undertaken public-to-private deals. This is expected to continue through 2022, with flexibility being the name of the game for buyers. So as well as diversifying their targets, super funds are also more open to inventive deal structures and arrangements. We expect more funds to work in consortia to undertake a ‘carve out’; buying up entities that contain a portion of infrastructure – retaining the infrastructure elements, while their partner(s) retain the other assets.

The infrastructure industry has always been fond of an acronym and ‘ESG’ is cropping up in just about every due diligence conversation across the country. But this acronym is about more than just ticking a box. 

Environmental, social and governance performance can now make or break infrastructure deals. Shareholders and stakeholders are voicing their expectations clearly and, increasingly, mandating that funds investigate and disclose ESG in their investment strategies. 

Established funds are heeding these market signals, while a growing number of specialist ESG funds are also now competing for ESG friendly assets in the Australian market. Acquirers are ramping up their due diligence of assets to test the veracity of any ESG claims and credentials. Attention is extending beyond past and current performance, with buyers seeking to understand what an assets’ future ESG potential is likely to be.

For prospective sellers, ‘greenwashing’ will no longer cut it. ESG targets need to be specific and measurable, while performance needs to be reported transparently.

It’s worth noting that, although ESG has ‘gone mainstream’, dealmakers are not all responding uniformly. With an eye on the long term, some sellers are seeking to exit certain assets while some buyers can still be tempted by medium-term returns creating deal opportunities. Gas infrastructure deals are a prime example of this. Some dealmakers recognise Australia will remain reliant upon gas for some time (depending on how long it takes for alternative fuels such as hydrogen to become scalable and economically viable); others consider gas tainted from an ESG perspective.