The Australian M&A Outlook 2024: Infrastructure Industry Insights

The federal and state governments, with a notable exception being Western Australia (WA), will run significant deficits which will likely increase borrowings. Even though this is the backdrop for government finances, there is still currently a lack of opportunity across the country for private capital to be deployed into infrastructure projects, with no capital recycling programs and a limited pipeline of public-private partnerships coming to market.

Australia’s infrastructure challenges are complex (e.g., energy transition ambitions and an increasingly sensitive housing market supply deficit) which require significant capital and the government simply cannot do it alone. There are some opportunities for the private sector to partner with government on infrastructure (social housing, distributed networks, and last mile infrastructure that can front-end housing developments) and the energy transition (see the energy transition investment theme below), but there needs to be more.

The increased AUM and size of equity cheques available for deals is such that M&A is now at a global scale – the local sale of 30% of Neoen Australia was gazumped by a US$7bn (AUD$10.6bn) takeover of Neoen by Brookfield at the headstock level in Paris; and the upcoming mega APAC data centre transaction is mooted to be valued at close to AUD$15bn.

In Australia, consolidation of smaller super funds looks set to continue. This will result in higher AUM, which will force fund managers and super funds to rebalance portfolios and achieve diversification by type of asset and sector, by geography, and ideal size of investment, with a number of funds overweight in certain of these categories.

This is now leading to:

• a divestment of smaller investments (relative to current fund and investment size) and/or underweight holdings and a number of these assets are being exited (or rumoured to be) through the pre-empts route (e.g. Perth airport, Brisbane airport, New South Wales (NSW), LPI, Electricity Distribution Cos, Victoria Desalination). For super funds, this presents a unique opportunity to undertake asset swap transactions with peers to exit sub-optimal investments and grow in others to achieve their portfolio balancing targets.
• an increased desire to invest in overseas markets as evidenced by the larger Australian superfunds opening offices in the United Kingdom (UK) and the United States (US); and/or a greater willingness to look at core-plus opportunities.

Australia has set sail on our journey towards net zero although we have a long way to go. There are many varying views on how long and how we should get there, with the recent decision to extend the life of a coal-fired power station in NSW to August 2027 to manage energy reliability risk.

Whilst there is no silver bullet that can decarbonise the Australian economy in the short term, the state and federal governments have transformative initiatives like the Capacity Investment Scheme following Renewables Energy Zones launched by the NSW Government. Both initiatives can aid strong private sector participation through financing, execution and operations expertise to build out 10,000km of transmission lines and 29GW of renewable energy and storage. The success of both initiatives will be important if Australia is to meet its 82% renewables penetration target by 2030. The other areas that government must consider are the planning and approvals processes which are slowing down the required build out of green energy infrastructure.

Ultimately, a successful renewables generation pipeline, battery storage, and transmission network build out in Australia will bolster decarbonisation in other sectors (e.g., transport and data centres) and support local supply chain development, assisted by the recently announced Made in Australia and other programs.

However, there is competition from other governments, such as the Inflation Reduction Act legislated by the US, which is turning into a transformative program for the US economy and creating competition for capital allocated for energy transition deals but has also accelerated reshoring of capital to local industries.

Offshore players will continue to invest, provided the regulatory environment stays supportive. Australian infrastructure assets will continue to attract offshore players in 2024, including European Union (EU) investors with evolving environmental, social, and governance (ESG) mandates, as Australia presents strategic opportunities for these players to transform their business models. In 2023, nearly two thirds of deals in the renewable energy space were done by these types of investors.