This article is sponsored by Ardian
Like many things in North America, the mid-market is considerably larger than people on the outside may appreciate. We spoke to Mark Voccola and Stefano Mion, the co-heads of Ardian’s North American infrastructure fund, about how their market differs from those of other developed economies.
They also discuss the distinct challenges and opportunities the North American infrastructure mid-market presents, particularly as the pandemic has put the spotlight on many essential aspects of infrastructure, and as the economic outlook, notably the uncertainty around inflation, casts the value of the asset class in a new light.
How do you define North America’s mid-market?
Mark Voccola: I think of it in equity cheque size and, for me, it is between $100 million and $300 million, but the size can change depending on the opportunity.
Stefano Mion: We look for assets or companies where we can be number one or a strong anchor investor. We like to have companies that are in a stage of their life that can grow, either through capex or acquisition. That is where the mid-market allows you to operate in a more flexible way: there are companies that still need some support in the development of their management team and are in an earlier stage than larger corporates.
There are also companies that have the potential to become major corporates themselves or be acquired by larger corporates in some later stage of their lives. That is what the mid-market gives you in terms of growth and exit – a company either becomes standalone or a platform that is a perfect add-on for an existing large corporate.
How do you approach growth and what do you look for in the potential of a company?
SM: First we look at market dynamics because you need to have a growing market and a management team that can execute growth. In infrastructure you can either build new assets or buy assets that have been built and add to them, or a combination of the two. The key way to create value in infrastructure is through investment, so the mid-market lends itself to that very nicely.
MV: In our portfolio, we have a couple of examples of that – Skyline Renewables is one. It started out as a management team with one small investment in a wind farm in the US. Fast forward three years and now, through a combination of construction of new assets and acquisitions of existing ones, you have a company with 1.1GW of operating renewables and an enterprise value approaching $1 billion. Through building and buying mid-market assets you can create a company that is bordering on that large corporate scale.
SM: Another example would be LBC Tank Terminals, which is a petrochemical storage company. Again, this was a growing market and a company that had an existing installed base of storage facilities in strategic ports, mostly in Texas and Louisiana.
The company had a meaningful landbank and client base, which it matched, and we supported the management in building new facilities for existing clients. Storage capacity has increased by more than 50 percent since acquisition and that has been achieved through strategic capex projects.
In Europe it is often said that the mid-market is overlooked by finance, which is more interested in large corporates or in start-ups. How is the mid-market perceived in the US?
SM: I would not call it neglected, but coming from the European experience, the American market is different. The start-ups are still there, but the corporates are very large, so there is a wide gap between the two.
In Europe, a large-cap is not as large as an American one and so the mid-market in America covers some very large businesses. In Europe, finance can move from being in the large-cap to mid-cap very quickly, while in the American market there are many large-cap players who just won’t get out of bed for anything less than $500 million.
However, in the mid-cap universe in North America, you still get meaningful companies that have global aspirations. That is an interesting dynamic – global scale companies in the mid-market segment. It also means that in a company of the size that we target in North America you can find a very capable management team who can be incentivised with both market standard base remuneration, plus very strong incentives on the growth.
What are the particular sector opportunities in your market today?
MV: There are three broad sectors we see as the important opportunities. Firstly, in energy there are certainly opportunities in both greenfield and brownfield renewable investments, and we’re primarily talking about solar and wind investments across the US. There are also more opportunities around cleaner natural gas generation as a complement to those renewables. Additionally, within energy there are growing opportunities in the storage space, notably the lithium-ion battery segment.
The second space, growing similarly to renewables, is telecommunications infrastructure – towers, fibre and data centres. This is a field where mid-market businesses can invest in capex and really build value.
Finally, the third opportunity we see is transportation. It’s a sector that is changing when it comes to the electrification of the auto-fleet in America.
President Biden has made a lot of positive noises about infrastructure investment and renewable energy in particular. Without drawing you into politics, how important is the Biden administration going to be in creating opportunities for infrastructure investment?
MV: For the last 10-15 years, renewables have been growing as fast as they possibly could, starting with the Bush administration, though Obama, Trump and now and the Biden administration. It is not really a political question, because it is what the market wants.
I would say the Biden infrastructure plan will provide tailwinds for a sector that is already growing well and has a great track record. We will continue to see numerous opportunities.
What we might see is a little more around tax policy. We might see expansion of the Investment Tax Credit and maybe new tax credits for electricity transmission infrastructure.
That is an important part of renewables in helping move the power from where it is generated – where it’s windy and sunny – to the load centres where it is needed. It also means moving power across utility territories. If you see those tax credits you will get more certainty and more comfort for people to keep pouring money into this space.
What are the challenges in the US mid-market?
SM: There are regulatory risks and sometimes that is where you may have a little bit less power as a mid-market player, because you may not have the access and the lobbying power of other larger players. But, on the other hand, you are nimbler as a mid-market player and you can adapt very quickly to changes in regulation.
MV: It is important that when you are picking your asset you select sectors that are essential, because you are building your leverage with regulation that way. If you are building the most efficient company or a new solution that is an essential asset – a new transmission line or a new road, for example – you will do better through the ups and downs of the regulatory environment.
The biggest up and down in the last year has been the pandemic. Has that had any distinct effects on the infrastructure market?
MV: One thing the pandemic has done is shine a light on the importance and the resilience of energy and of renewable energy in particular. There were impacts on employees, but absent that, those energy assets and companies still worked, and they proved they could provide downside protection to investors as the economy turned down.
That is what you would expect to see, and it is what we model, but it was good to see in practice. The pandemic also shone a light on the importance of the telecommunications infrastructure network.
That network allowed economies around the world to be resilient, it allowed remote working and meetings that I am not sure everyone was taking advantage of. As well as being good for growth in that sector it again shows the resilience and the downside protection that infrastructure investments provide.