Outlook 2016: The squeezed middle

In Europe, the mid-market is no longer immune to return compression. A trend to watch out for?

“We are seeing managers with a reasonably cheap cost of capital – people who set up managed accounts, or captive infrastructure managers – enter the mid-market. So some traditional barriers to entry, like size of transaction and long lead-up times, are no longer stopping some managers from underwriting a €100 million investment at 8 percent, which we thought was reserved for large-cap direct investments.”

That somewhat starling titbit came from InfraVia partner Bruno Candès, at the latest edition of our European fund management roundtable. And if it doesn’t quite take a wrecking ball to the notion of the mid-market as a kind of last bastion for general partners (GPs) seeking decent returns, it certainly serves as warning shot. Especially when you take into account that Candès’ – and InfraVia’s – métier is very much focused on the mid-market.

That’s not to say the European mid-market will be bereft of opportunity. At the same roundtable, Ardian head of infrastructure Mathias Burghardt argued that while the large-cap infrastructure space was as expensive as any other asset class, European “mid-sized assets […] can still be bought at reasonable prices”.

And let’s not forget that the largest first-time infrastructure fundraising since 2009, according to Infrastructure Investor Research & Analytics, was for a mid-market focused infrastructure fund. New-York based I Squared Capital hit its $3 billion hard-cap earlier this year, proving there was no shortage of limited partner interest for this type of strategy. With the fund approaching the halfway investment mark after less than two years on the market, it is also demonstrating there is no shortage of deals out there.

Candès agreed there was “a tremendous amount of deal flow in the mid-market, but you need to add value. If you’re a mid-market GP wanting to earn a fee, you now need to deploy the GP’s full gamut of solutions. Thinking you are safe because of what was until recently a relatively protected market won’t cut it anymore,” he argued.

So in a way, Candès is really just warning against complacency. As infrastructure continues to garner record levels of attention, that just sounds like good advice to us.