Europe: UK is ‘first port of call’

The recent £585.1 million (€808.9 million; $858.2 million) sale of a 40 percent stake in Channel Tunnel rail service Eurostar by the government – with Canadian pension La Caisse taking 30 percent and UK asset manager Hermes Infrastructure 10 percent – was one very visible illustration of the continuing attractiveness of the UK market.

“It’s as busy on the UK buy side as it’s been for the last several years. Over the last year, activity has been very strong and it’s still an extremely attractive market for both fund managers and direct investors,” says Jason Clatworthy, a partner at Deloitte UK and European infrastructure M&A leader.

He adds that, for those investors looking to do deals within Europe that are based outside the region, the UK will typically be their first port of call. Transactions have been particularly notable in sectors such as train rolling stock companies (ROSCOs), regulated assets and renewable energy.


While demand appears to be stronger than supply, the first signs are emerging that sales from first-generation infrastructure funds in Europe will help drive future deal flow. Many of these funds, Clatworthy points out, have been weighted towards the UK and he expects a range of assets – including airports and water companies – to be placed on the sale block over the coming couple of years.

Clatworthy believes that good regulation is one of the reasons the UK is so popular. “People see the UK as one of the best regulated markets,” he says. “People generally remain nervous about regulators. However in the UK, even though there has been some noise around the water sector, investors are of the view that regulation is much more challenging in other parts of Europe.”

He does note however that some funds have been asking questions about the possible impact of a change of government arising from the upcoming general election. There are, for example, some uncertainties around the general tax environment beyond 7 May.

Perhaps the biggest downside for the UK has been an inability to convert greenfield potential into delivered projects. Clatworthy says the Thames Tideway project – which includes government guarantees – is “quite an interesting model” that has kept “more investors interested than would otherwise ordinarily have been the case”.

The UK’s public-private partnership (PPP) market, meanwhile, has been “pretty quiet” although appetite in the secondary market remains strong. Fund managers which have developed strong track records in the UK are now beginning to export their expertise into emerging PPP markets.


Meanwhile, Clatworthy sees the Nordic region as “the only European region close to rivalling the UK” at the moment, in terms of infrastructure deal activity. This view was highlighted by the recent €6.6 billion sale (subject to regulatory approvals) of its Swedish electricity distribution business by Fortum Corporation to a group of investors led by Canada’s Borealis Infrastructure.

“The region is very active and newer entrants to the market are very keen to understand more about it,” he says.

He expects to see more deals in sectors such as regulated assets, transport, renewable energy, district heating and airports. “Everyone’s up there having a look – the big direct investors, fund managers and new entrants,” says Clatworthy.

He says that Sweden is currently the most active of the Nordic markets, having taken that mantle from Finland. In Denmark, despite high hopes, there has not yet been a regular flow of deals. Indeed, deal flow could potentially become an issue throughout the region. It needs to be remembered that, viewed individually, these are relatively small markets and, over the course of time, may struggle to live up to the expectations of the large number of direct and fund investors that are now scouring the terrain.

However, when looking at the Nordic region, the combined potential with respect to deal flow remains high.

The PPP market has been a little more productive than in the UK. The number of completed PPP deals in Denmark has close to doubled in the last two years, but the market remains fairly sedate in Sweden and Finland.

In Sweden there have been some concerns over the uncertainty of tax treatment of investments although Clatworthy points out that there has at least been visibility over proposed changes which means they can be modelled. In conclusion, he expresses the opinion that there are “a lot of positives” in the Nordic region.


The same cannot so easily be said of Germany where, according to Clatworthy, “regulation and taxation can be very challenging and yield is hard to find. It’s a challenging market.”

Germany saw a number of deals from utilities selling off non-core assets a few years ago, and has also seen quite a lot of renewable energy deals. However, there is now uncertainty in the renewables sector and assets available to buy are now typically at the smaller end of the market. PPPs, meanwhile, are “very complex and there is not a lot of government support except for the education sector”.

Clatworthy sees Germany as a market where fund managers are likely to be more in evidence than direct investors, since the latter cannot find sufficient big-ticket deals and have gravitated to the Nordic markets instead. “Even when opportunities in Germany crop up that you think might be of interest to them, they are too busy elsewhere,” he notes.

Elsewhere in Europe, Clatworthy notes that Spain is “on the radar again” after that country’s post-Crisis woes, while investors are also doing a lot of homework on Poland. With a combination of distressed sellers, good assets and greater visibility on Europe’s economies, it appears that the region as a whole offers much promise.