Ridgewood: Creating value in the lower mid-market

Delivering in the lower mid-market in a sustainable way offers important structural advantages, say Ridgewood Infrastructure managing partners Ross Posner and Michael Albrecht.

This article is sponsored by Ridgewood Infrastructure 

The large-cap end of the market may receive the lion’s share of the capital and attention, and Ridgewood’s Ross Posner and Michael Albrecht like it just that way. They and their firm, Ridgewood Infrastructure, focus on the lower mid-market, where there is relatively more dealflow, less capital and a highly compelling essential infrastructure investing proposition.

Drawing on a well of experience and relationships, US-focused mid-market specialist Ridgewood Infrastructure has been quite active since hitting the hard-cap on its inaugural fund in early 2020. The firm primarily invests in water, utilities, transportation and the energy transition. Managing partners Ross Posner and Michael Albrecht describe the dynamics at play that make the lower mid-market a highly attractive area upon which to focus.

How has investment and dealmaking in the lower mid-market been affected through the pandemic period?

Michael Albrecht

Michael Albrecht: We actually saw an acceleration of opportunities in the marketplace, triggered by a number of factors. I think businesses, particularly in the lower mid-market, were seeking capital providers to help them grow, to invest in their businesses, as well as to help finance capital expenditures and customer acquisition. They were seeking partners who brought more than just capital, who could help them successfully navigate through a challenging macro environment oftentimes despite significant secular growth trends in their sectors. For us, it actually served as a great tailwind for origination.

What makes the lower mid-market so attractive to infrastructure investors?

Ross Posner

Ross Posner: There are several reasons. First, there is a deep opportunity set. Forty percent of the infrastructure transactions executed in our market have an equity need of $150 million or less. However, given the capital flows into infrastructure private equity, only 10 percent of the capital raised is sized towards this investment opportunity universe. We love that structural inefficiency, and when it’s coupled with the relationships and capabilities of our team it becomes an even more attractive backdrop from which to originate and drive our repeatable and operationally oriented value creation strategy.

As you look a bit deeper, you can see that we are focused on investing in truly essential infrastructure assets and businesses. For example, if you look at the investments we made in recent years, they include high-growth regulated utilities and long-term contracted businesses with high-credit-quality counterparties. Additionally, our value creation strategy is really fit for purpose in this part of the market.

How do you balance value creation with ESG aims and responsible investment?

RP: Our view is that they’re highly complementary. Ridgewood has been focused on integrating ESG into our investing for a long time and we do not view value creation as being at odds with ESG. We believe our ESG focus creates material value in our underlying investments and can unlock new business initiatives that not only benefit the planet, but also enhance profitability and their longer-term sustainable operations.

For example, let’s consider our Ecosave energy efficiency investment. The business is leveraging its core competency of reducing energy and water consumption, thereby reducing CO2 emissions, while also generating long-term contracted cashflows. And it is doing so in a high growth industry dynamic.

At the smaller end of the market, we are able to make an outsized impact with regard to ESG and sustainability-focused initiatives. Our investment approach is really geared towards the inherent value created through those ESG initiatives. Our view is that the buyer universe for our investments will assess much greater value to a sustainably positioned and managed business.

How would you define your acquisition strategy?

MA: Our strategy is focused on identifying truly essential businesses and assets. Those that can generate long-term, non-correlated cashflows with high-quality counterparties. We utilise a top-down and bottom-up approach to origination of those investments. From a top-down perspective, we are focusing on themes, subsectors and industries that exhibit all the underlying essential infrastructure characteristics that we find compelling.

Importantly, our analysis is not isolated to just the current economic environment, but instead tracks the entire life cycle to ensure that underlying cashflows will endure.

Conversely, on the bottom-up approach, we are seeking investments, or attachment points through our relationship networks. Ridgewood is in the market in active dialogue with corporates, management teams and trusted advisers to bring those to the surface. The depth and breadth of our origination network allows us to bilaterally create opportunities outside of an auction process, which contributes to our ability to generate higher risk-adjusted returns.

This repeatable process has led to us investing in the largest water PPP in US history, forming a unique joint venture with the largest privately owned transport and logistics company in America, and owning one of the fastest growing utilities in the country.

How do you see investments in energy efficiency developing as part of the wider portfolio?

MA: Thematically, the energy efficiency sector has been a long-standing area of interest of ours, where companies focus on providing solutions for customers seeking to reduce their energy usage, which translates to lower costs and lower carbon emissions. The ability to deliver greater profitability through the advancement of ESG goals is very powerful. The challenge for many managers is that limited opportunities exist to deploy large amounts of capital into this space.

Ridgewood’s focus on investing in the mid-market is right sized for the opportunity in the US, which is large and highly fragmented. Thus far, we have completed two investments focused on energy efficiency infrastructure.

Our Environmental Infrastructure Partners (EIP) investment – a joint venture with Sustainability Partners – is focused on providing energy efficiency and other sustainable-focused infrastructure under contract with high-quality counterparties throughout the MUSH market – municipal, universities, schools and hospitals.

Our most recent investment, Ecosave, is an energy efficiency infrastructure company focused on the commercial and industrial market. Ecosave is a high-growth company that was searching for a partner. They were attracted to Ridgewood’s industry expertise and our proven ability and track record of helping companies accomplish their growth objectives, as well as the strong cultural fit and the rapport with the CEO and other executives that we created. It was about truly forming a partnership, not just a financial transaction, by providing strategic insight and professionalisation to help them think about the next leg of their growth journey.

How will the recently passed US infrastructure bill affect opportunities for value creation and investment in the lower mid-market? 

MA: Our strategy is not reliant on legislation or other uncontrollable factors. However, the infrastructure bill could provide a tailwind. For example, government dollars allocated to subsectors like water could really shine a light on the need for greater capital. This is particularly relevant for midsize cities and midsize utilities that could expand their investment budget if they had a partner like Ridgewood to provide not just capital but strategic insight. The US infrastructure bill is not something the private markets required, but we view it as an upside to create even more opportunities.