Why smaller infrastructure fund sizes with mid-market focus versus large funds are appealing

When discussing infrastructure investment opportunities with potential investors, they often prefer large funds over mid-market transactions.

There is a lot to be said about this, which is why investors would do well to take a closer look at opportunities in the mid-market segment.

EPICo II fund (Article 8 Fund*) is a diversified and balanced portfolio of European greenfield and operational infrastructure assets such as Energy Transition, Digital Transformation, and Sustainable Mobility and Transport.

1. Expected Returns

Expected returns are higher, as (i) the market for the (mid-market sized) transactions that EPICo II is focusing on is less crowded than the (large sized) market the more considerable funds are targeting, (ii) EPICo II is (through its team and network) in a position to work on transactions before they hit the market and therefore has a head start in the transaction and faces less competition on price than with competitive auctions and (ii) EPICo II and the team has the experience and capabilities to develop projects from the start of construction throughout operations, thereby creating a value inflection point, rather than just buying operational assets. (The opportunity to create value is bigger). The higher returns are not generated from a higher risk profile but from the fact the manager puts in a lot of hard effort and work.

2. Risk

Risk is lower as EPICo II and the team spend a significant amount of time (as opposed to money) in developing the opportunity and structuring the deal, including setting up the underlying contracts (construction, operations & maintenance, supply, off-take, ect.). The team often has lengthy discussions with various stakeholders (in both the private and public sector) before an investment opportunity becomes concrete. The risk profile is therefore actively structured by the team to fit the fund, as opposed to a more common approach where a fund performs due diligence on a given structure and risk profile to assess the opportunity. EPICo II helps shaping the opportunity and its risk/reward profile. Also, risks profiles are not a linear equation. The larger projects become, the more complex they get and more points of failure can arise.

3. Contract Terms

The contract terms with the developers are better through the manager's active involvement, experience, and the fact that he develops trusted partnerships. In return, the hands-on approach also adds value for the developer/vendor in creating and growing the opportunity. Combined with the work the manager puts upfront in structuring the transaction and contracts, the terms are better, resulting in a lower risk profile for the same or better returns.

4. Capital Deployment

Larger funds are under pressure to deploy capital. Due to the size of more significant funds ( > 1.5bn euro), they are pushed towards more effective transactions. The number of available deals for these more considerable funds is limited compared to the amount of capital deployed worldwide. Combined with time constraints in the investment horizon of these funds, it puts a lot of pressure on them to deploy capital, thereby driving up prices and/or increasing risk tolerance and reducing return capabilities. We see this in the larger infrastructure transactions where significant funds compete against each other but sometimes even have different strategies. This is due to the scarcity of deals and the abundance of capital. Fortunately, the market that we serve (mid-market) and the fact that we have a significantly large pipeline compared to our fund size allows us to invest in the projects we believe are the right fit and reject transactions that we think are not favorable in terms of risk and/or return.

*An Article 8 Fund under SFDR is defined as “a Fund which promotes, among other characteristics, environmental or social characteristics, or a combination of those characteristics, provided that the companies in which the investments are made follow good governance practices.”

Don't hesitate to contact us for more information on the EPICo II fund.