Infrastructure: Embracing Change as the Only Constant

Geopolitical shifts, deglobalization, persistently high interest rates… New macro trends have considerable impacts on diverse markets, such as M&A where overall transaction volume fell by 20% in 2024, while some sectors, such as infrastructure, prove resilient.

The infrastructure sector seems to navigate uncertainties while delivering essential and sustainable projects. The sector is indeed driven by huge investment needs related to energy, social and digital transition. For instance, Europe has to invest 800 billion euro a year in infrastructure. Long-term needs drive the market independently of short-term turmoil.

In 2024, infrastructure activity has effectively remained strong everywhere, particularly in the US, largely driven by the Inflation Reduction Act (IRA). The impacts of geopolitical shifts are evident in LNG projects and the emergence of gigafactories across various sectors. The new paradigm for China is expected to generate significantly more investment abroad from Chinese companies.

At the same time, these changes are shaping infrastructure investments, compelling the sector to reinvent itself and permanently adapt to new trends. The robust activity is also the result of effective risk management in the infrastructure space globally. This requires innovative financing schemes with appropriate risk and profitability levels for all types of investors.

This resilient and adaptive context set the stage for the discussions held at our traditional Natixis CIB Infraday, which gathered more than 300 clients and partners last Thursday, November 7, at the Pavillon d’Armenonville in Paris.

The development of new infrastructure-like assets, fresh approaches to risk, and the challenges and opportunities arising from environmental, social, and digital transformation were highlighted in the various panels. The impact of climate change on valuations and the need to rethink the future of traditional infrastructures were also explored.

One critical theme that emerged during the discussions was the evolution of project finance, requiring a paradigm change in the approach to managing risks. Traditional project finance proved remarkably effective in mitigating conventional risks such as construction, operational, payment, and country risks, often leaving little to no residual risk for project companies.

Over the past two decades, a significant shift toward embracing more merchant and technological risks has been observed. As stakeholders explore this new territory, pricing has adjusted to reflect the higher risk/return profile, prompting the industry to retool itself to navigate this complex landscape.

Today, the infrastructure sector finds itself in a modern phase of project finance, especially since 2020, where undeniable challenges posed by climate change, technological breakthroughs, and social shifts must be confronted. The transformations in infrastructure necessitate a re-evaluation of risk assessments and long-term perspectives to seize the opportunities presented by this transition.

This situation translates into two significant hurdles:

The unprecedented proliferation of new technologies, applications, and markets: The rapid emergence of innovative assets is evolving at an impressive pace—consider hydrogen, battery storage, carbon capture, sustainable aviation fuel, artificial intelligence, EV charging, new rail operators, and even nuclear energy.

Finding ways to finance these new technologies: The inherent risks associated with these innovations are not traditionally managed by banks. To move forward, strategies must be developed to mitigate these technology risks and ensure that all financial institutions become comfortable with the modern challenges and uncertainties they present.

This necessitates innovation in financing structures—considering blended models that facilitate risk-sharing (for example, through close collaboration with insurers) and attracting a diverse range of investors.

In this transformative environment, Natixis CIB is committed to play a valuable role for its clients and partners—by consistently being a pioneer in delivering value at every stage of the financing chain and assisting investors in their asset allocation decisions.

Opening the first session of the afternoon, Jean-François Robin, Global Head of Natixis CIB Research, shared his immediate thoughts on Donald Trump's election as the 47th President of the United States and its implications for the global macroeconomic landscape. Robin emphasized that this time, the Republican candidate comes with a clear mandate. While he may not fulfill his entire agenda, the numerous announcements made suggest that reforms are inevitable.

Among the most significant changes, Robin highlighted isolationism and a substantial increase in tariffs, potentially more severe than in 2016, which is likely to put a sudden stop to global trade. As a second-round effect, China is expected to respond by attempting to export its surplus to other regions, particularly Europe.

The geopolitical landscape is also set to undergo dramatic changes, with Trump indicating a cessation of support for Ukraine and leaving his Middle Eastern policy still undefined.

Another key measure from Donald Trump is deregulation measures and tax cuts, which have led to a surge in the markets. It is anticipated that the Republican president will exacerbate the public deficit, and this massive injection of new money is expected to result in rising inflation.

Regarding the implications for transition issues, Robin acknowledged that the victory of a climate-skeptical candidate is not a positive development for the energy transition, as it is notably absent from his agenda, signaling a halt at the federal level. However, he remains optimistic about the ongoing transition dynamics, for a simple reason: renewable energy is competitive in terms of production costs.

In this respect, Jean-François Robin highlighted encouraging figures: global investments in the green transition total $2 trillion annually, with $2 invested in renewables for every $1 in coal. In the past year, a record 560 gigawatts of renewable energy were connected worldwide, and the U.S. set a record by installing 20 gigawatts of solar panels in 2024, double the previous year's amount.

Jean-François Robin concluded his remarks by addressing breaking news in Europe and the elections in Germany, pointing out that coalition and budget issues are not limited to France. He believes that greater investments in Germany could ultimately benefit Europe as a whole.

For this 14th edition, we have chosen to focus on Climate Change Adaptation (CCA), particularly on water issues, which have significant needs that cannot be met without the involvement of private investors. Indeed, when the drivers of climate risk and their potential impacts on the infrastructure market are well understood and integrated into business models and plans, they can also create investment opportunities.

CCA is defined by the IPCC as the “process of adjustment to actual or expected climate effects in order to moderate harm or take advantage of beneficial opportunities.” In this regard, CCA presents a compelling business case for investment: the benefit-cost ratio ranges from 2:1 to 10:1, according to the Global Center on Adaptation, meaning that every dollar invested can generate between 2 and 10 dollars in return. Infrastructure represents 23% of the investments required to address the challenges associated with CCA, which are estimated to amount to USD 160-340 billion per year by 2030 and USD 315-565 billion by 2050, according to the Adaptation Gap Report 2022.

Yet, adaptation finance remains the neglected stepchild of infrastructure finance. Actually, the specificity of CCA lies in the absence of universally accepted impact metrics, as adaptation investments depend on specific regional or local vulnerabilities, in contrast to climate mitigation. Consequently, there is no universal solution for CCA challenges that works perfectly in every conceivable situation, leading to a case-by-case approach for opportunity identification.

To address the technological issues and financial considerations related to developing CCA – and notably water - infrastructure, we had an excellent lineup of panelists. Marco Arcelli, Chief Executive Officer of Acwa Power, discussed the conditions for replicating cost-effective and energy-efficient desalination solutions developed in the Middle East. Arnaud Nicolas, Partner at Antin Infrastructure Partners, shared his experiences with Indaqua in the Portuguese market, where water scarcity is also a significant concern. Stéphane Rainard, Head of Infrastructure Debt at Swiss Life Asset Managers France, provided insights from an investor's perspective.

The panel was moderated by Laurie Chesné, Head of the Green & Sustainable Hub EMEA and Barbara Riccardi, Regional Head for the Middle East, Caucasus, and Central Asia at Natixis CIB.

The infrastructure sector has undergone significant evolution over the past decade, with infrastructure funds gaining flexibility in Core+ sectors and introducing new infra-like assets into their strategies. These assets include, among others, electric vehicle charging networks, driven by the energy transition, and railway networks which are transitioning due to increased competition in formerly public services.

The emergence of these new types of assets within the infrastructure class has reintroduced risks that had previously been largely mitigated in more mature, vanilla assets like renewable energy. Investors are now grappling with new exposures, such as technological challenges and revenue volatility linked to merchant or traffic risk. Interestingly, while these risks pose challenges, they also enhance the potential profitability of infrastructure portfolios.

To attract equity and debt investors, it is essential to address the complexities of investing in these emerging asset types within a rapidly evolving segment. Questions arise regarding the timing of technology adoption, strategies to cope with price volatility in the energy sector, and the ability to source appropriate capital based on the risk profile of each business stage.

To explore the evolving landscape and how clients are adapting to these challenges, Philippe Bories, Senior Banker and Global Head of the Transport & Environment Industry Group at Natixis CIB, and Julien Devaux, Regional Head of Infrastructure & Energy Finance for the United Kingdom and Nordics at Natixis CIB, invited notable speakers from various sectors.

Christophe Bordes, Managing Director at Infracapital and former Board Member of Recharge, shared insights on managing revenue volatility in electric vehicle charging stations amid fluctuations in electricity prices, EV penetration, and various charging and pricing dynamics. Laurent Fourtune, Chief Executive Officer of Kevin Speed, provided his experience on building knowledge from lessons learned in other countries within the railway sector. Rodolfo Guarino, Chief Executive Officer and Founder of Hippocrates Holding, explained how a network of pharmacies can be considered infrastructure. Finally, Ben Wright, Chief Financial Officer of Statera Energy, particularly shared his experiences in managing technological risk in the energy storage and battery field.

The discussions highlighted a combination of four key tools for effectively managing the risks associated with these new infrastructure-like assets: expertise in equity projection management, the ability to conduct country/market comparisons, strategies to mitigate emerging volume merchant risk, and the capacity to evaluate technology and identify the optimal timing for deployment. Additionally, managing costs is another critical aspect of risk mitigation.

Traditional infrastructure has historically thrived in a low-interest rate environment with minimal sovereign macro risk. Its defining characteristics—such as decorrelation from economic cycles, resilience to inflation, investment-grade counterparties, and stable cash flows—have endowed this asset class with a robust nature.

However, as interest rates rise, sovereign risk has re-emerged as a significant concern. Indebted governments might be tempted to bolster revenues through increased taxation, or to alter regulatory frameworks. Amid the current uncertainty surrounding geopolitics and regulation, a pressing question arises: how do infrastructure originators navigate this new landscape? Has the asset class truly passed the resilience test? Have infrastructure funds adjusted their portfolios to focus on assets less vulnerable to sovereign risk, or have they had to embrace additional risk to maintain their returns?

Another critical issue facing core infrastructure is the reported 20% decline in global M&A transactions closed up to Q3 2024 compared to Q3 2023, according to Infralogic. The total number of transactions dropped by 109 to 242, marking the lowest level since Q2 2018, when 241 deals worth USD 72.2 billion were finalized.

This drastic decline can largely be attributed to a mismatch in price expectations between sellers and buyers. How are infrastructure funds working to understand and bridge this valuation gap in M&A processes? What strategies are they employing to close deals in this challenging environment?

Vincent Berry, Managing Director of Infrastructure at Natixis Partners, and Tomas Gomez Palacio, Managing Director at Natixis Partners Iberia, had the privilege to discuss these pressing issues with Julien Gailleton, Deputy Head of Infrastructure at AXA Investment Managers Alts; Eric Machiels, Managing Director at OMERS Infrastructure; and Alessandro Valenti, Managing Director and Head of Infrastructure Financing at Igneo Infrastructure Partners.

The demand for data centers is rapidly increasing due to the ongoing digitalization of the economy and the recent surge in requirements driven by generative AI. Data consumption is expected to triple by 2025 compared to 2020 levels.

From a sustainability perspective, large hyperscale data centers provide more efficient data management compared to previous models where individual companies managed their own data on-site. However, the substantial growth in data volume has resulted in increased power demand, which poses challenges in terms of availability, particularly as competing needs for new, carbon-free generation intensify.

To illustrate the rising power demand, electricity consumption for data centers in the European Union (EU) is anticipated to grow at about 9% per year due to digitalization, including AI, potentially exceeding 5% of total EU electricity demand by 2026. In the United States, the largest data center market globally, data centers represented roughly 4% of the nation's electricity demand in 2022, a figure projected to rise to nearly 6% by 2026. Cooling processes also raise questions regarding the efficient use of air cooling, possible use of refrigerant gases, as well as water consumption.

Rebecca Smith from the Green & Sustainable Hub at Natixis CIB and Robert Wallin, Managing Director of the Telecom & Tech Industry Group at Natixis CIB, were honored to invite esteemed speakers to explore these sustainability challenges, beginning with the identification of bottlenecks in areas such as energy sourcing, cooling technologies, and land availability.

Panelists also addressed the sources of pressure—whether from clients, regulation or the financial market—and examined whether technological advancements are exacerbating or alleviating these challenges. We extend our warmest thanks to Joe Harar, Chief Financial Officer at EdgeConneX; Chester Reid, Chief Financial Officer at Yondr; and Alexey Teplukhin, Managing Director of Capital Markets at IPI Partners for their valuable insights.

We are grateful to our panelists for their thought-provoking contributions and to all attendees for their active involvement in this crucial sector!