Private equity helps future-proof essential services
Private equity (PE) funds’ role in infrastructure investments is shifting, according to Niklas Nordenswan, client executive at SEB. Instead of core assets – like roads, ports, and airports – PE is increasingly focusing on sectors exposed to competition and market risk, where it actively contributes to modernising services.
With over 25 years of experience in banking, Niklas Nordenswan’s current role involves working closely with PE funds that invest in infrastructure. When it comes to such funds’ reduced investments in core assets, Nordenswan attributes the development to a few key factors.
“Large-scale infrastructure projects like building a new road or airport tends to offer very low returns. This makes it hard for private equity funds – which need to deliver yield to their investors – to compete in that space. Higher interest rates have driven up return expectations even more. In addition, governments are becoming increasingly protective over critical infrastructure, which makes such investments all the more complex.”
But, as mentioned, there are other infrastructure sectors with greater appeal, namely those exposed to competition and market risk, such as energy production, transportation, waste management and digital infrastructure.
Our PE clients like investing in tangible, asset-heavy businesses – for example bus fleets and heating plants – and often modernise them with greener technologies, electrifying buses, and so on
A core part of the investment strategy is to improve the businesses they acquire, so they are more efficient and attractive when it’s time to sell. Thereby, they also future proof essential services and help make them more sustainable, by reducing the emissions generated by these”, Nordenswan says.
Another promising area is the collaboration between PE funds and municipalities. In cases where public entities lack the capital or expertise to modernise infrastructure, PE can step in – bringing funding and operational know-how.
As an example, Nordenswan mentions Finland, where PE has partnered with municipalities to upgrade district heating systems from coal or peat to renewable sources.
“It’s a win-win. The municipality can redirect capital to core services like schools or elderly care, while the PE fund invests in and improves the infrastructure. All in all, there’s a clear appetite for these kinds of investments, they’re not just financially sound – they’re meaningful”, he concludes.