Infrastructure and real assets to the fore in 2020

  • Outbound Chinese M&A in infrastructure to continue

  • Demand for energy assets to fuel U.S. infrastructure M&A in 2020

  • Fog of Brexit uncertainty lifts in the UK & Europe

2019 was another significant year for M&A activity in the global real assets class, with strong demand for infrastructure assets. But will this interest continue into 2020 and beyond? Deal Dynamics spoke with Hogan Lovells M&A partners practicing in China, Europe and North America to garner their insights on this trend.

Liang Xu, M&A Partner, Beijing

In recent years, compared to other sectors, there have been many cross-border transactions focusing on infrastructure and real assets emanating from China. This is no coincidence. The Chinese government has long recognized the importance of infrastructure and real assets as essential parts of the overall economy, and this sector will continue to fuel M&A activity in 2020.

China’s Belt and Road Initiative, launched in 2013 with the explicit intention of exporting manufacturing and infrastructure capabilities, is a key driver for China’s cross-border investments in infrastructure sector, including through M&A.

With cross-border M&A between state-backed Chinese companies and their North America peers having ground to a halt as a result of the ongoing trade dispute and onerous CFIUS regulations, we are likely to see Chinese firms focus on other jurisdictions, including Eastern Europe, South East Asia, Latin America and Africa.

The United Kingdom, post the initial Brexit agreement, is also likely to provide a fertile hunting ground for acquisitive Chinese companies in real assets and infrastructure. Jingye’s recent £1.2 billion acquisition of British Steel provides a timely example.

Government support for outbound activity

Central to any outbound Chinese M&A activity is, of course, the question of whether a proposed deal represents a good use of China’s hard-won currency reserves. And while deals are always evaluated by Chinese authorities on a case-by-case basis, infrastructure-related transactions are likely to receive less scrutiny than other sectors, such as consumer and retail.

If 2020 currency considerations see a more vibrant outbound Chinese M&A market in infrastructure, global regulatory constraints are a potential countervailing factor.

The reception Chinese firms receive from foreign regulators can sometimes be unfavourable. Increasingly restrictive regulations in Western Europe mean that Chinese buyers must clear more hurdles than peers from other countries. Security is often cited as a key concern for foreign regulators; however, Huawei’s recent success in bidding to build Germany’s 5G telecoms infrastructure suggests a possible thawing of relations.

Sarah Shaw, M&A Partner, London

European M&A in the real assets and infrastructure sector has remained surprisingly robust despite significant political uncertainty since the Brexit referendum in 2016.

Following the recent election of the Conservative government in the UK, the political environment is more stable than it has been for some time. Greater certainty and clarity of domestic industrial policy is likely to create a more attractive environment for investment in real assets in the UK in 2020.

Furthermore, infrastructure and transportation have been singled out by the new UK government as priority sectors going forward. These assets are seen as being a critical part of modernizing the UK economy, making it a more efficient and attractive destination for foreign businesses in the post-Brexit landscape.

In addition, the UK wants to take a lead in the green energy space, meaning that significant investment opportunities for foreign businesses can be expected in this sector too.

UK-China relationship to strengthen around asset class

M&A deal flow between the UK and China is likely to increase in 2020 with the UK government encouraging Chinese investment in infrastructure – especially given that, notwithstanding the recent signing of a phase one trade agreement, the U.S.-Chinese trade war is unlikely to be entirely resolved anytime soon.

As in North America, private equity is expected to have a significant role to play in real asset and infrastructure M&A in the UK and Europe in 2020.

During 2019, many funds dedicated to investing in the infrastructure sector have sought refuge on the side-lines, waiting for greater certainty before making moves. With the threat of a Corbyn government in the UK now gone, it is likely that these funds will dust off their pitchbooks and accelerate plans to deploy capital in the space in 2020.

One part of the infrastructure market where we expect to continue to see a growth in M&A activity in 2020 is telecoms, with the market for data centers, fiber and cloud-hosting predicted to be particularly vibrant.

Greg Hill, M&A Partner, Houston

The U.S. economy enters 2020 with 10 consecutive years of growth, historically low unemployment, and other strong fundamentals. Nevertheless, political and economic volatility will likely impact overall M&A activity, as in 2019.

While political change increases uncertainty for all sectors of an economy, November’s election in the United States could spur, rather than slow, M&A activity in infrastructure and real assets. While certainly not invulnerable to politically-induced volatility, the long-term focus of infrastructure and real assets can serve to mitigate the impact.

A larger field of players considering the sector

When it comes to sources of capital, the playing field has broadened. The players include strategic buyers with strong balance sheets, as well as family offices, pension and private equity funds, all with ample reserves of dry powder.  Moreover, to adapt to the longer-return horizon of infrastructure projects, several specialist funds have launched to compete with traditional sources of capital. Thus, in 2020, we should continue to see a significant amount of capital chasing a limited number of deals.

Smart investors are focusing not only on valuations and expected returns, but also on managing risk.  In this environment, we see continued interest in targets engaged in businesses providing infrastructure – especially energy infrastructure – and holding real assets. Within the energy industry, several subsectors stand out.

Capacity constraints in oil & gas infrastructure fuel interest

For oil and gas infrastructure, the fracking boom in the United States has had a fundamental impact.  While there have been dramatic increases in the production of oil and natural gas, the United States has still not built out sufficient pipeline and infrastructure capacity to accommodate these new volumes. Unlike exploration and production companies, midstream businesses are less directly impacted by volatility in commodity prices. For these reasons, we expect that 2020 M&A activity in the midstream sector will continue to be robust. 

Similarly, we expect power generation and infrastructure to remain a high-interest area this year. There will be a continuing build-out of the U.S. power infrastructure, and demand remains strong, especially for deals involving renewables and storage assets.  Power assets are often sound investments – they offer consistent returns and are less risky than some other options. We saw a lot of deal activity in renewables in 2019, and we anticipate this area will remain active in 2020.

Energy is what fuels our economy, and we expect that energy infrastructure deals will be strong in 2020.

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