Infrastructure Investors See ‘Stodgy Old Businesses’ as a Way to Go Green

High valuations, significant dry powder, and an ESG tipping point have investors looking in unlikely places for good deals.

Illustration by Jeffrey Kam

Illustration by Jeffrey Kam

As they prepare for a global energy transition from fossil fuels to renewable options, investors have turned to unlikely assets in an effort to gain an edge.

According to Anthony Diamandakis, co-head of Citigroup’s global asset management business, infrastructure investors are buying up “good legacy businesses” like bus operators or power generator operators, in an attempt to “green” those businesses and reduce certain climate risks — and to make a higher return.

“The angle is to take stodgy old businesses that rely on conventional energy and [invest] capital into a transition that [those companies will] likely have to make for regulatory or competitive reasons anyway,” said one asset allocator, who spoke with Institutional Investor under the condition of anonymity.

The investment theme marks the convergence of a few trends, according to Diamandakis, the allocator, and other industry experts. First, private asset valuations are at all-time highs, while the amount of capital chasing these deals has also peaked.

“What you’re seeing is [happening because there’s] so much capital and dry powder in private equity and infrastructure,” the allocator said. “There are a lot of transactions that are very expensive on a multiples basis.”


Meanwhile, climate-focused investing has recently reached something of a tipping point. Investors have begun to realize that an energy transition from fossil fuels to renewables is imminent, and they don’t want to miss out on potential profits — or be left with legacy assets that will no longer be useful.

“There is a recognition now that sustainability does pay,” said Arash Shojaie, principal at QIC Global Infrastructure. “It’s no longer a question of sacrificing returns.”

An investment manager whose firm has taken advantage of this trend agreed.

“You can play the energy transition one of two ways,” said the manager, who spoke to Institutional Investor on condition of anonymity. “You can find a startup that has to raise capital to build and commercialize a product or new technology, or you can do it the other way around and transition an incumbent that already has customers and a trusted brand. We think from a risk perspective, transitioning an incumbent is a better probability-adjusted bet for our investors.”

Diamandakis pointed to two recent deals as examples of this trend. In March, I Squared Capital and TDR Capital acquired Aggreko, a temporary power generator company, via Albion Acquisitions, which is owned by the two private equity firms. According to Diamandakis, the investors plan to transition Aggreko from primarily diesel fuel to batteries for its power-generation needs.

And in June, EQT, a EUR 67 billion ($77.6 billion) investment manager, acquired First Student and First Transit, both bus companies that operate stateside. The investment firm plans to reposition the bus fleet so that it can use renewable energy rather than diesel. “They shrewdly realize that it’s a great way to invest in the energy transition,” according to the allocator, who has invested with a private equity firm making this play. “It’s another angle that’s not as obvious as investing in renewables or climate technology.”

Shojaie pointed out that electric buses and vehicles have another value proposition: during off-peak periods, they can be used as massive batteries. “If you have a giant portfolio of tens of thousands of these, you can conveniently turn [it] into a power station,” he said.

Parking lots are another investment ripe for a makeover, according to Shojaie. While people may drive fewer cars in the future, those who do drive may use electric vehicles, which need charging stations. Shojaie said that QIC’s transportation team is exploring the potential of turning parking lots into charging stations.

The allocator noted that she’s seen something similar in real estate, particularly in certain data centers in which her institution has invested. They have set up closed-loop cooling systems that reduce the amount of water needed to keep their buildings at the correct temperature.

Digging deeper into the business case for these deals, Shojaie noted that the infrastructure markets are seeing a period of compressed returns. Funds with high return targets need to evolve, and this is one way they’re doing it.

The allocator said it makes sense that infrastructure funds are the ones leading the trend, because infrastructure investors are used to deploying capital to improve their assets. “It’s not just a cost-benefit analysis or reducing long-term operational costs,” she said. “It’s about driving top-line revenue.”

Diamandakis added that while the operating margins for these assets will likely be higher, so too will the returns.

“The energy transition may not be the primary reason that one of these groups makes an acquisition, but it will be one of the main reasons that they’ll be able to pay the premium for these prices,” he added.