The Impact of U.S. Infrastructure Investment on M&A

The U.S. Senate recently passed the $1.2 trillion bipartisan infrastructure bill, titled the Infrastructure Investment and Jobs Act (IIJA), to improve the country’s roads, bridges, and utilities. The bill does face an uncertain future in the House of Representatives, where its support is more limited. Still, the Democratic Party could use the reconciliation process to get the bill passed into law.

The bill includes:

$73 billion for electric grid and power infrastructure
$66 billion for passenger and freight rail
$65 billion for broadband investments
$55 billion for water systems and infrastructure
$50 billion for Western water storage
$39 billion for public transit
$25 billion for airports
$21 billion for environmental remediation projects
$17 billion for ports and waterways
$15 billion for electric vehicles
$11 billion for road safety

So, what might this all mean for M&A?

With this bill’s possible massive cash infusion comes a slew of opportunities for investment, as well as mergers and acquisitions across many sectors, including the middle market. Some private companies can be expected to consolidate in order to provide services needed for the infrastructure plan, and private equity and asset managers are certainly paying attention at a time when interest rates remain low. Also, take into consideration that the majority of professional service companies have a smaller number of employees. This opens the door for M&A strategies that focus on synergies, efficiencies of scale, and consolidation. And it all comes at a time when many Baby Boomers are seeking to retire, raising the number of companies available for sale.

In fact, infrastructure M&A in the U.S. soared in the first half of 2021, with deal value rising to $126 billion. That’s a five-time increase in total deal value from H1 2020. Deal volume also jumped year-on-year, with 191 deals recorded versus 162 in the first half of 2020.

In 2020, the COVID-19 pandemic made it difficult for investors to conduct site visits and some due diligence because of restrictions. But now that those restrictions have been lifted and remote due diligence has become more commonplace, pent-up demand for M&A activity is driving up investment in 2021. Also playing a large role is the availability of dry powder for infrastructure deals, with a 235% increase in the last decade.

When it comes to how infrastructure is defined has also changed due to the shift to digital-based businesses, so there is less focus on capital expenditures and more focus on return profiles and operational abilities regardless of broader market conditions. Infrastructure investment is also looking for platform investments that enable the targeting of smaller, add-on deals.

Certain infrastructure verticals, like data centers and telecom companies, have seen a surge in demand during the pandemic due to homeschooling and remote working. In 2020, U.S. data usage increased 18% from the previous year. And value is once again being seen in sectors that were negatively impacted by the pandemic, such as air travel and oil and gas, indicating a rebound in investment. Additionally, a growing number of asset-light infrastructure companies are garnering more attention in the M&A community.

Infrastructure fundraising increased in the last ten years, peaking at more than $46 billion in 2018. Private equity tends to like infrastructure deals because they are less volatile than fixed equities and the contracts often last for long periods of time, so the returns are more secure. Over the past three years, private equity has started or acquired 50 new government services platform companies. And a possible influx of federal funding for certain sectors makes many businesses attractive acquisition targets, driving up competition.

Amidst all the opportunities, there is still reason for tempering expectations for private equity investments. The 2700-page infrastructure bill encourages states and municipalities to consider public-private agreements. Under the bill, local governments seeking federal funds for projects of more than $750 million must run cost analyses on private partnerships, but it doesn’t require them to create them. This could limit opportunities for investment of all that dry powder that’s available.

At the same time, the bill could create opportunities for more investment in electric vehicle infrastructure, renewable energy, and the electrical grid, which could lead to the completion of some mega-deals.

Looking to Sell?

If you are considering the sale of your company, our M&A experts would love to hear from you to discuss how Benchmark can help you create value and get a deal that changes the game for your future.

Americas: Sam Smoot at +1 (813) 898 2350 / Smoot@BenchmarkIntl.com

Europe: Michael Lawrie at +44 (0) 161 359 4400 / Lawrie@BenchmarkIntl.com

Africa: Anthony McCardle at +27 21 300 2055 / McCardle@BenchmarkIntl.com

ABOUT BENCHMARK INTERNATIONAL

Benchmark International’s global offices provide business owners in the middle market and lower middle market with creative, value-maximizing solutions for growing and exiting their businesses. To date, Benchmark International has handled engagements in excess of $7B across various industries worldwide. With decades of global M&A experience, Benchmark International’s deal teams, working from 14 offices across the world, have assisted hundreds of owners with achieving their personal objectives and ensuring the continued growth of their businesses.

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