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The Infrastructure Investor Podcast
Mid-market muscle: How smaller deals are powering the next US infrastructure boom
00:25:07
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- [00:03]
A
Infrastructure in the United States is going through an exciting but turbulent time. Rapidly rising power demand, opportunities to support industrial reshoring and the need to replace aging transport and utilities infrastructure all add up to a huge opportunity set. But managers also have to navigate policy uncertainty amid ongoing macroeconomic and geopolitical headwinds. In this special episode reported by Ben Payton and sponsored by Ridgewood Infrastructure and i2 Capital, we'll discuss the outlook for investors in US mid market infrastructure. Although the headlines might be dominated by the mega funds, it's the mid market where a lot of the action is really happening. In sectors including data centers, renewable energy and water utilities, managers in the mid market space often stress their ability to offer higher returns and easier exits compared to their large cap colleagues. To discuss whether this still holds true as competitive pressures rise, we're joined from New York by Ridgewood Managing partner Ross Posner and from Miami by i2 managing partner Gautam Bandari. They'll discuss how mid market managers are mitigating their exposure to risks and coping with the impact of regulatory changes. They'll also look at opportunities in energy and other rapidly changing sectors. And finally, they'll dissect the ability of mid market funds to generate distributions and convince investors to allocate ever greater volumes of of capital. Welcome to the Infrastructure Investor Podcast. In an uncertain macroeconomic environment with more competitive pressures, some might question whether established managers are well placed to stay ahead of the game. Ross Posner acknowledges that more players are entering the mid market infrastructure space, but says that success is all about getting the basics right.
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B
I don't really think the macro factors are changing the structure of the market and the competitive dynamics. I think that's more about the overall growth and maturation of the infrastructure market. I expect more market participants across all areas of the market as the industry continues to grow and mature. I think is a good comparison. You can look at what's happened in kind of non infrastructure private equity over the last couple of decades as a good indicator of how things are going to unfold. Here one stays competitive by having a sustainable differentiated edge in investing a well respected and recognized brand and ensuring you remain really thoughtful and agile across market dynamics. Our part of the market has the most deal flow and is less intermediated. Those are great fundamentals from which to originate investments. That's not changing. You combine those two factors, the differentiation in a manager's style and the market size and that's a really compelling backdrop that persists over time even as the industry matures.
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A
Gautam Bandari adds that Mid market managers enjoy protections against some of the volatility that's affected the large cap space in recent years.
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C
I think the critical element here is that when you think through logically for regulatory and policy risk, you quickly arrive at the conclusion that Mid cap is somewhat insulated from it, right? So a typical mid cap asset is 5,600 million of equity value. It is not going to make on anybody's Twitter feed or X feed. It will not make headlines. And when you actually have large changes in the government either going right or left, it's actually the mega projects that make the headlines, they become controversial. You're also living in a time of high inflation, right? So if you're doing a big build, which is complicated, think of a very large LNG facility, chances are that it's going to be quite expensive and will have cost overruns because you are in a somewhat unpredictable environment. Maybe there will be steel tariffs that come in there that'll throw a lot of contractors off course.
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A
He also stresses that mid market managers often rely less on credit and are therefore less exposed to risk.
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C
When you are in a higher inflation environment and with some volatility, credit becomes a little bit more expensive. And so when credit is more expensive, people who rely on credit as a part of value creation, which tends to be large stable companies, they're a little bit more challenged, right? So I think when it comes to mid cap, credit is not a big part of your value creation. In fact, most of our companies are very moderately levered. We have never had a default and in fact in many companies we don't have any debt because we are building that company from start through our platform strategy. And so we're not going to take financial leverage risk and compound it with operational risk. So we have enough operational risk that we choose to keep the financial risk to zero. And so I think when you think about it from those lenses of what will make the headline news, you know, I think Mid Cap is generally spared that piece.
- [05:19]
A
While Ridgewood and i2 both operate in the mid market, the two firms have different strategies. Ridgewood retains its specialized focus on the US market and Posner says there's no need to change course, especially as demand for infrastructure investment continues to increase in the United States.
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B
The approach is working out great. You know, we set up the investment strategy that's durable to invest through different cycles, different idiosyncratic elements in the macro that may be going on. And if you think about what's gone on over the last five years or so, the factors are different today than they were five years ago. But our strategy, we persist with the strategy because it's durable. So from a value creation standpoint, it's operationally oriented, it's repeatable. The smaller end of the market is where the transaction sizes and scale are as it relates to the number of them, yet it's less intermediated. So you can source very effectively, usually at a discount. You can kind of control your outcomes by continual operationally oriented value creation that's repeatable. And then when you exit, you're exiting to really the most competitive part of the market. Right. So structurally none of that has changed. Don't perceive it changing. So the way in which we invest really hasn't changed very much at all.
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A
Bandari however, says that i2's global strategy allows the firm to repeat much of what works in the US and other markets. He stresses that mid market managers are able to benefit from promising megatrends both in and outside the U.S. i think
- [07:03]
C
the build cycle has really started. So if you look at construction activity, factory construction activity, you track any number of variables. I think it is undeniable that re industrialization of not just the US but also Europe has started. Right. So Germany had a 500 billion euro infra package to make German industry competitive. Right. And the UK has the same desire. So every country that I know of, including Asia, countries in Asia as well as countries in Latam are on that job creation reindustrialization cycle. And then when you think about that cycle, it actually doesn't occur at the mega cap space, it occurs at the small cap mid cap space. Because those factories and the data centers and the power plants are all sort of squarely in the mid cap space. That's where entrepreneurs take risk, developers take risk because the government does not.
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A
And he emphasizes that with European countries following the US lead and seeking to re industrialize, there's an opportunity for infrastructure managers to scale their strategies globally.
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C
And if you could repeat, say a good strategy, a winning strategy, and take advantage of that alpha creation in multiple markets, then you should, and I would tell you it's actually a lot lower risk than you think because the laws of electricity or the laws of physics, even the equipment is exactly the same. This is a very consolidated space. There are only a few turbine suppliers in the world, there are actually only a few solar plant manufacturers in the world. And so if you can take advantage of your scale to get cheaper procurement, consolidated engineering as we do, and then actually repeat the same concept with local development teams and actually take advantage of the same mega trends globally, then I think you should. It's actually quite easy to do and actually a lot lower risk than many people assume.
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A
Last July, the U.S. congress passed and President Trump signed the quote, unquote, One big beautiful bill act into law. This had major implications for infrastructure investors, removing many of the tax incentives for renewable energy that have been included in the Inflation Reduction act that took effect under the Biden administration. Bhandari says the abrupt changes that came with the Trump bill highlight why managers are wise to keep some of their eggs outside the American basket.
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C
It's an excellent example of why being global actually helps quite a bit. So if you look at our portfolio, we have a lot of renewables exposure. We just happen to have zero U.S. renewable exposure. And part of it was not, frankly the luck, but it was because if you go back two years in your memory, sort of renewables occupied the same space that AI occupies today. It was the hottest sector. There were deals being done at what we felt were inadequate returns. And so we had the optionality to pass on those deals. At the same time, pursue renewables everywhere in Europe, in Latin America and Asia. So we have a very large renewable portfolio, about 11 gigawatts, but we just pursue that portfolio in other markets. So the optionality to say no works very well.
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A
Yet he emphasizes that outside some specific types of assets, the outlook remains broadly positive in the US market, even within the renewable energy space.
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C
Obviously for very large projects, particularly offshore wind, the writing's on the wall. So I won't belabor the fact that it is quite negative. But I think at the same time there is a huge drive for industrialization in the U.S. remanufacturing of certain critical components and that drives demand up. There's a price reset which is very healthy for the industry. And then eventually I think the consumers and the long term PPA providers of electricity just have to pay more because the government subsidy is gone, it's no longer there. I might remind people that actually in many markets, including in Asia and sometimes, sometimes in Europe, we are able to compete with power without a subsidy.
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Posner says that while Ridgewood is US focused, the size of the US market means it's perfectly possible to avoid overexposure to any particular sector. And he tells us that Ridgewood had largely steered away from renewable opportunities that were over reliant on subsidies.
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B
So our approach to investing through the fund is on a diversified basis. So there's not a sector in which we have to invest, whether that be renewables, whether that be other areas within energy, whether that be transport Right. So we're looking at relative value across all the different sectors in which we invest. And so our position has been generally in kind of the larger capital flows into renewables in the US much of which was subsidy oriented. As we passed on all of it, Right. Our view was the risk wasn't priced correctly. And so we passed on those opportunities and we invested across other sectors and different areas within energy and things that had the same benefit of the secular growth trends, but maybe not directly into say solar or offshore wind. We've made one solar investment. We did that in a large scale company that's winning in this environment and we did that in a highly structured security. Similarly, we look at the diversification of the portfolios we're constructing and when we see the risk adjusted returns in any sector or subsector not making sense, we won't invest in that.
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A
He agrees with Bhandari that renewables will continue to play a role in the fast growing US energy sector and points out that it's possible for managers to benefit from these opportunities without being dependent on subsidies.
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B
And so as it relates to the obb, I feel similarly that renewables are here for the market has to and is getting repriced. PPAs are now having elements, attractive elements that they used to have that went away for a while. And so fundamentally as a source of the generation stack, renewables will be a part of that. Right. As it relates to our investing strategy, we've found other opportunities that benefit from those secular trends and have invested into those and not in areas where subsidies created a disproportionate amount of the investment return.
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A
One of the key trends in the US energy sector right now is the rise of distributed generation, sometimes known as dg. With fast growing industries like data centers looking to jump ahead in the grid connection queue, Posner says infrastructure funds can profit from distributed assets that offer behind the meter solutions.
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B
We like the DG space. We've got a couple of investments that are participating in that in a couple of different ways. The secular demand growth is still there. The constraints on the grid and other elements create great opportunities for behind the meter solutions. We're investing into that. We're able to do that as a really attractive unit level economics. And so a couple of our investments right now are focused in that area.
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A
Bondari, meanwhile, notes that there's a growing need for grid stabilization solutions, especially in markets where intermittent renewables generation provides a growing share of the electricity mix.
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C
What I find interesting is that actually that occurs in grids that are not super connected, right so we have seen that in the UK for instance, right. Grids get quite unstable depending on how windy or sunny the island of UK is. And then of course you can see that in Japan. So when you look at our portfolio, it started off in the uk. We own one of the largest distributed generators in the uk, including grid stabilization with batteries with synchronous condensers. We repeated that in Japan. We are one of the largest operators of batteries in Japan. We are doing that in Australia and you can see elements of that being required in Texas because the ERCOT grid is not super connected with other grids. So I think it's a play that is here. It's a part of modern grid architecture. And I think the amount of capital required in that space is actually phenomenal. And I don't think people appreciate the amount of capital that you need to actually put. And if you don't, and as you saw last year in Spain, you could have blackouts. And so I think that that's one of those areas that was historically underinvested.
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A
Demand for electricity is growing at a significant pace in the US for the first time in decades, driven in large part by the boom in data centers as well as the reshoring of other energy intensive industries. Posner says that one way mid market and for that matter, large cap managers can ride the wave is through investments in utilities.
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B
The utility opportunity is abundant up and down the capital stack. We have owned a couple of utilities, recently exited one of them and what we've been able to identify or exceedingly high growth regulated utilities in the gas space, in the water and wastewater sector, we've got another one we're under active discussions with right now. And the other thing, even with the large utilities, they have a capital allocation challenge that they're working through and so there's an opportunity to partner with them in specific geographies or specific product types to create joint ventures to help them solve some of their capital allocation challenges and create opportunities for us. So whether it's owning them outright, growing them organically, growing through acquisition, creating strategic joint ventures, all of that's on offer and active across our portfolios.
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A
Mid market managers have long argued that the relative ease of exits is one of the major advantages of their space. Posner says this thesis is still holding up well as managers demonstrate their ability to offer distributions to investors.
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B
So we've had a couple of very strong exits over the last year or so. We have another one or two in the chute right now. And so we've been delivering strong returns and distributions to our investors despite some of the macro headwinds. And so at the smaller end, what we're creating, and our firm in particular is focused on acquiring or creating relatively unique assets or businesses that are kind of the have to haves for the eventual next owner, whether that's a strategic, whether that's a larger financial. And so that helps to insulate against some of the headwinds there and then certainly the value creation strategy, while we own it, the strategic repositioning all helps to generate really strong returns. The other thing we've focused on, which I think people have appreciated it more now, is having competition at the exit. So those strategics and those financials not only help to drive a bit more value at exit, but it also a competitive process, sale process helps to provide surety of closure. Three, five years ago when we would talk about that, people may not have focused on it as much they do now. And so it's all of those factors that enable us to harvest our investments at attractive returns and get liquidity back to our LPs regardless of the point in the cycle we're in. And as a result I think they appreciate that.
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A
Bondari also offers a positive view, noting that mid market managers benefit from intense competition for the best assets when the time for exit arrives.
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C
For us, this has been our most fruitful year in terms of exits ever. We had six exits. The DPI is great. In fact, in the last exit we had 24 bidders. I think what is critical is that you prepare your companies for that strategic ownership. Right? So strategics are looking for different things when they actually buy. Not just of course, financial returns, but also more importantly how well the companies run, what the safety systems are, what the audit systems are. So if you have a well developed company with good processes, good systems, good ERP systems, then I think you're able to attract those strategics.
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A
Infrastructure investor data shows that 2025 was a healthy year for fundraising with some $200 billion raised for unlisted closed end structures in the first three quarters of the year. Bandari however, cautions that this partly reflects several mega cap funds reaching final close in the mid market space. He says competition isn't as intense as it might first appear.
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C
Many LPs are still rebalancing their portfolios and getting liquidity. So I think fundraising is off to a good start way two years ago or three years ago, but I don't think it is at the clip that you would think. If you read all the press articles about mid cap now, the good Part about this is that the success of mid cap managers, both in delivering returns and the consistency of returns has been acknowledged. And so some of the mega cap managers have actually launched a mid cap strategy. So what better proof than this strategy works when you actually see some of the biggest large cap mega cap managers launch their own sort of mid cap funds. So I think that's a huge endorsement to the resilience and the success of a mid cap strategy.
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A
Posner agrees that overall fundraising figures only tell part of the story.
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B
I think there's a macro and a micro and there's kind of a beta and an alpha as well. As you kind of go through this. So at the macro I think those stats are a little misleading because it's really just based on funds having final closes, right? So if you think about the duration that it's taken people to raise funds, generally it's taken much longer, large cap, mega cap and you know, if you think of that as just the market and then there's a micro. And it really depends on the manager, right? It depends on your performance. We were talking about dpi, the ability to actually get returns back, not just share marks of investments, a differentiated strategy, consistency, discipline through the cycles. And if you're able to do that and generate compelling returns and take care of your LPs, then it's likely that when you go out to raise capital, that'll certainly be helpful for fundraising.
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And while he's not certain about the pace of fundraising in 2026, he stresses that managers who can demonstrate a positive track record are well placed to raise capital.
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B
I think people were expecting it to increase last year and the year before, and my general sense, it's going to be slower than what some of the gps may want. Directionally, we've seen different funding cycles. This is one of them. But again, for individual managers and strategies and funds, if you're executing at all facets across the investment cycle and delivering those returns, you should be in good position to raise capital. So I think it directionally increases, it increases more slowly than people would like. And differentiated strategies that are doing well, where investors have strong constructive relationships with their investors, their partners, they'll fare well in fundraising.
- [23:31]
A
What is clear is that interesting times lie ahead for us mid market infrastructure. Structural factors, particularly the rising demand for electricity, are creating a lot of opportunities. And mid market managers will be at the forefront of converting possibility into progress across multiple segments of the asset class. On the other hand, policy uncertainty remains a risk in the year ahead. If the US fails to offer a supportive investment environment, managers do have the option of deploying capital outside of the United States, including in European markets where many of the same structural tailwinds are also present in the infrastructure space. Overall, managers that can demonstrate a track record of delivering superior returns, achieving exits, and mitigating their risk exposure will be well positioned to make the most of what could be a new infrastructure super cycle in the world's largest economy. Thanks again to Ross Posner from Ridgewood Infrastructure and Gautam Bandari from I Squared Capital for joining us. If you want to hear more episodes, you can subscribe to the Infrastructure Investor podcast wherever you like to listen, or head to infrastructureinvestor.com there you can also get all the news and analysis you need on the institutions, the funds, and the transactions shaping the asset class. This episode was reported by Ben Payton, produced by Natalie Novikova, and edited and narrated by me, Eric Fish for Infrastructure Investor. Thanks for listening.