Investors Seek Opportunities in Underground Infrastructure

Increase in Investment Opportunities in Underground Trenchless Infrastructure

Despite a reduction in M&A across sectors last year, underground trenchless infrastructure continues to draw investor interest, likely to increase as dealmaking recovers. This growth can be attributed to legislation such as the Inflation Reduction Act and Chips and Science Act, which incentivize domestic industry and clean technology investment, especially in underground infrastructure.

Cale Kaczmarek, a principal at Huron Capital Partners, states that there is significant opportunity in investing in businesses that undertake repair, maintenance, and services like underground CCTV work for piping, including wastewater and drinking water. Scott Kohlbrenner, a managing director at Houlihan Lokey, adds that his firm has seen increased demand from public and private owners for expert design, installation, and maintenance of both old and new infrastructure.

Valuations and the Influence of Legislation

Kohlbrenner notes that valuation multiples have varied significantly, based on margins and organic growth. However, reaching these valuations often involves negotiation with sellers, given the incentives provided by legislation aimed at repairing existing infrastructure. Karl D’Cunha, managing director at advisory firm Ankura, elaborates on the influence of the Inflation Reduction Act on investment incentives and the challenges of securing high multiples.

Impact of Service Orientation on Valuation

Kaczmarek suggests that a company's valuation depends more on service orientation than government incentives. Businesses that focus on service, maintenance, repair, and recurring services like cure-in-place piping activity typically have higher valuations.

Fragmented Market and Challenges

The underground trenchless infrastructure market is fragmented and localized, affecting investment decisions. The growth in this sector is expected to be in the mid-single digits, and companies must find the right balance of contract and full-time workers to be attractive to investors. Experience and expertise are essential for growth, and many companies, particularly in the lower and middle market, continue to struggle with this.

M&A Activity in Underground Infrastructure

Despite the presence of big players and numerous smaller ones, the pace of M&A in the trenchless underground infrastructure sector is not expected to slow down. Houlihan Loki’s Kohlbrenner expects more M&A due to the needs of aging owners and assets long-held by private equity. However, D’Cunha warns that exits may be problematic in the short term due to increased volatility, the upcoming presidential election, and industry uncertainty.

Despite these challenges, it is expected that the relationship between providers and asset owners will strengthen. Kohlbrenner emphasizes the importance of being a fair, trustworthy, and reliable corporate competitor in this industry.

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