According to Dealogic, 2023 saw the lowest Q1 global deal volume and value since 2012, with just 9,400 deals worth almost $591bn.
But the infrastructure, energy, and projects sector has remained resilient. Dealogic reports 1,953 utility and energy deals worth over $253m in 2022 – a drop in value of just over 16% on 2021, and still higher than all but one of the years 2013-19. Firms on both sides of the Atlantic have noted this, and have invested heavily in infrastructure in recent years, as evidenced by Clifford Chance (CC)’s recent Houston launch. UK-based firms argue that their full-service capabilities give them an edge in the sector. But opinion on this strategy remains split. Some question the importance of full-service capabilities – in the US market in particular.
David Lee, chair of Allen & Overy (A&O)’s global projects, energy, natural resources and infrastructure board, describes the sector as ‘the investment opportunity of a lifetime for our clients. We will never see a market like it, where there’s a global shift in economic interests and, for the foreseeable future, a policy shift in the direction of encouraging net zero.’
Martin Nelson-Jones, global chair of DLA Piper’s infrastructure, construction and transport sector group, tells a similar story. ‘The ever-increasing importance of the net-zero agenda and the fallout from the Ukraine war have put an increased spotlight on energy supply and energy security. And governments realise that they have to make substantial investments in the energy sector.’
‘Nearly any firm that tells you that it’s got solid-gold hydrogen experience is stretching credulity.’ Tom Swarbrick, Bracewell
James MacArthur, a London corporate partner who recently left Weil for Sidley, notes the attraction of the sector in tough economic times. ‘There can be an element of inflation-proofing in investments in certain infrastructure assets, as the longer-term nature of the underlying contracts can include inflation-based increases in their terms.’
These factors have accelerated a longer-term trend of increased private investment in the sector. Herbert Smith Freehills’ (HSF) global infrastructure co-head Gavin Williams explains: ‘In the space of three decades, infrastructure in Europe has gone from being something mainly owned and operated by parts of the public sector to a class of assets increasingly in private hands. Private equity and infrastructure funds have played a leading role in this evolution, drawn by the attractive returns that their downside-protected revenues offer investors.’
Recruitment drive
This, more than anything else, has driven firms’ recent moves in the sector. US firms have made efforts to build dedicated infrastructure M&A practices, as distinct from more traditional project finance ones. Kirkland, for example, broke into the European energy and infrastructure market with its September 2022 hire of Sara Pickersgill (see profile) from A&O, and followed up with James Boswell and Toby Parkinson from CC and a clutch of vertical hires. Paul Hastings made its bid in the area with its January hires of Jessamy Gallagher and Stuart Rowson from Linklaters, and has continued to build. Linklaters, meanwhile, hired John Guccione from Latham in March. Latham also lost Brendan Moylan to Weil in April, leaving the firm without a dedicated energy and infrastructure M&A specialist.
In May, Ashurst picked up five partners from Shearman & Sterling in London, Seoul, and Singapore, including project finance partner Sanja Udovicic and energy M&A specialist Julia Derrick in London, who rejoined the firm after less than a year at Shearman.
This spate of activity follows an unusually busy 2022. Recruitment firm Fox Rodney reports that projects and energy was the fifth-largest sector for London lateral moves over the course of the year, with 27 hires. Notably, those hires marked a 56% increase on 2021, dwarfing the next largest increase (a 14% uptick in financial services regulatory and funds hires).
In MacArthur’s view, ‘while there is, of course, still a place for those firms that focus on the project finance, greenfield space’, many of those investing in the sector in the London market are ‘very much targeting the core plus, transactional sector.’
‘There is an enormous amount of investment required in all areas of infrastructure in the US. The opportunity is large enough to create decades of work.’ David Lee, Allen & Overy
‘I’ve heard it compared to school kids chasing a football’, Williams comments. ‘It’s certainly a play everyone is making just now!’
However, others argue that a transactions-only approach does not fit. ‘A corporate M&A partner may say it doesn’t matter what type of assets you’re acquiring or selling, but we win work because we have expertise in infrastructure across the board,’ argues Terence van Poortvliet, Ashurst’s EMEA co-head of projects and energy transition. ‘They are sectors we’ve lived and breathed. We are able to give buyers and sellers an insight that they might not otherwise get.’ Indeed, of the firm’s five recent hires in the sector, only Derrick focuses her practice on M&A.
DLA takes a similar approach. ‘Energy and infrastructure are areas where you need to cover all the bases’, says Nelson-Jones. ‘You need people who really understand areas like contracts, planning, employment, and regulatory work.’
A&O, too, focuses its strategy on full coverage. ‘You need detailed sector knowledge. You can’t just go from doing a PE deal one day to an infrastructure deal another day to a telecoms deal on a third day,’ says Lee.
Sector knowledge
No-one in the market denies the importance of knowing the asset class. In Williams’ words: ‘One of the distinctions between infrastructure assets and others is that the fundamentals depend to a far greater degree on legal and regulatory factors. Whether because an asset is subject to economic regulation, its right of use is subject to public procurement, its revenue is highly contracted, it benefits from public subsidies, or it enjoys some sort of monopoly, investors’ view of value will be far more sensitive to legal and regulatory analysis than for many other private capital investments.’
And the importance of expertise only increases when lawyers are advising on more novel projects. ‘Nearly any firm that tells you that it’s got solid-gold hydrogen experience is stretching credulity,’ says Tom Swarbrick (pictured), a Dubai-based projects partner at Bracewell. ‘There just haven’t been enough projects in the area yet.’
But there is a difference between having experience in infrastructure transactions and having the sort of strength in depth that firms which brand themselves as full-service trumpet.
This split in approaches to the sector reflects a larger divide between UK and US firms. The biggest UK firms make much of their global presence and breadth of expertise. The most profitable US firms do not: instead, they focus on a narrow core of high-value work.
Some UK firms believe that their full-service offering will be enough to access top-line private equity and transactional work. ‘Not many non-US firms get to play in the large-cap private equity space now,’ admits one partner with knowledge of the industry. ‘But you can if it’s energy and infrastructure.’
This prompted CC’s decision to open an office in Houston in June, following in the footsteps of firms such as Clyde & Co and Ashurst.
Speaking to Legal Business about the Houston launch, regional managing partner for the Americas, Sharis Pozen said: ‘This play in Houston is all about extending our energy and infrastructure practice. We have a market-leading practice globally and the one piece of it that was missing was Houston and having a hub in the US for energy and infrastructure.’
With official Texas state government figures reporting a Q4 2022 growth rate of 7%, the highest of any state and far above the national rate of 2.6%, it is easy to see why. Preliminary figures for the full calendar year of 2022 are even more astonishing, estimating the size of the Texas economy at $2.36trn – up 14.8% on 2021.
‘If there continues to be a high flow of infrastructure deals in specialised regulatory areas, I do see the capital-focused firms bringing in regulatory expertise on the transactional side.’
Brandon Dalling, King & Spalding
A&O, meanwhile, intends to build out its US energy and infrastructure offering as part of its strategy around its proposed merger with Shearman. The firm made a major play in this area in August, hiring Kfir Abutbul from Paul Hastings to head a dedicated US energy private equity offering. ‘The US is a massive one for us,’ admits Lee. ‘There is an enormous amount of investment required in all areas of infrastructure in the US, and in particular the energy transition creates unprecedented opportunities. The opportunity is large enough to create decades of work, so that it’s something we’re really focused on in our team.’
The US energy sector has been buoyed in recent years by a high level of government support. ‘The opportunities created by the Inflation Reduction Act have, understandably, drawn the attention of project developers and investors,’ notes Sarah Pollock, corporate energy partner at HSF. And some firms hope that they will gain a foothold in the US market as existing clients based in Europe and elsewhere invest in the US.
But if US firms feel threatened by UK firms’ moves, they are not showing it. Several partners argued that, while UK firms are certainly keen on Texas, none has yet achieved significant success in the area.
Many were also sceptical of the appeal of a full-service approach to US clients. ‘I don’t think the full-service model is fully there yet’, says New York-based King & Spalding (K&S) partner Brandon Dalling. ‘If there continues to be a high flow of infrastructure deals in specialised regulatory areas, I do see the capital-focused firms bringing in regulatory expertise on the transactional side. But I don’t think they’re going to bring in dedicated regulatory service teams, because that work tends to be at a lower price point than high-profile buy, sell, and finance.’
UK firms hoping to develop in the US with existing clients may also find that their clients prefer to instruct established US firms on high-value transactions. Especially if those clients come to the view, apparently widespread among US clients, that no international firm, no matter how ‘full-service’, will be able to handle regulatory work across all 50 states without local support.
The infrastructure sector is undeniably performing well, but lofty ambitions of leveraging expertise in the sector to access top-end transactional work and the US market may prove misplaced.