Private investments in infrastructure — current topics and trends
If you look at the priorities of private investors, there is a clear focus on digitalization topics. There is great interest in the development of data centers in particular. Unfortunately, Germany currently only ranks 14th among all EU countries in terms of digitalization. However, the fact that the digitalization of our industry is one of the key factors for economic success is hardly being questioned anymore.
A number of challenges arise in connection with the expansion of critical infrastructure. As lawyers, we repeatedly find that access to electricity, i.e. the issue of grid connection, is a difficult topic in many places. On the one hand, grid connection capacities are limited, meaning that data centers have to compete with a large number of other consumers. The current government did not want to prioritize data centers with regard to the allocation of grid connections. On the other hand, it must be noted that agreements to secure network connection options are now being concluded at very early project stages. As a result, projects with a low probability of success are blocking valuable capacity.
The second problem is the energy efficiency of data centers. Germany is particularly strict in this area by international standards and demands very efficient energy use. In practice, this efficiency can often only be achieved if the waste heat generated in the data centers is used. This represents a major hurdle for operators. The capacities of local and district heating networks in Germany are limited. Building new network structures is expensive. If you don’t want to use the waste heat to grow pineapples on the data center site — which would theoretically be possible — but to use it more sensibly, the heating networks need to be expanded. However, due to the long investment periods, this would primarily be a matter for the public sector, as district heating is currently more of a niche area for private investment.
Infrastructure investments are of interest to more and more private equity funds with a long-term investment horizon. Predictable, stable income with reliable customers is attractive, hence the great interest in data centers, which are generally purchased by hyperscalers ( = Cloud service provider that operates an enormous computing, storage and network resource infrastructure and makes it available globally and with great scalability. These providers own and manage huge data centers that enable them to offer cloud computing services efficiently and cost-effectively on a large scale) .
Another topic is, of course, energy supply. Private investors have been active in the field of renewable energies for a long time, and there will continue to be a great deal of interest here, provided that the site capacities allow it.
However, when it comes to the major issues of network renovation, both for rail and road, it is likely to be primarily the public sector that is in demand. The challenges here are too great, the investment horizons too long and the counter-financing concepts too difficult to grasp for private investors to be interested.
I would say yes. If the service of preparing tax returns is seen as a public service, the question of whether and how private equity funds can invest in tax consultancy firms is a very interesting one. — How the so-called prohibition of third-party ownership can be circumvented is legally complex and is currently being discussed by the professional associations of tax advisors with varying results. Interestingly, the same question arose around ten years ago when private equity investors entered the healthcare sector, where private equity-financed ophthalmologist and community medicine chains are now well established. The tax consultancy sector is particularly interesting for investments in the area. The sector is complaining about difficulties in finding staff. Succession problems are foreseeable and the solution could lie in the more effective use of AI-supported technical solutions — ideal for buy and build strategies. I therefore believe that the entry of professional private equity investors can neither be held back nor is it a disadvantage. Investment in complex IT solutions must also be financed. This is where private equity can and will make a contribution.
Michael Sinhart is a partner in the M&A/corporate law department at Gowling WLG in Frankfurt. He heads the German Corporate, Finance & Tax practice group.
His focus is on advising on German and international transactions in the infrastructure and private equity sectors. In addition, Michael has many years of experience in international joint venture projects, both from a drafting perspective and in work-out scenarios. His practice therefore covers all aspects of shareholder disputes and restructurings, both in and out of court.