In this article Viktor Dietrich, Research Director for infrastructure, venture capital and natural capital, revisits the case for investing in European infrastructure equity. He suggests reasons why small-to-mid-sized opportunities should feature prominently on investors’ radar.
Read this article to understand:
- Why the outlook for infrastructure equity is starting to look brighter
- The positive signals coming from publicly listed infrastructure assets
- Why small-to-medium sized assets look to offer the best value
Having endured a tough period since 2023, the outlook for infrastructure equity is starting to look far brighter. Three key drivers of returns have turned in the asset class’s favour and there is no shortage of capital waiting to be deployed. We delve into some of these trends and explain why we see most value in small-to-medium sized investments.
Arguably the biggest cause for optimism comes from the signs that real yields in Europe, as measured by ten-year government bond yields less annual inflation, have started to stabilise. Having been slow to recognise the inflationary risks posed by global supply chains seizing up and a sharp rise in energy prices following Russia’s invasion of Ukraine, the European Central Bank (ECB), like its peers, belatedly hiked interest rates rapidly through 2022 and 2023.
As a result, real yields, were driven into positive territory having been negative for most of the prior period that followed the global financial crisis. That, in turn, depressed investment returns on infrastructure assets.
Although higher inflation in many cases helped fuel top-line growth, since most infrastructure assets have inflation-linked revenue streams, this impact was outweighed by the negative impact of rising discount rates.
Real yields peaking
While real yields remain in positive territory, the outlook appears relatively stable. Although the ECB may now pause its cutting cycle as it awaits confirmation inflation has been quenched, at 1.5 per cent or more we are confident real yields have peaked.
This suggests the asset class is currently offering an asymmetric return profile. Investors are being afforded meaningful downside protection, at the same time as an opportunity to benefit from sizeable upside should real yields start to head back towards zero or below.
Discounts to NAV on London-listed infrastructure investment trusts have been shrinking
The second positive signal is being provided by infrastructure equity investment trusts listed on the London stock market, most of which have exposure to European assets. These trusts’ assets are appraised semi-annually and the discount rates applied to these investments have been rising steadily since 2022. On average, they are currently at a five-year high.
While this largely reflects the rise in government bond yields that has been seen over this time, it is potentially significant that discounts to net asset value for these investment trusts have been shrinking over the past two years. This provides another signal that investors are starting to believe the discount rates being applied to the trusts’ assets are potentially too high.
A vote of confidence
This is a positive signal from public markets which should eventually feed its way into increased demand for privately held assets.
The third tailwind for infrastructure investment comes in the form of what we have referred to as thematic investment drivers, most notably efforts to decarbonise economies.
Thematic investment drivers have been central to Aviva Investors’ Climate Transition Euro Infrastructure approach
Across Europe governments remain committed to stripping out carbon emissions. With many remaining strapped for cash following the pandemic, they are heavily reliant on private capital, and as a result are continuing to subsidise the investment in the various infrastructure assets required to meet their climate objectives.
These subsidies are designed to attract capital into new infrastructure projects, for example in hydrogen and battery storage facilities. It should be remembered that if governments are to hit their decarbonisation targets, they will need to phase out coal and eventually gas.
Thematic investment drivers have been central to Aviva Investors’ Climate Transition Euro Infrastructure approach, guiding investments across energy transition, sustainable transport, as well as digital and social infrastructure.
Demand for power continues to rise
At the same time, we expect to see rising demand for electricity from data centres, and other computing uses, another impactful trend. This points to continued, sustained demand for power which would clearly benefit existing renewable energy installations.
Infrastructure investment spans a broad spectrum of investment opportunities
Infrastructure investment spans a broad spectrum of investment opportunities. Usually tied to long-term contracts that are in many cases indexed to inflation, infrastructure returns tend to be relatively stable. For this reason, the asset class can help protect a traditional bond/equity portfolio at various stress points through the economic cycle.
Based on historical data for the ten years to the end of 2024, our analysis suggests that by adding European private infrastructure investments to a traditional 60:40 portfolio of public stocks and bonds, investors could have significantly reduced risk without sacrificing much by way of return, as shown in Figure 1.
Figure 1: Infrastructure’s diversification potential (per cent)
Note: 10-year history to December 31, 2024. Infrastructure is based on de-smoothed volatility after Geltner AR1. Portfolio weightings illustrated as: MSCI World TR/Global Credit/(Infrastructure).
Source: Aviva Investors, Preqin, Bloomberg. Data as of September 30, 2025.
The top line in Figure 1 shows historical investment outcomes when different allocations of European infrastructure were added to a portfolio containing global equities and corporate bonds.
Small is beautiful
While infrastructure equity as a whole looks well placed to benefit from the factors outlined above, we have a long-standing preference for small-to-mid-sized projects for several reasons. Firstly, evidence suggest fund managers typically have to pay a much lower multiple of underlying earnings (EBITDA) when acquiring an equity stake in smaller infrastructure projects compared with larger ones.
As shown in Figure 2, transactions with an enterprise value (EV) below $500 million have consistently traded on a lower multiple.
Figure 2: European infrastructure, average EV/EBITDA and count, split by EV
Note: Data is 2014–August 2025 M&A transactions which have reached financial close and have reported EV/EBITDA.
Source: Aviva Investors, Infralogic. Data as of August 2025.
Sourcing opportunities in the low to mid-market segment for Aviva Investors usually involves taking equity stakes in companies or platforms (through bespoke structuring and bilaterally sourcing) with a typical equity size of €50-€100 million. Such assets are too small for many large-cap managers, given the complexity of completing transactions. This leaves a diverse range of attractive investment opportunities for those managers willing to consider them.
Small to mid-sized businesses are often more innovative and growing faster
These small to mid-sized businesses offer investors other advantages. For instance, they are often more innovative and growing faster. They also tend to be nimbler, finding it easier to adapt their business model to the latest market trends.
The latest investment in the low to mid-market segment in the Climate Transition Euro Infrastructure strategy is a bilateral deal involving an initial €75 million commitment to Terra One, a vertically integrated battery storage developer and operator based in Germany.
Unlocking further value
Fund managers can potentially unlock further value by working closely with management to drive through operational efficiencies, deliver organic growth, expand via acquisitions and improve ESG performance.
We typically have board representation, ensuring hands-on asset management and effective execution
Smaller-scale projects often deliver tangible social benefits too, by supporting smaller local businesses, creating jobs and improving community infrastructure, thereby enhancing public trust and engagement. Our integrated infrastructure equity investment and asset management team actively partners with portfolio companies to support their journey toward sustainable growth, profitability, and operational maturity. We typically have board representation, ensuring hands-on asset management and effective execution of the strategic business plan.
And as our portfolio companies grow, they become attractive to a wider range of investors seeking larger ticket sizes and investments. This has the potential to boost valuations via a re-rating given the tendency for bigger companies to trade on higher earnings multiples.
According to Preqin, smaller funds have historically generated higher internal rates of return (IRR) than their bigger counterparts over the past two decades, as shown in Figure 3.
Figure 3: European infrastructure, average IRR and aggregate fund AUM, by fund size
Note: Data is based off reported IRRs (Small Cap: 59, Mid Cap: 43, Large Cap: 30 and Mega Cap: 6) of Infrastructure Core, Core Plus, Opportunistic and Value Added closed funds from 2005–August 2025. Preqin defines AuM as the sum of dry powder and unrealised value, with aggregate AuM the sum of all funds' AuM, with a fund vintage from 2005–present.
Source: Aviva Investors, Preqin. Data as of August 2025.
Our confidence in the market is buttressed by recent fundraising activity. European committed capital yet to be deployed, known as 'dry powder', reached a peak of over $180 billion in 2023, according to Preqin data, following substantial fundraising activity in the previous two years (see Figure 4). Although that figure has since fallen, it remains substantial at $148 billion.
Moreover, the fact the total has started to decline is a sign of confidence in the market as it indicates fund managers are finding attractive opportunities to put their money to work. The continued deployment of capital should eventually feed through into higher earnings multiples, especially in those sectors benefiting from the strongest structural tailwinds.
Figure 4: European infrastructure dry powder, 2009-2024 ($bn)
Source: Aviva Investors, Preqin. Data as of August 2025.
Many countries across Europe need to invest more, both upgrading existing infrastructure assets and building new ones, given ongoing efforts to decarbonise economies, upgrade electricity grids and build out digital networks and infrastructure. For example, McKinsey forecasts global annual infrastructure investment of $3.7 trillion over the next decade.
With many governments wanting to use infrastructure as a lever for economic growth, but at the same time facing spending constraints, it seems likely they will continue to look towards the private sector for the necessary capital.
Investors are likely to have no shortage of opportunities, especially in areas such as clean and secure energy generation, digital connectivity, and sustainable urbanisation. With various tailwinds starting to emerge simultaneously, they have a strong incentive to start deploying capital.
