Greater unpredictability puts a premium on resilience

The first half of 2025 has highlighted the fragility of some of the major infrastructure systems societies rely on. The Iberian blackout and the multi-day closure of London Heathrow Airport were stark reminders of just how badly things can go wrong.

The cost of such failures is significant. The Heathrow shutdown alone is estimated to have cost airlines up to £100m¹. More generally, the European Commission’s Climate Adaptation Strategy notes that every single euro invested in prevention and resilience could yield 14 euros in future savings².

For long-term investors in infrastructure, incidents like these have underlined the importance of resilience. LPs should be assessing their own infrastructure portfolios and seeking to understand in more detail how major infrastructure failures can ideally be prevented or at least mitigated.

Building a critical infrastructure asset’s resilience goes beyond strengthening an asset’s ability to withstand shocks. It’s about investing in systems that evolve. Climate change, digitisation and changing societal behaviours all create a ripple effect that infrastructure must be prepared to absorb.

A holistic approach

To properly assess resilience, LPs should interrogate every phase of a manager’s investment process, looking for a strategy that is built around anticipating shocks and embedding flexibility, sustainability and robustness into every aspect of ownership.

Resilience starts with sourcing the right assets with traditional infrastructure characteristics, structuring them to endure the toughest economic cycles and systemic shocks and building an experienced team to proactively manage and respond to issues. Whether it is supply-chain fragility, regulatory volatility or climate impact, the real test of an infrastructure company is not when things are easy, but when factors turn against it.

Good sourcing depends on thorough due diligence and strong scenario-based investment assessments. LPs should investigate how GPs model downside risk, how they look for early warning signs and ensure that they have processes in place to constantly re-assess the risks that assets face.

This process should include stress-testing against extreme but plausible events. For example, in our processes, we map out what can go wrong, how that could impact the business and what steps can be taken to prevent or mitigate the potential impact. Business planning should model these real-world scenarios. Is there clarity on the exposure to changes in legislation, energy transition regulation, cyber threats, or even tariffs and military conflicts? Are the underwriting case and supporting value creation plan aligned to address these types of risks?

Once these factors are understood, they can be applied effectively. In our acquisition of Scandinavian rail freight provider Hector Rail, which we completed in August 2020, we modelled prolonged scenarios around the impact of lockdowns and border delays. In addition to the modelling and our deep knowledge of the business, we conducted a rigorous due diligence process, including a granular analysis of associated industries and individual customers. We also examined the historical impact of prior economic downturns on each of Hector Rail’s customer sectors. This conservative approach informed pricing to provide greater downside protection while in turn creating greater opportunity to benefit in a market recovery scenario, which the business has since exceeded.

Structuring transactions appropriately also supports resilience. This includes using conservative gearing to preserve financial flexibility. A more conservative structure provides companies the robustness to withstand volatility and to continue to invest in resilience. According to the US Federal Reserve³, highly leveraged private equity-backed infrastructure firms were significantly more likely to breach covenants during the Covid-19 pandemic.

Contracts that are inflation-linked and use availability-based payments reduce revenue volatility. For instance, assets like LNG terminals typically benefit from availability-based throughput agreements which ensure that the assets continue to deliver income regardless of market conditions.

Agility and adaptability are key

Resilience also comes from a strong approach to value creation through an investment life cycle. In 2022, the OECD published a report⁴ on infrastructure governance which revealed that the capacity for long-term performance hinges on adaptive management and the ability to respond to policy shifts. The best managers will draw upon teams with vast experience to apply to their portfolio companies.

Cross-functional integration between investment, asset management and ESG teams ensures that risk and value considerations are aligned through the life cycle of an investment. This integration allows a fund manager to pivot quickly in response to changing conditions. For example, some industry ports and logistics hubs that historically served gas customers are considering how they can diversify. We are starting to see some sites begin to deliver plans to become major hubs for renewable energy. Such transformations don’t happen by accident, they require active, continuous engagement and a long-term mindset.

Former leaders of major infrastructure businesses and subject matter experts that have deep industrial and operational expertise can be invaluable for helping to co-develop value creation plans that factor in potential downside risks, commercial opportunities, regulatory expectations, innovation and local community needs.

This experience can be vital for navigating complex planning processes for developing new infrastructure. On-site renewables, like solar, for example, can protect assets against rising energy costs and achieve measurable progress against sustainability targets.

Follow-on capital is another key indicator of resilience-focused management. Managers should routinely look to allocate capital to strengthen operational agility and market responsiveness. Bolt-on acquisitions in particular can be essential for helping companies respond to changing regulation, enhance environmental performance and diversify revenue streams, ultimately supporting performance over the long term. LPs should be looking for managers with a proven track record in this area.

Building resilience does not always require large scale investment, it can be as simple as getting the basics right, such as implementing robust financial systems, strengthening corporate governance and embedding cybersecurity measures. These practices can eliminate avoidable vulnerabilities and significantly improve organisational preparedness.

For LPs, an approach likes this means resilience is built through proactivity rather than only reacting to crises as they emerge. It is about cultivating resilience through anticipation, adaptation and discipline, ultimately doing everything possible to prevent issues from occurring in the first place.

Resilience is value

In a world where risk is more frequent, more varied and more global, resilience is more than protection, it is value.

LPs must seek infrastructure managers that actively embed operational and strategic robustness into every investment. That means rigorous due diligence, conservative structuring and proactive management.

This approach will protect the asset, protect capital and maximise the chances of outperformance. Most importantly, it ensures that infrastructure delivers so that society at large can press on with the business of living.

Interested to find out more about Ancala’s approach to investing in infrastructure? Register your interest, here.

References

1. https://www.bbc.co.uk/news/articles/cly22eelnxjo

2. Adaptation Strategy: https://climate.ec.europa.eu/eu-action/adaptation-climate-change/eu-adaptation-strategy_en

3. US Federal Reserve Private Equity and Debt Contract Enforcement: https://www.federalreserve.gov/econres/feds/files/2023018r1pap.pdf

4. OECD Infrastructure Governance Indicators: https://www.oecd.org/en/publications/oecd-infrastructure-governance-indicators_95c2cef2-en.html