Infrastructure debt in 2025

Read this article to understand:

• Private investors’ role in funding increased infrastructure investment
• Why renewable energy assets may offer attractive opportunities
• Why investors need to conduct thorough due diligence and maintain credit discipline

A year ago, we expected a recovery in the number of new European infrastructure debt deals coming to market. This followed a sluggish year in 2023, when high interest rates led borrowers to refrain from issuing debt.

While our expectations for 2024 were met, it is important to recognise that demand continues to outstrip supply. Regular issuers tapped the market for private deals. As a result, even relatively long duration debt met with strong demand from institutions in the UK, Europe and US.

As we look ahead to 2025, 2024 will be remembered as the year Carbon Capture, Usage and Storage (CCUS) in the UK broke through from concept to reality. More than two decades on from the 2003 Energy White Paper, two landmark projects in Northern England closed in December with combined debt financing of around £8 billion. They are the two largest UK infrastructure debt transactions in the past decade.

These deals were financed by 20 banks with no role for either institutional investors or the UK’s rebranded National Wealth Fund. Banks’ healthy appetite for such deals serves as a reminder to investors that they need to carefully assess where opportunities exist to commit capital.

We strongly believe there is value in the market. But in an increasingly heterogeneous market with assets representing a range of risk and return, the ability to cover the market as widely as possible, conduct thorough due diligence and maintain credit discipline, are vital.

2024 in numbers

2024 saw 456 private market infrastructure debt transactions across continental Europe worth £131 billion, ten per cent more than in 2023 and the highest figure in at least a decade.¹ Of this, about £40 billion was greenfield investment, ten per cent down on the year.

From a country perspective, France led from Italy and Spain with around £25.5 billion equivalent from 62 deals mainly arising from fibre and data-centre deals, with the largest transaction XPFibre’s refinancing of €5.7 billion of debt. This was the second largest deal in Europe after Telecom Italia’s sale of its fixed network to KKR, which included debt valued at around €10.5 billion.

The UK witnessed 121 deals worth around £35 billion. While greenfield investment represented just under a third of this total, stripping out the two CCUS projects it accounted for less than £3 billion.

Renewables contributed just £396 million to greenfield investment amid a total absence of new offshore wind debt transactions. Given the government’s wish to boost growth while decarbonising the electricity grid, the outlook for infrastructure investment in the UK remains positive. However, a lack of deals coming to the market is a concern for investors and the government alike.

UK Infrastructure investment themes for 2025

Our outlook for 2024 focused on the slow evolution of the market and the ongoing influence of the five key themes shaping the UK infrastructure market: post-COVID meets ESG; decarbonisation; regulation to competition; consolidation in the fibre market, and evolution of the UK Infrastructure Bank.²

These themes remain present but with a new government keen to increase economic growth and become a clean energy ‘superpower’ the need to shift gear becomes even more important.³ Given the low volume of greenfield deals closing in 2024 outside of CCUS, 2025 needs to be about delivery.

The Labour government has been busy creating and reforming various organisations as it looks to ramp up infrastructure investment. Investors are now looking to the June 2025 launch of the ten-year National Infrastructure Strategy (NIS). Containing plans for both economic and social infrastructure, it will be published alongside a review of government spending. Investors are seeking greater clarity as to how the government plans to deliver new infrastructure.

A new funding model?

The key question for many investors is whether there is likely to be any role for private capital in tax-funded infrastructure projects such as public transport and social infrastructure. There has been widespread speculation schools and hospitals could be built using a new version of the Public Private Partnership (PPP) model, but it is unclear there is much enthusiasm in Whitehall. If this does happen it is more likely to be down to spending constraints than PPP’s perceived ability to deliver value for money.

While a new form of PPP seems likely to be used to pay for the new high-speed rail terminal at Euston, and could also be used to fund a new tunnel under the Thames, there are doubts as to how enthusiastic contractors are to get involved.

For now, private investors seem likely to continue to focus on consumer-funded infrastructure projects involving regulated utilities, airports, ports, fibre, and energy transition sectors such as battery storage and electric vehicle charging. There should also be renewed activity in the renewable energy sector after the most recent government auction led to 131 new projects, some of which are expected to secure funding this year.

Another successful auction this year could establish a material pipeline of longer-term solar, onshore wind, and particularly offshore wind, projects. Increased supply of assets could offer attractive opportunities to investors after a period when excess demand for green assets pushed up valuations.

We expect the process to finance two offshore electricity transmission projects to finalise in 2025, alongside the tender for the last two projects in the TR10 auction process. Industry regulator Ofgem continues to consult with relevant parties as to how best to deal with the expected increase in project sizes and ways to speed up the process from tender to financial close.

Among other deals to look out for, financing of the Hynet CCUS transport project in north-west England should be completed early this year. That would provide confidence for the future of other CCUS transport projects being developed in north east Scotland and the Humber region.

Following a turbulent year in 2024, given much-publicised problems at Thames Water, the regulated water sector is set to be subject to several consultations in 2025 including the findings of an Independent Commission. Restoring wider investor confidence into the sector will remain critical given the investment required. The total investment proposed over the next regulatory period is £108 billion.⁴

Nuclear options

No outlook would be complete without a mention of nuclear, and in particular the financing of the Sizewell C reactor. With a final decision fast approaching, it would appear the only private debt required may be that which is being backed by France’s Export Credit Agency, with the majority coming from the UK government for value for money reasons. The UK government is also set to announce this spring its preferred partner to build small modular reactors, although the only financing requirement is likely to be to fund early-stage development costs.

In the transport sector, the long-awaited major Southeastern Rail rolling procurement should proceed to close as one of the few private-sector rail financing opportunities. The bus market will continue to mature, having seen around £1.5 billion financing in 2024 as operators and local authorities seek to decarbonise their fleet. The port sector will continue to invest to reduce carbon emissions and further development is likely in Scottish ports to support floating offshore wind. These will provide good examples of the challenge to provide risk-bearing capital to finance assets essential to support the development of a national supply chain delivery, ahead of any assurance relating to the development and construction of the wind-farm assets.

The airport sector will continue to be active as companies recapitalise their balance sheets. The recent acquisition of AGS Airports by AviAlliance shows the sector remains attractive to investors. There is no lack of investor appetite for well-established operating assets, as shown when AGS and Edinburgh Airports both raised debt last year.

Finally, the digital sector is likely to witness contrasting investor sentiment. The UK fibre market continues to slowly consolidate. Over the next few years, we expect further consolidation as companies focus on increasing revenues from their existing networks, rather than expanding them. Debt investors rightly remain wary of committing capital to new ventures given past expansion.

Debt financing in electric vehicle (EV) charging remains limited as companies continue their early-stage development mainly through equity financing. The sector needs to see increased installation and usage over the next few years to generate sufficient stability to support larger-scale debt financings. There is a danger companies expand capacity too quickly as happened in the fibre sector, although this will only become apparent once consumer ownership of EVs has plateaued.

There is no doubt data centres are the hottest part of the European infrastructure market at present with sites being developed in multiple locations. Around £1.25 billion was raised by UK data centre developers in 2024 and this will increase in 2025. It is a similar story on the continent.

The shape of the current pipeline suggests UK infrastructure debt financing will hold steady at around £30 billion in 2025. But even if there is not a material increase, the UK will remain the leading market across Europe, offering a range of deals in terms of their size and the risk-adjusted returns on offer.

Opportunities are arising from early-stage development for new or existing technologies through to longer-term stable operating assets. While this illustrates that infrastructure is neither homogenous or boring, investors need to conduct thorough research and retain their investment discipline to uncover value.