Recent news that private equity barons Blackstone Group and Global Infrastructure Partners are exploring a $21 billion bid for Kansas City Southern de México, the freight rail operator that serves northeastern Mexico and the U.S. borderland, has spotlit the still-vital appeal of railroad assets to private investment funds—and maybe even presaged a near-term jumpstart in M&A activity.

Despite a blasé sector outlook at the start of the year, compounded by a 20% decline in rail freight volumes due to economic fallout from covid, interest has been steady for freight rail targets. This has been particularly the case for private-to-private investments in short-line operators, due to their traditionally attractive free cash flow yield-to-equity characteristics, and (possibly) their tendency to attract less regulatory scrutiny than larger acquisitions.

Why put new-economy money behind vestigial, old-economy railroads? Some observers point to the transformational impacts of efficiency technologies on the sector, new opportunities for organic growth, or a perceived higher likelihood of recession-related consolidation targeting synergy-starved railroads in particular. Others may be wagering on increased U.S. trade activity with Mexico or simply a proxy for post-covid economic decoupling with trade partners further afield.

Small deals, too

Smaller-sized, regionally-focused deals have also hit the tape in recent weeks. This summer, Dallas private equity firm Paceline Equity Partners, which focuses on value-oriented and special situations opportunities in real assets, announced its acquisition of Cleveland’s Railway Equipment Leasing and Maintenance (R.E.L.A.M.), which leases rail track maintenance-of-way (MOW) equipment to railroads, construction companies, and industrial companies.

“Despite the current unprecedented macroeconomic backdrop, R.E.L.A.M. has demonstrated stable cash flows driven by non-discretionary maintenance and safety-related spending, making it a highly attractive and recession-resistant investment,” Paceline Chief Investment Office Leigh Sansone said upon making the deal public.

Earlier this month, Alpenglow Rail, the Denver-based investor in North American freight rail and other transportation assets, announced together with its partner, Canadian mid-market infrastructure investor Connor, Clark & Lunn (CC&L) Infrastructure Group, that it would acquire USA Rail Terminals, a two terminal platform providing railcar storage, transloading and terminal switching services for transporters in the Texas Gulf Coast region.

The investment was the second to date for Alpenglow and CC&L Infrastructure, which manages over $69 billion in assets on behalf of institutional, private and retail clients. Last September, the firms announced a joint venture to develop and operate a strategic portfolio focused just on North American railroad assets. Their first acquisition was Ontario’s VIP Rail, a rail logistics company best known for transporting petrochemicals across Canada.

Also happening in Europe, by the way

Rail deals have also been occurring across the Atlantic of late. Earlier this week DIF Capital Partners, the Netherlands-based investor in telecom, transportation and energy assets with EUR 7.5 billion in assets under management, announced that it will pay the Touax Group EUR 81.9 million for a 49% stake in Touax Rail, Europe’s second largest lessor of intermodal railcars.

While praising Touax Rail for its “robust and resilient business model which is well-positioned for growth,” DIF’s announcement specified that the investment will be targeted at developing Touax’s long-term freight wagon leasing business.

Earlier this summer, Sweden’s EQT announced the sale of Scandinavia’s largest private freight operator, Hector Rail Group, to independent, U.K.-based infrastructure investor Ancala, having superintended 80% growth in fleet and revenues at the company since acquiring Hector Rail in 2014.

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