A few weeks ago, I attended DISTRIBUTECH – one of the largest events focused on the North American electrical grid – bringing together industry experts, company executives, and investors to discuss the latest trends around transmission and distribution tech, grid modernization, and the energy transition. I came away confident in the potential for near-term investment supporting sustainable growth in the sector and excited to see the various themes our clients will start to dig into in the coming months.

Often referred to as “the largest machine in the world,” it is clear that addressing shortcomings of the North American grid will require rapid acceleration with regard to the build out of new infrastructure and the repair/replacement/retrofitting of existing infrastructure. Said differently, there seems to be consensus across the industry that we are in the midst of a paradigm shift: We’re clearly in the midst of an ecosystem that has moved from openly acknowledging historical underfunding of critical infrastructure toward urgently entering a moment of “catch-up” and improvement as aging infrastructure continues to deteriorate. Coupled with increased load growth and the integration of distributed renewables, it’s clear that investment must accelerate to keep the proverbial lights on. While this change in pace will create ample opportunities for investors, it will also create a far greater need to determine where and how to focus time and energy when it comes to evaluating potential investments. This is especially true given a rapidly, and often unpredictably, shifting energy policy landscape, which we believe creates a strong need for real-time feedback from market participants who are “in the arena.”

Across a dozen or so conversations with investors at DISTRIBUTECH, one thing was clear: Everyone had taken notice of how many of their peers were in attendance. Finding potential areas of opportunity will be increasingly competitive, as Private Equity investors are well aware of the amount of capital that will be needed to upgrade the North American grid. With that in mind, creating a diligence strategy that allows investors to find a differentiated view on what is – and perhaps more importantly, is not – an attractive area to deploy capital will be extremely important.

Below, I’ve outlined four key considerations that, when executed well, can allow investors to run hard and build conviction around attractive assets while avoiding over-marketed businesses trying to take advantage of the “Grid Gold Rush” to transact at elevated multiples:

1. Define your areas of interest well in advance of opportunities:

Given ever increasing competition for deals tied to growing, upgrading, replacing, and hardening the grid, it’s more important than ever to determine which areas you’re interested in digging into more deeply, allowing your team to run quickly at opportunities. Early Voice of Customer work can help you figure out which niches might be commoditized or are overly competitive, reducing margins and creating structurally unattractive areas of focus

2. Design extra focus around pricing and volume, particularly diving into how much volume is based on overflow or pull-forward vs. being driven by fundamental demand:

Determining which categories allow for premiumization – and which providers have earned the right to capture it – is critical in markets growing above historical averages while understanding whether volume is durable – or if the target is merely benefitting as an overflow supplier because preferred options are sold out – can be particularly difficult. Overall, having strong answers around how durable margins might be and why those margins are well earned and highly defensible, is imperative

3. Create a deep understanding of a target investment’s ability to scale rapidly:

Many businesses – whether manufacturers, service providers, or software companies – will try to take advantage of the rapid increase in spending on grid expansion and replacement. That makes it all the more important to have a deep understanding of what factors may inhibit a target’s ability to scale, including topics like labor availability, raw material availability, sales and support organization structures, etc., as well as determining whether your firm has the requisite value creation skillsets to help remove these blockers

4. Understand specifics around how the target advances grid expansion and addresses necessary replacement (and how much it is getting credit for doing so):

Providing Utilities and Contractors with lower material costs, reduced labor intensity, or shorter construction timelines will create winning businesses; however, understanding the specifics (e.g., what percentage of cost savings is being offered? How many labor hours are being saved?) of a target’s value proposition as well as what it is actually being credited for accomplishing by customers can create far deeper conviction

DISTRIBUTECH’s impressive attendance this year was an exciting reminder of how much investment activity is likely to occur in and around the North American grid and made it clear how essential it is that investors are disciplined in their diligence activities. Rapid growth and expansion can create opportunities for investment, but determining whether you’re chasing a durable winner or an undifferentiated tag-along enjoying a few bumper years can be difficult. Creating parameters early, testing a tight thesis, and proactively conducting diligence on specific points of differentiation (and their durability) can all reduce risk and help uncover lasting winners.