The New Frontier of Risk: How KKR's EU Probe Reshapes Private Equity's Capital Allocation in Infrastructure Sectors

In July 2025, the European Union's competition regulator launched a formal investigation into KKR, a U.S.-based private equity giant, over alleged misrepresentations in its 2024 €22 billion acquisition of Telecom Italia's fixed-line business. This probe, centered on the accuracy of long-term access agreements between Telecom Italia's FiberCop unit and rivals like Fastweb and Iliad, is not merely a legal hiccup for KKR but a harbinger of a broader regulatory shift. The EU's scrutiny of KKR underscores a growing trend: private equity firms are facing unprecedented oversight in critical infrastructure sectors, reshaping capital allocation strategies for 2025–2026.

The EU's Regulatory Tightrope

The European Commission has long emphasized “unambiguous compliance” in merger reviews, but recent enforcement actions have grown sharper. KKR's case is emblematic of the EU's evolving approach to private equity megadeals, where the Foreign Subsidies Regulation (FSR) and Basel IV reforms are redefining the rules of the game. By mid-2025, the Commission had received 179 FSR notifications, with a third tied to private equity. This regulatory framework mandates pre-merger notifications for cross-border deals and empowers ex officio investigations, even in the absence of formal filings.

The implications are clear: private equity firms must now navigate a labyrinth of compliance requirements. The EU's scrutiny of KKR's Telecom Italia deal, for instance, highlights how regulators are dissecting the economic logic of long-term access agreements—tools often used by PE firms to justify market competition. If the Commission concludes that KKR misrepresented details, the firm could face fines, reputational damage, or structural remedies. This scenario is not hypothetical; similar penalties have been levied against Facebook and General Electric in recent years.

Capital Allocation Shifts in a Riskier Landscape

The KKR probe is accelerating a strategic recalibration in private equity capital allocation. With the EU's FSR and Basel IV reforms creating a more complex regulatory environment, firms are increasingly prioritizing sectors with predictable returns and strong policy tailwinds. This has led to a surge in infrastructure investments, particularly in energy transition and digital infrastructure.

For example, the EU's Clean Energy Package and Revised TEN-E Regulation are unlocking €600 billion in grid infrastructure spending by 2030. Private equity firms are capitalizing on this by targeting regulated assets with long-term revenue visibility, such as renewable energy projects and data centers. The EU Hydrogen Bank's first auction in February 2025, which secured a weighted-average price of €0.48/kg, further illustrates the appeal of these sectors.

However, regulatory risks remain. The EU's FDI screening regime, now fully operational since 2020, subjects infrastructure sectors like telecoms, ports, and semiconductors to heightened scrutiny. This has led to longer deal timelines and increased due diligence costs. For instance, the e&/PPF Telecom Group case in 2025 required behavioral remedies to address competition concerns, setting a precedent for future enforcement actions.

The Geopolitical Factor

Geopolitical uncertainties are compounding regulatory risks. The U.S. imposition of new import tariffs in 2025 has created volatility in global supply chains, prompting European private equity-backed firms to hedge against exposure. The European Central Bank's Financial Stability Review has warned of “confidence effects” in trade-sensitive sectors like consumer discretionary, where credit rating downgrades have surged.

Meanwhile, the EU's 3% Most Favored Nation (MFN) tariff is keeping input costs competitive, making Europe a more attractive destination for onshored green-tech manufacturing. This, coupled with the Critical Raw Materials Act's €30 billion in financing, is drawing capital to sectors like green hydrogen and transport electrification.

Strategic Implications for Investors

For investors, the KKR case and broader regulatory trends signal a need to rebalance portfolios. Here's how to position for the 2025–2026 environment:

1. Diversify into EU Infrastructure Sectors: Sectors with regulated returns, such as grids and renewable energy, offer stability amid regulatory uncertainty. ETFs like the iShares Europe Infrastructure Index (PII) or the STOXX Europe 600 Infrastructure Index provide exposure to this shift.

2. Prioritize ESG-Compliant Portfolios: The EU Taxonomy Regulation and Clean Energy Package are reshaping sustainability reporting. Firms with transparent ESG frameworks, such as those aligning with the EU Green Deal, are better positioned to navigate scrutiny.

3. Monitor FSR-Related Risks: Investors should assess the FSR compliance status of portfolio companies, particularly in cross-border infrastructure deals. Firms with robust due diligence processes, like Blackstone's recent investments in European energy storage, may outperform.

4. Hedge Against Trade Policy Volatility: Given U.S. tariff risks, consider overweighting sectors less exposed to trade shocks, such as healthcare or software. These sectors align with the EU's Digital Decade strategy and offer resilient cash flows.

Conclusion

The EU's probe into KKR is more than a regulatory footnote—it is a signal of the new normal for private equity. As regulators tighten their grip on infrastructure deals, firms must adapt by prioritizing compliance, diversifying into resilient sectors, and leveraging policy-driven opportunities. For investors, the key lies in balancing risk with the potential for long-term, regulated returns. In this evolving landscape, those who navigate the regulatory tightrope with agility will find themselves at the forefront of a capital reallocation that is just beginning to unfold.