Why the digital arms race is heating up

“Historically, infrastructure as an asset class has been resistant to innovation, resulting in many traditional infrastructure investors mispricing the risks of technology disruption and failing to capitalise on new infrastructure opportunities enabled by technology.”

If that reads like an opening salvo, that’s because it is.

The above is from Sidewalk Infrastructure Partners’ marketing materials. SIP, for those of you not paying attention, is Alphabet’s newest venture, a spinout from urban innovation business Sidewalk Labs in partnership with the Ontario Teachers’ Pension Plan. Alphabet (for those of you really not paying attention) is Google’s parent company. And Google… well, Google is a verb.

Technology – and the disruption and opportunities it brings – has been on the minds of infrastructure investors for a long time. In 2016, during our Global Summit, we joked that, “at times, the ghost of Airbnb seemed to literally be haunting the [Berlin] Hilton, as investors wondered which infrastructure sub-sectors were ripe for that kind of disruption”.

Since then, a lot of the focus has shifted to the opportunities technology brings, with digital infrastructure – data centres, 5G, fibre – stealing the limelight. But the risks never went away. Ask Google which infrastructure sub-sectors are ripe for disruption and its answer, via SIP, is all of them.

“SIP believes technological advancements are accelerating widespread and fast-paced transformation in traditional infrastructure, posing long-term risks to industry stakeholders,” the firm states on its website. “Today, many traditional asset owners, cities, and investors may not be equipped to assess the impacts of the accelerating application of technology to infrastructure.”

There’s good reason for that too. As SIP states in its marketing materials, “because the risk-return profile of advanced infrastructure systems differs from traditional infrastructure investments, traditional infrastructure investors may shy away from the investment”. As if to underscore that point, OTPP partnered with SIP through its Teachers’ Innovation Platform, which invests in late stage VC and growth equity, not its infrastructure unit.

That creates a bit of a head-scratcher for the industry. On the one hand, most teams and businesses are organised to service the needs of a relatively low-risk asset class. It just so happens that low-risk asset class (like many others) is on the cusp of being transformed by forces that are alien to its practitioners. As such, visibility into those outside forces is essential – and lack of it, a key risk.

Of course, no one’s saying the industry has been standing still, like lambs to the digital slaughter. Macquarie Infrastructure and Real Assets and AMP Capital, to cite just two examples, have made high-profile hires recently to boost their tech-savviness (see here and here). And just because Google has trained its sights on infrastructure, that doesn’t automatically make SIP one of the Four Horsemen of the Apocalypse, poised to rampage all over the asset class.

Google has – correctly – identified that infrastructure is ripe to be enhanced and disrupted by big data and artificial intelligence, two sectors where it’s currently king. So why wouldn’t it want in on the action? Which is different from saying it can walk right in. Google’s voracious appetite for data, in particular, has seen Sidewalk Labs generate plenty of controversy in Canada, where it’s trying to build a smart city on the Toronto waterfront.

None of which negates the point that traditional infrastructure investors need to gain much more exposure to the technological forces poised to change the asset class.

In that sense, InfraVia Capital Partners’ new €300 million infratech growth fund seems like a good move. Yes, it’s a completely new business line, backed by a set of investors with a different risk-return appetite. But it allows its infrastructure business to gain much-needed exposure to promising tech companies operating in sectors in which it has historically invested.

Whether it’s through hiring or adding new business lines, there’s a digital arms race going on that traditional infrastructure players can no longer afford to ignore.

Write to the author at bruno.a@peimedia.com