Ardian on why standing still in digital infra destroys value

A proactive and agile approach to digital transformation is critical for all infrastructure assets, say Ardian director Pauline Thomson, CIO of infrastructure Marion Calcine and head of infrastructure Italy Rosario Mazza

This article is sponsored by Ardian

Why is it so important to have a digital strategy for all portfolio companies?

Pauline Thomson

Pauline Thomson: The disruption of new technology is impacting infrastructure, just as it’s impacted all other sectors of the economy. There is no value chain that’s immune. We promise our LPs long-term yield and stable assets, and we can’t fulfil that promise without being proactive with respect to digital transformation.

Infrastructure assets today must have direct access to the end user, otherwise they will be disintermediated by digital players. That direct contact is also important to ensure service doesn’t fall short of user expectations. In addition, it’s crucial to embrace new technologies that can dramatically increase efficiency. Those that fail to do so will destroy value as they lose their competitive edge.

How do you approach this digital transformation internally and how do you work with management teams?

PT: At an investment team level, we’ve equipped ourselves to be able to assess the digital maturity of an asset both in the due diligence and asset management phase. We then support management teams in their innovation watch. Our in-house digital team regularly scouts the market for new technologies of interest and we also support management teams in identifying priorities in their technology roadmap.

We collaborate with management teams on data analysis projects and have data scientists within our investment team who can help drive these initiatives. And we’ve also hired someone with a pure technology background to support us in tech innovation. This trend of bringing in new types of talent is something we increasingly see mirrored in our portfolio companies as they embark on more and more data science and technology projects.

What sorts of value creation levers are you looking to pull when enhancing digital maturity?

PT: There are two primary goals. First, a direct impact on EBITDA margin through the introduction of new revenue streams and/or enhanced productivity. Second, a decrease in cost – through more efficient maintenance schemes, for example. It’s also a way for us to secure a premium at exit because it ensures the asset is still relevant and competitive.

The more the market believes in the capacity of an asset to innovate and adapt, the more likely it is to give it a premium. Take Indigo, a car park operator we exited a few years ago. Even though car parks had been impacted by policies to reduce carbon in cities, Indigo was able to integrate a digital car parks booking platform and offer soft mobility solutions in French cities. Therefore, we were still able to create value for our investors at exit, despite a changing market environment.

What about your recently announced software partnership with Greenbyte in relation to your renewables portfolio? Why did you make that move?

Marion Calcine

Marion Calcine: We started out investing in the renewables sector 15 years ago when solar and wind farms would sell all their production through feed-in tariffs. The shrinking cost of technology and increase in renewables capacity has decreased the need for subsidies over time, however, and so market volatility has increased. Today, you either have PPAs that tend to be shorter duration than feed-in tariffs, or you have a purely merchant environment. That trend is not going to be reversed. Renewables are only going to become more competitive and, because of their inherent intermittency, that’s only going to mean more volatility going forward.

A lot of that plays into the hands of utilities. They have large, diversified portfolios of both thermal and renewables assets and large, diversified client bases, all on a single balance sheet. We invest across multiple funds and so cannot build that same level of diversification. But we do have other advantages. We’re nimble and can make decisions quickly, which is why we decided it was crucial for us to equip ourselves with the most efficient software tools in the market.

These tools are designed to enhance production – ensuring plants’ downtimes are minimised and that they are less prone to intermittency than the competition. Accurate forecasting is vital to ensure your penalty is low when there is a high cost of balancing on the network. And so we partnered with Greenbyte, the largest provider of renewable asset performance management software, to make sure our assets are performing in line with what the manufacturers promised, for example, as well as identifying trends at a global level.

We have a 3.5GW renewables portfolio, so there’s a huge amount of information to be gleaned. For instance, we’re able to identify that certain turbines work less well at high wind speeds than others. Armed with this information, we’re in a better position to negotiate with manufacturers in order to increase productivity.

You have also entered into a partnership with Pexapark. How does all this fit together?

MC: Our partnership with Pexapark allows us to better monitor the risk that comes with a more volatile market. The utilities have trading desks but, as infrastructure funds, we’re not in the business of internalising energy trading.

What we can do, however, is identify the most appropriate hedging products in order to stay within the risk boundaries we’ve defined. We’re able to do this through our partnership with Pexapark, which is a Swiss company focused specifically on evolving the operating system for post-subsidy renewable energy management, providing both revenue and risk management tools.

Integrating software from Pexapark and Greenbyte within the Ardian portfolio is enabling us to tackle the three main challenges facing the renewables market today – production risk, price risk and, finally, cannibalisation risk – because we’re now able to determine the impact of increased renewables capacity on our own assets. This technology therefore ensures our assets will stay relevant and competitive over the long term.

Where next for these partnerships?

MC: In the future, our end-to-end digital tool will be able to tell us that our production forecasts over the next 24 hours will be extremely high, that the rest of the market will also be producing large amounts and so revenues will be low. There will come a point at which we can use this information to put electricity in a battery, instead of on the grid.

The ability to integrate renewable energy with storage solutions will be critical to managing volatility in the future. Meanwhile, managing volatility will be critical to ensuring that renewables continue to fall within the parameters of infrastructure as an asset class. And, of course, ensuring institutional capital continues to flow into the sector is vitally important for the energy transition.

What has the impact of covid been on the infra digital sector and why is it an attractive space for deployment?

Rosario Mazza

Rosario Mazza: We’ve all seen our day-to-day lives become more digitally enriched in terms of communication, entertainment, e-commerce, remote working and remote education over the course of the past year. The pandemic has shown just how essential digital infrastructure has become. And I believe these changes are going to be permanent. It’s going to further accelerate data consumption trends. We have seen fixed-line data consumption increase by 70 percent and mobile data consumption by 40 percent. And, of course, upgrades have been necessary to support that change.

Digital infrastructure has also proved itself to be highly resilient during this crisis and bridging the digital divide has become increasingly prominent on the national and European agenda. All of this is creating a massive need for investment and a new momentum in the sector.

Where specifically are you seeing opportunities?

RM: We see opportunities in the towers sector. We’re invested in Inwit, for example, the second largest independent tower company in Europe. That company has performed very well during this downturn. In fact, the crisis, combined with myriad technological developments, has presented significant new opportunities for business development.

The towers sector primarily presents carve-out opportunities from the mobile network operators. In the fibre sector, meanwhile, we see opportunities to partner with those operators.

We’ve also seen some interesting data centre deals, but it’s important to ensure those assets have long-term contracts in place. If a data centre is really providing IT services, that does not fit within our definition of essential infrastructure.

And finally, how are the competitive dynamics of the digital infrastructure sector evolving?

RM: It is competitive, but no more so than many other infrastructure sectors. And there is a huge volume of dealflow. We see an evolution in the types of players in the market.

There are infrastructure funds, such as ourselves. There’s long-term institutional money. And then there is the emergence of specialist telecom infrastructure players. Inwit is one example. Others include Cellnex and American Towers. We’re also experiencing a wave of consolidation, and that is adding additional spice to the M&A

How are new developments such as 5G, edge computing and the internet of things impacting the investment landscape?

Rosario Mazza: This is a market that never stands still. 5G will be a gamechanger – it’s what will truly enable a digitised society, in terms of upload and download speeds, as well as low latency response times for applications. Communication is no longer going to only be about communication between people. It will also be about communication between machines. And when you are talking about things like self-driving vehicles, latency is critical. That’s where edge computing comes in.

Other new investment opportunities include small-cell and DAS networks for high-density areas, such as stadiums. Towers companies, including Inwit, are rapidly adapting to all of these changes. There’s huge potential to leverage existing asset bases to provide more and more services in response to innovation. And that innovation just keeps on coming.