Big picture: Shift to digital is inevitable

Infrastructure Investor highlights seven big ideas that will shape the future of asset class.

Following the much-anticipated COP26 conference in November, the talk around renewables has never been more prominent, especially when it comes to infrastructure. More and more, investors are looking to fund projects that will help support the energy transition, while increasing their focus on digital infrastructure.

Here, we highlight seven big ideas shaping the industry.

Race to net zero

Net zero is at the forefront of most companies’ ESG strategies and is especially important at a time when the world is racing to meet climate goals.

But despite an increased focus by the big hitters, not enough is being done at an industry level, argues Anne Valentine Andrews, global head of real assets at BlackRock. “What keeps me up at night is that we are still falling far short of the level of ambition to achieving net-zero carbon emissions by 2050,” she says. “Investment in clean energy hasn’t been enough to offset the decline in fossil fuels investment. Even greater investments would be needed to balance the transition and achieve net zero – this goes far beyond wind and solar; think green fuels, clean transport, carbon capture and storage, energy efficiency and much more.”

Net-zero initiatives are key in supporting the energy transition, with Arcus Infrastructure Partners describing net zero as “one of the most auspicious investment opportunities the post-war era has yet seen”.

Rise of AI

It is also clear that technology will dominate most sectors, including infrastructure, over the next few years, especially since data helps companies to create more innovative and efficient solutions.

“The spread of machine learning and data analytics tools enable new value-creation opportunities for management teams,” says Marion Calcine, CIO at Ardian Infrastructure. “Managers that can harvest the data generated by infrastructure assets can monitor the assets’ operations more closely and find additional pockets of value creation and optimisation, thus gaining a competitive advantage over conventional investors.”

As a result, the incorporation of AI and machine learning into infrastructure investing has been steadily on the rise over the past few years, adds Misha Logvinov, managing director and head of IT strategy at EQT. “We are really starting to see its impact across the asset class,” she says. “We now have access to more data than ever before and we are working hard to maximise its potential to create differentiated market leaders with new, AI-driven revenue streams.”

Performance monitoring brings results

Fund manager selection and performance monitoring are key aspects of the investment process in infrastructure. To select skilled managers, investors typically rely on rankings by quartiles of net IRR and multiples, and aim to work with asset managers that are consistently in the top quartiles. In order to monitor performance, EDHEC suggests investors should “compare the reported performance of the funds they are invested in, to that of comparable funds and, again, hope to achieve top-quartile results”.

However, according to EDHEC, there is a lack of infrastructure fund performance data available, hindering the process. Small sample sizes, human error, lack of funds and data biases are all reasons why performance data is scarce.

The company cites lack of data as a reason asset managers struggle to demonstrate whether they are performing adequately or not, and therefore, investors can be left feeling “none the wiser about the skills or performance persistence of their asset managers”.

Identifying new sectors

Looking to the future, it is no surprise investors want to tap new sectors, such as tech and social infrastructure. “Digital disruption is having, and will have, a tremendous impact on infrastructure companies’ business models,” argues Mathias Burghardt, head of infrastructure at Ardian.

Active GPs are also demonstrating an ability to increase transactional opportunities by identifying new sectors. At the same time, InfraVia says that GPs are “staying loyal to the underlying infrastructure thesis, and therefore capturing an early-mover premium”.

A focus on social infrastructure has been fuelled by the pandemic as well as ageing populations, with private investors moving to address the widening investment gap faced by healthcare or educational assets. “The ageing population is driving opportunities in social infrastructure and real estate such as retirement and nursing homes and home care services,” says BlackRock’s Valentine Andrews.

Burghardt adds: “The current growing competition is leading to a broadening of the infrastructure definition by GPs: we have recently seen commercial or social services being called infrastructure.”

Current investment in social infrastructure in the EU has been estimated at around €170 billion per annum by the European Commission, while the minimum infrastructure gap in social infrastructure investment is estimated at €100 billion to €150 billion per annum. That represents a total gap of more than €1.5 trillion over 2018-30. InfraVia describes this investment gap as a result of “stagnating public investments” and “massive investment and transformation challenges”.

Focus on social issues

When it comes to ESG, companies tend to prioritise environmental concerns over social and governance issues. However, Francesca Lloyd, managing director at FIRSTavenue, argues that by creating a better social environment, businesses can improve their longevity.

“Improved social indicators can help the long-term sustainability of your business,” she says. “Conversely, recent ethical scandals have shown that social issues can also erode significant shareholder value, despite this perception that environmental issues tend to be financially more material than social issues. Also, shareholders, LPs and regulatory bodies are forcing GPs to consider social factors. There has been an unrelenting growth in ESG requirements.”

Movements such as Black Lives Matter have also sharpened the focus on diversity, equity and inclusion. Firms are increasingly taking steps to attract and retain more diverse talent. “Recently, there has been a new wave of social issues – socioeconomic equality; diversity, equality and inclusion; digital rights; land issues,” Lloyd adds. “The materiality of these new topics is coming to light, so they need to be considered by managers.”

Investing in digital infrastructure

Covid-19 has forced businesses to undergo rapid digital transformations. Therefore, it makes sense that the focus on tech and digital infrastructure has accelerated.

“Up until around 10 years ago, this asset class was an unknown commodity,” says DigitalBridge’s president and CEO, Marc Ganzi. “But the importance of digital infrastructure has become increasingly clear over the course of the past decade; today, it is not only a growing part of the asset allocation programme of the world’s most sophisticated LPs, it is also a priority.

“Investors know that not only is digital here to stay, but that it is the fastest growing vertical within the infrastructure space.”

Edge computing is one area Ganzi expects investing to take off. He argues that despite networks holding up during the pandemic, there is still an “opportunity for more network quality at the perimeter – in the suburbs, secondary cities and rural areas across all geographies”.

Solving water scarcity

As the climate crisis evolves, water scarcity is becoming an increasing global problem. In California, the US Drought Monitor lists 88 percent of land as being in “extreme” or “exceptional” drought.

This will have a knock-on effect on agriculture, says Instar’s president and CEO Gregory Smith: “The effects of climate change leave the environment hotter and drier year after year, leading to increased frequencies of wildfires further impacting food production through both direct destruction, and indirect effects such as smoke damage to growing crops.”

He adds that the key to tackling this problem is through preservation of existing water sources as well as investment in smart technology, such as desalination solutions, which are designed to remove salt from seawater. “The crises threatening the security of our water and food are here, and the time for action is now,” says Smith.

“Learning from the experience in California and other water-stressed regions, enacting preventative measures to mitigate disasters through investments in much needed infrastructure and implementing enhanced management systems for our water resources can help us to improve the world for ourselves and for future generations.”

They said it

How the industry is shaping up

“As the industry continues to grow, there is a significantly increased focus on ESG integration”

Markus Hottenrott
Morgan Stanley Infrastructure Partners

“Investment in clean energy hasn’t been enough to offset the decline in fossil fuels investment”

Anne Valentine Andrews
BlackRock

“Infrastructure is becoming a mainstream asset class”

Barbara Weber
B Capital Partners

“Most investors are asking questions regarding the speed of deployment of core infrastructure”

Claus Fintzen
Allianz Global Investors

“Investors are increasingly looking to diversify their growing infrastructure portfolios among geographies, technologies, managers and investment cycles”

Michael Ebner
KGAL

“The spread of machine learning and data analytics tools enables new value-creation opportunities for management teams”

Marion Calcine
Ardian Infrastructure

“Digital disruption is having, and will have, a tremendous impact on infrastructure companies’ business models”

Mathias Burghardt
Ardian Infrastructure