This article is sponsored by EQT
How far has the infrastructure asset class come on its technology journey?
Lennart Blecher: It’s still early days, but the change that we are seeing is certainly happening at a remarkable pace. The transformations taking place in just about every infrastructure sub-sector are dramatic.
You only need to look back at where we were five or 10 years ago in terms of energy production, transportation, water or, in particular, communications, and then try and predict where we will be five or 10 years from now to see how digitisation and tech development are revolutionising these industries. So, yes, it is early days, but the speed of change is incredible.
You mentioned the telecommunications sector as being particularly affected by tech advances. How has the arrival of new technology impacted the industry so far?
Masoud Homayoun: I would definitely say the telecommunications sector is leading the way in terms of the rate of technological change. The driving factor is the scale of consumer and business demand. Just look at the amount of data that individuals and businesses are consuming. Look at their growing demands for low latency and ready accessibility. That has spurred a huge amount of innovation and I believe will continue to do so. Tech development and customer demand go hand in hand.
What opportunities has that created? Where has EQT been concentrating its investment efforts in the sector to date?
LB: Just taking a step back, EQT approaches infratech from two different perspectives. The first is enabling infrastructure – fibre being a prime example. The second is deploying technology in infrastructure companies to make them operationally more capable and faster to lower costs or drive growth.
Within the telecommunications industry, where we have a great deal of experience, both of those themes are valid.
EQT has focused heavily on enabling infrastructure such as fibre, but also data centres. In fact, we are now one of the largest investors, if not the largest investor, in fibre globally, with significant investments in both North America and Europe.
EQT has invested substantially in these areas because we see the cloudification of data, and demands for speed and accessibility of that data, as being one of the most significant global trends right now.
We are committed to increasing fibre penetration around the world, which, it is worth mentioning, also has a significant societal benefit when you look at a country such as Germany, where access to broadband is actually relatively low.
You talked about looking 10 years ahead at how industries are likely to have evolved. What new opportunities will have emerged in the telecommunications sector and what new technologies are likely to facilitate that?
“Tech development and customer demand go hand in hand”
You might feel that we have come a long way with our iPhones and our apps, but the telecommunications sector is really still in its infancy in terms of the power that technology can bring. We will continue to see significant data growth and we will also see a massive uptick in automation across all industries. All of these things will require high speed communications; they will require low latency communications; they will require storage capacity; and they will require security.
I think in 10 years’ time we will only have seen an acceleration of what we are seeing now in terms of fibre penetration and cloudification. Obviously, we will also see big increases in wireless communications and the internet of things. But that will require investment in fixed networks as well. If anything, I would expect to see an acceleration of the trends we are currently seeing.
What changes have you seen in the energy sector and what changes do you predict are still to come?
MH: With energy, we are also touching on another major secular theme, in terms of sustainability. I think we will continue to see that push towards sustainability, as well as improvements in efficiency gains and decentralisation, which is what is required for us to achieve the UN Sustainable Development Goals that have been agreed upon across the world.
“LPs are supportive of funding infratech because they understand that technology is there, ultimately, to safeguard their investments”
Technology will be an important enabling factor in achieving those goals, and we merge technology with sustainability – this is a powerful combination. We see it already with the deployment of renewable energy production at scale. This has become possible due to technological development resulting in the rapidly falling cost of those renewables, which is now on a par with, or even below, that of alternatives.
Similarly, I think advances in data analytics will continue to create massive gains in the efficiency of energy usage, both in our infrastructure businesses and, if I speak for the wider EQT universe, in the real estate businesses, industrial companies and so forth. The combination of advances in energy production and energy efficiency are what will allow for a more flexible and decentralised system where businesses and consumers can both adapt their energy usage, but also be contributors to energy systems.
And what changes is technology bringing to the transportation sector?
MH: Data analytics and automation can be used to design transportation systems that run far more efficiently and sustainably, especially in combination with electrification. For example, the introduction of technology to EQT’s rail freight business has decreased maintenance costs because we now have the information we need to take preventative action, which is far more efficient and adds value for customers.
How do you ensure that portfolio companies are on the right side of tech disruption?
LB: Firstly, at EQT we talk about applying a thematic investment approach. In other words, we make sure investments are focused on particular themes where we see secular growth. That secular growth may be driven by a number of macrotrends, including urbanisation or sustainability, and technological advances and digitalisation are certainly among the most powerful of them. We look carefully at the opportunities that those investment themes and associated technologies are creating. But we look carefully at the risks as well.
It is important to thoroughly investigate every sector and every asset from a disruption perspective. We are supported in that by EQT’s internal digital team and the EQT Network, our global advisory network comprising some 500 former operators and top managers from some of the major blue-chip technology companies themselves. Using that expertise, we will look at both sides of the coin for each and every asset. What are the risks associated with this investment opportunity getting disrupted? But equally, what are the opportunities if we can become the disrupters and use technologies to provide better essential services to society or be more efficient and create even stronger and broader value?
Finally, EQT has the advantage of having a diverse platform of different business lines, including a venture capital arm. That is very refreshing. Having a team sat alongside us that is focused pretty much exclusively on disruption keeps us on our toes – we collaborate a lot and inspire each other. And this keeps us agile. That is how we ensure portfolio companies end up on the right side of tech disruption.
But what about the risks associated with cybercrime, as assets are increasingly interconnected?
MH: Cybersecurity is certainly something we need to recognise as a serious matter. It is a risk that cannot be fully excluded and as we move into an increasingly connected world, that threat level is only going to climb. However, EQT’s in-house digital team has the expertise and works in a highly systematic fashion to address these risks in each and every portfolio company. And together with technology advisors in the EQT Network we can ensure that the businesses EQT owns are prepared and future-proofed for such threats. Those risks can never be eradicated entirely, but preparation is, I believe, key.
How would you describe limited partner appetite for funding infratech, and is it changing?
LB: Limited partners are generally very supportive. Obviously, it depends a lot on whether you are talking about enabling infrastructure such as fibre or data centres, or if you are talking about deploying highly innovative, cutting edge technology into infrastructure companies. There is variability in risk appetite among investors. But, by and large, I would say limited partners are supportive of funding infratech because they understand that technology is there, ultimately, to safeguard their investment and also contribute to a more modern society. I would argue, in fact, that not pursuing infratech innovation is a recipe for being disrupted, sooner or later. That is where the real risk lies.
Do you think the covid-19 pandemic will compromise that willingness to support innovation?
LB: I would actually argue the opposite: that covid-19, with all its ramifications, will encourage further investment in technology. Obviously, we are still in the midst of this terrible pandemic, which has had significant impacts on every aspect of our lives. But we are already seeing a remarkable speed of change in a number of sectors, in terms of the way we live and work. That speed of advance has been driven by the coronavirus.
For example, EQT had long identified remote and flexible ways of working and the use of teleconferencing and other technologies as important themes. But now we know, for a fact, that a huge number of companies are able to efficiently operate remotely, and many are unlikely to go back to the exact same way things were done before. That capability has been driven by tech developments and enabling infrastructure such as fibre. Without that, the economic and social effects of covid-19 would have been significantly worse. The situation we find ourselves in now will only accelerate trends that were already underway.