In 2013, when I started writing about infrastructure, the asset class was boring. Not literally boring: as I discovered in the years that followed, not least by hanging out in the Berlin Hilton lobby post-conference hours, the infrastructure investment community is endowed with plenty of colourful characters. But the way it was defined then was fairly conservative. Toll roads were fine; renewables just acceptable; rolling stock, still something of a wild choice. More exotic sectors such as cooking oil were seen as a flash in the pan – at best.
Fast-forward four years and the industry has come clean about its appetite for launderettes, test labs and motorway services areas. LPs may sometimes worry about strategy drift, but they don’t shout very loudly if the returns are good: the latest vehicles by Antin and EQT, ‘guilty’ of the examples mentioned above, were closed on big amounts in little time. LPs are even starting to invest directly in companies that stretch the asset class’s definition – think of OTPP and USS’s punt on crematoriums, or West Midlands and WSIB’s bet on a ferry service.
Which prompts me to wonder: what will we call infrastructure in 2037? I can see two sources of new assets. First, infrastructure will extend to new spheres simply because technological progress will mean its core functions – to transport people or distribute power, say – can be more effectively performed by new gear. Such prospects have been well covered, including in our own Future of Infrastructure supplement last year, where we considered space travel, asteroid-borne solar panels and charging stations for self-driving cars.
Brainstorming about these is fun, but in the nearer term, dealflow may consist of more prosaic assets – those not currently seen as infrastructure, but which could be soon. That may happen because cash-strapped governments will divest equipment that’s always been in public hands, or because clever – or creative – GPs will find that previously esoteric sectors can generate secure, stable cashflows in the long run.
Let’s explore a couple of examples (purely hypothetical, as we’ve not done a great deal of due diligence). A vast proportion of the world’s activity relies on (reasonably) accurate weather forecasts. Get it wrong and passenger planes are in for a good shake, the winter Olympics turn into a soggy failure and avocado harvests are under threat. Deservedly so, weather stations and the associated equipment are sophisticated pieces of kit – and expensive ones, too. States that own them could get much money from selling concessions to long-term investors, which could then bill the service back to governments or clients.
Another avenue with potential is the search engine. The accumulation of data means the sector has natural monopolistic tendencies, as the dominance of Google in vast parts of the world illustrates (in countries where the Silicon Valley giant is not number one, other players hold a similar market share).
It’s not inconceivable, for example, that states will want to regulate what will essentially have become a public utility, helping turn online search into an infrastructure sector. Also, Google is not just a search engine anymore. It has myriad strings to its bow, from self-driving cars to recruitment businesses. Perhaps – a big perhaps – there will come a time when Google leases out its search engine unit to inject capital elsewhere, maintaining some form of access to customer data.
In our pages, we’ve often warned readers that sectors previously thought of as monopolistic could be thrown open to competition by unforeseen forces, such as technological disruption. But the reverse is probably true as well. The infrastructure of the future may already be here.
Matthieu Favas will continue at PEI as the Editor of sister publicationAgri Investor.