It has become something of an ‘in joke’ within the infrastructure asset class that what practitioners do is “boring”. It’s a confession sometimes heard on stage at conferences, is almost always greeted by a ripple of mirth from the floor, and is made in acknowledgement of infrastructure’s supposedly safe and steady nature and reliable cash flows.
Leaving aside what many would say is an inaccurate depiction of an asset class that confronts investors with a wide array of risks, it also may be one reason why the words ‘infrastructure’ and ‘technology’ are rarely seen in the same sentence. Perhaps technology, with its cutting-edge and fashionable associations, is viewed as simply too exciting.
Michael Barben, partner and global co-head of private infrastructure at private markets specialist Partners Group, says: “There is this simplification that infrastructure investments are not affected by new technology. But, given that infrastructure assets have such long lives, it would be foolish to assume that technology could not be a big driver that will have an impact on the value of assets – whether positively or negatively.”
Indeed, Barben says Partners Group’s decision to pass on one investment was “driven by worries about the impact of technological change on the asset”.
There are, in fact, various ways in which technology may affect value. It may be, in an extreme case, that a business plan is based around the application of a new technology that would hand a particular infrastructure company or asset an advantage over its competitors. Alternatively, an existing investment may be detrimentally affected should it involve the use of a technology that is superseded by some new innovation which either reduces or destroys the value of its predecessor.
“I think it [technology] is something that is too easily disregarded,” says Barben. “Technology means a lot of different things. For instance, it can affect the terminal value and we’ve seen that in the power generation sector, for example, where there have been significant technological advances. The terminal value of such assets has changed, as well as a function of renewable energy technology becoming much more efficient.”
The renewable energy example is much cited, with the rapidly falling cost of renewables technology seeing wind and solar power reach cost parity with fossil fuels in parts of Europe, the US and some developing markets.
Another, related example is that of shale. The extraction of shale oil and gas is enabled by the technology that facilitates an extremely complex extraction process. The result of being able to drill for shale is a huge new infrastructure opportunity in the form of a vast need for pipelines, storage facilities etc. but also creates a large number of stranded traditional energy assets.
There are other examples. In the airports sector, for example, technology continues to create (through, for example, the Airbus A380 and A480) ever larger aircraft capable of carrying a greater quantum of passengers. For airports, putting in place new infrastructure to receive and cater for larger planes can involve substantial capital expenditure. Likewise for ports receiving ever-larger cargo-carrying ships, such as the new generation of huge Panamax vessels in the Panama Canal.
Barben suggests the build-out of new fibre optic technology is one development that should be on investors’ radars. At the time of going to press, Partners Group had just invested in this area through Seabras-1, the first direct subsea fibre optic cable running between New York and São Paulo.
“The Seabras-1 project is a great fit with Partners Group’s strategy of seeking out opportunities to construct the core infrastructure assets of the future,” said Brandon Prater, partner and global co-head of private infrastructure at Partners, in a statement announcing the deal.
He added: “Telecommunications demand between South America and the US – and indeed the rest of the world – is only going to grow in the future and we see huge potential for [developer] Seaborn’s cable networks.”
Erich Becker, who heads the infrastructure team at London-based fund manager Zouk Capital, agrees that technology can be a major factor in infrastructure investment – particularly at his own firm, which has a growth capital as well as infrastructure specialisation.
“The two are linked,” he says. “People miss a lot of opportunities if they don’t look at the technology aspect.”
He admits that there is the type of infrastructure investment which revolves around fixed cash flows in exchange for making assets available and where technology risk is low. Equally, there are many cases where regulators incentivise better performance and where the importance of implementing better technology can be every bit as important as better operations.
Becker provides an example from the field of “big data”. “We are surrounded by a flood of data and we often struggle to collect that data and make it useful to us,” he says. “But it’s highly relevant to the efficient running of infrastructure assets if you can distil that down to what’s essential and relevant.”
“For example, he continues, “you can collect terabytes of data when you’re running a gas turbine or are a transmission system operator. If you can collect that data to make it understandable and available for analytics that can improve efficiency, you can pre-empt failures and reduce operating expenses.”
Becker believes that having an understanding of technology and its potential applications can open up a wider range of investment opportunities to infrastructure fund managers.
“It can give you more diversified deal flow,” he says. “We like areas that are slightly outside the capability of other infrastructure investors and we like being early movers in those areas. For example, we’ve spent a lot of time looking at how best to integrate renewable energy into the grid and the challenges that it poses. As a result, we can understand how to improve the operations of transmission assets.”
Becker says there can be “very interesting exchanges” with his colleagues on the growth capital side and points to one example where the relationship has proved beneficial: namely, being able to react in an appropriate way in the face of the steep falls in renewable energy technology equipment prices and tariff reductions.
“By having investments on the technology side, we had a good understanding of how the value chain worked with respect to panels and how we could work with our partners on the production and installation side to keep them going despite the tariff cuts. It meant they could keep installing at a time when the feed-in tariff would soon be one-third of what it was.”
As the examples given here would indicate, infrastructure investment can be a lot more exciting than it is sometimes given credit for. Barben thinks there should be a greater acknowledgement of this:
“It’s infrastructure dogma that technology is not significant. People say we’re not technology investors but, in many cases, the thing that you own is affected by technology. Assets have long lives and there is often an impact that may not kill the investment but could certainly create significant damage to its terminal value.”