You could say our annual Infrastructure Investor Berlin Summit has been growing in tandem with the asset class. So when we drew a record-breaking 800 attendees this year, you could rightfully conclude that the asset class has reached a new level of maturity – not to mention new levels of investor attention.
With that in mind, it was refreshing, alongside the buoyant sense of optimism, to see delegates eschew business as usual to tackle some of the challenges facing the asset class. Take disruption, a key theme that resonated throughout the halls of the Berlin Hilton during 2016's conference discussions.
As Antin Infrastructure Partners ' Mark Crosbie put it in a panel focused on long-term trends: “Infrastructure is becoming far from being the safe predictable asset you can lock away and get the coupon on every quarter. It's facing risks and opportunities that none of us could have predicted before.”
QIC head of infrastructure Ross Israel noted during that same panel discussion that with automated vehicles on the rise, it is time for all transportation investors to begin combing through their businesses to see if there is a likelihood of them being upset by new paradigms. As an example, he pointed to a sub-sector others might overlook – parking.
“Parking in terms of automated vehicles is going to iterate significantly [in the coming years]. Inner core parking could be phased out,” he said. “What that means is you need to be a more active investor going forward. Leverage the opportunities that exist.”
As if to underscore that point, between the time that our conference wrapped up and the publication of this month's issue, Honda has released a car with self-driving technology (capable of automated driver assist functions such as variable cruise control) for just over $20,000.
For DIF managing partner Wim Blaasse, elderly care – a healthcare offshoot that has long sat in the realm of real estate investment – is another possible another area ripe for disruption. GIC senior vice-president Andreas Köttering agreed: “One of the latest studies shows that the population over 65 on a global basis will be 25 percent in 2050. It will be a huge global problem,” Köttering said.
“In Japan, [they] don't have enough people to take care of the old people, [whereas] in Germany it's a regulated business with regulated income tax, so you really need to look at specific markets,” he argued, adding this is likely to be a geographically-targeted play.
The area that seems ripest for disruption, however, is the energy space, with Israel saying that QIC puts the energy sector “right at the top of the list in terms of disruption”. Distributed power, in particular, seems to be in investors' crosshairs. “If you look at the growth markets where we are investing, power is really needed,” Actis partner and co-head of energy Mikael Karlsson said in one of many exclusive video interviews conducted throughout the conference.
“In Africa, four out of five people are not connected to the network and […] how many phone calls do we get on a daily basis on a fixed line today? It's all mobile phone technology, right? The same is going to happen with distributed power,” he predicted.
A WORLD OF INSECURITIES
As the world continues to connect and expand the internet of things, perhaps the most troubling disruptor across not just infrastructure but all finance sectors comes in the form of hacking and cyberterrorism.
During his opening keynote on day two of the Summit, Lord Jonathan Evans, former director general of the British Security Service, noted that much of the world's strategic infrastructure is “quite old”. As such, it is going to be extremely difficult (and expensive) to update and protect these assets.
Evans, who is now chairman of the financial system vulnerabilities committee and a non-executive director at HSBC , highlighted that companies are often targeted because of the sector they are in rather than for what they do in particular. He added that most malicious attacks are not discovered until about eight to nine months after initial penetration. As Evans pointed out, quoting an old saying in the intelligence world: “There is only one thing worse than not discovering a spy and that is discovering a spy.”
In order to protect their assets, he said, companies need to make a realistic assessment of the threats they face. They need to think critically to assess what truly needs to be protected from attack rather than trying to defend a “very tenuous line” that surrounds their entire businesses. And most of all, companies need to ensure their partners are on the same page when it comes to security.
As an example, he noted that the attack on retailer Target that saw nearly 90 million customers' credentials stolen originated within the company that supplied its air conditioning. Much the same applied to an attack on JPMorgan that was made possible through a security weakness on the part of the company that provided gym services for its staff.
Despite all of these new realities, one thing remains the same: strong infrastructure deals must be built on strong fundamentals.
That is not to say we should minimise many of the potential challenges we just highlighted. But as Hermes Investment Management chief executive Saker Nusseibeh pointed out in an end of day one interview with Campbell Lutyens chairman John Campbell: “In general, even disruptive technologies don't happen as quickly as we think. I'm pretty sure that in time most cars will either be hybrid or electric, but the technology is more than 15 to 20 years old.”
In a world of roughly 7 billion people, Nusseibeh highlighted, 4 billion have no modern communications, 2.5 billion have no sanitation, 2.3 billion have no reliable source of energy, 1 billion are currently without roads and 900 million lack access to safe drinking water. On the most basic level, these people are what the work of infrastructure investors is really about.
As the Hermes chief executive eloquently put it: “There is no genius needed to discover what is going to be scarce.” The question now is how quickly governments and investors can rise to the challenge.