Physical assets such as roads, energy networks and public facilities have gained a well-deserved reputation among investors for generating dependable, fixed income-like returns, together with the potential for capital gains from additional targeted investments.
In an environment where yields on traditional fixed-income securities remain far below their historic norms, infrastructure’s financial qualities have prompted pension funds and insurers to increase their allocation targets significantly. It is very likely that appetite for infrastructure investments will continue to grow and the market will become even more competitive. Indeed we have seen signs of this recently with China’s $2 billion input into the European Fund for Strategic Investments.
However as more players enter the market, true competitive advantage will be gained by asset managers who are aware of – and embrace – the most important influence on the future of these real assets today: digital disruption. Put simply, we are seeing how technology is affecting every area of public life, and physical infrastructure is no different.
Retailers have already seen their business transformed by digital technologies and have been forced to adapt or face extinction. More recently, the hotel industry has faced the same conundrum. A few years ago it would have seemed ridiculous to suggest that major international hotel groups, which have invested over decades to create premium assets that are all but impossible to replicate, could face serious competition from a website with a few hundred employees and almost no physical assets. Today, just seven years after it was set up, Airbnb is fast becoming the world’s biggest hotelier in terms of room nights and it already commands a valuation far in excess of the world’s leading hotel groups.
By any standard, this is a striking development. But it is important to keep a sense of perspective. Technological advances have always shaped the demand for infrastructure assets: the invention of the steam engine created the rail industry; mass production of cars vastly expanded the road networks; harnessing of electricity and gas led to the construction of generation and distribution networks; the spread of commercial flights created thousands of airports around the world.
To that extent, therefore, the changes now under way are simply the continuation of a trend that has shaped our infrastructure for centuries. However, the speed with which digital technologies can enable competition to emerge from unexpected sources and force the transformation of apparently well-established markets poses a different kind of challenge for owners and managers of infrastructure today.
Purchasing assets that appear to dominate their market in the belief that their income streams will remain secure is no longer a tenable approach. Infrastructure owners must now manage their assets very actively and develop an investment strategy that anticipates the ways in which their markets are likely to evolve.
A key area where we may see further disruption from digital technology is in urban parking. In the same way that Airbnb has started to threaten the dominance of the major hotel owners, this change has profound implications for a company such as Indigo (ex-Vinci Park), in which Ardian Infrastructure is a major investor.
Ardian invested in Indigo in June 2014 and almost immediately after the deal, Indigo launched an initiative to build a digital parking and mobility app aimed at making motorists’ lives easier. In major European cities, drivers often have to spend lots of time driving around looking for a place to park, which wastes their time and increases congestion. Indigo’s app, OPnGO (now available in France), alleviates this problem by helping motorists find parking facilities more easily. It collates information on nearby off-street, on-street and private parking areas before comparing the prices and showing you where to go. It then allows you to book and pay through the app, meaning you do not have to drive around looking for a parking space, and you don’t have to worry about dealing with different providers and payment methods.
The ease and convenience of OPnGO represents a major improvement in the level of service that parking operators can offer customers and creates an additional revenue stream. The management of OPnGO is now extending it to cover spaces controlled by other parking operators in order to counter the risk that a technology-based rival will enter the market and establish itself as the motorist’s trusted parking agent and intermediary, as happened with online booking websites in the hotel industry.
Indigo, alongside its spin-off company OPnGO, has moved quickly to anticipate the way in which digital technology can improve the level of service they can provide, making their customers’ lives easier and reinforcing their business’s competitive position at the same time.
It does not require great imagination to see that other, major changes lie ahead. Twenty years ago, airports could handle a take-off only every three minutes. Thanks to technological development, it is now possible to manage a take-off every sixty seconds, effectively tripling the capacity of an airport in the space of a few years. Developments such as this require very significant investment in airport capacity and facilities in order to handle the increased levels of passenger traffic. Airport owners that fail to keep up will have less attractive and therefore less valuable properties.
Another example is the French car ride sharing start-up BlaBlaCar, which is fast becoming a competitor for the dominant national train operators in France. The work going on now to develop driverless cars could have similar effects on the capacity of road networks, increasing the earning potential of these assets significantly and reducing the pressure to build.
Again, the implications of technological change for the owners of physical infrastructure are likely to be profound. Our use of electricity to power a growing proportion of road transport will create the demand for an entirely new power infrastructure to service the new generation of vehicles. And as technology enables much more sophisticated electricity distribution and the ability to store electricity more efficiently, so the economics of renewable energy assets will be transformed. As electricity storage technology develops, batteries will start to be classed as infrastructure assets.
All of these processes will have enormous implications for the owners and managers of infrastructure assets and for investors in this asset class. Strategic vision and broad exposure to different types of infrastructure and active management are essential in order to remain ahead of the developing trends and ensure that today’s income streams prove sustainable. This world is one that favours big investors with large specialist teams that can track developments and transfer knowledge and innovations across their portfolio.
A further advantage will be gained by asset managers that can provide investors with a truly multi-local strategy. We have seen with Airbnb, for example, that different local authorities react in different ways when met with disruptive business trends. Managing infrastructure assets in the future will require a truly multi-local on the ground presence and in-depth knowledge of local regulatory frameworks, laws and customs.
Underpinning all of this is the fact that investment in infrastructure is a long-term activity. Infrastructure managers have to anticipate well in advance how they will need to integrate new technologies into their business and invest accordingly – the alternative is to allow a competitor to get there first. Falling behind the pace of technological innovation and investment will mean falling off the pace altogether.