Roundtable: Living in the digital world

This article is sponsored by AMP Capital, Ardian, First State Investments, Mercatus and Pinsent Masons

About six weeks before we gathered for Infrastructure Investor’s inaugural infratech roundtable in London, the city and other parts of the UK suffered their worst power outages in more than a decade as the country’s grid struggled to deal with the effects of a lightning strike.

This led to multiple failures, such as trains being unable to move, an airport plunged into darkness and traffic lights coming to a halt. This was due in part to an offshore wind farm suffering a sudden and near-total loss of power after displaying what a preliminary report into the incident described as “unusual characteristics”. To compound this, the UK’s grid did not have enough back-up power, and particularly battery storage, to help it cope.

The litany of infratech-related failures in this episode almost dictate that those responsible should have had live audience seats at our roundtable, where they would certainly have been able to glean a few pearls of wisdom.

Our gathering at the London office of First State Investments is a more intimate affair. But as our five roundtable participants are quizzed on how they balance long-term investment with the rapid pace of technological change, battery power is one of the first examples they bring up.

First State partner Niall Mills recalls the firm’s investment in Swedish ferry business ForSea. “It is now 100 percent battery-powered and was the first fully battery-operated ferry business in the world, helped by the fact it’s a short crossing,” he says of the route between Denmark and Sweden. “It was really the first large-scale installation of batteries on ferries, but we ultimately view it as sustainable in the long term. It has also been very well received by passengers and policymakers alike. The risk to that business would be if the Danish and Swedish governments decided to build another bridge, as it would undercut the ferry crossing. However, the fact the ferry cross is zero-carbon provides a compelling argument against this.”

While Mills highlights technology’s short-term political benefits, Adam Ringer, principal at AMP Capital, is keen to show how it can benefit the growth of infrastructure investment as a whole over the long term.

“If the market sees you are transforming the infrastructure in a sustainable way for the future, they will obviously give it a premium when you exit”

Pauline Thomson
Ardian

“This is a massive opportunity for us,” he says. “We can actually think about how we can take these ideas and create new sectors for infrastructure investment. As these businesses grow in scale and become more networked, the barriers to entry actually increase. In addition, what is essential infrastructure changes over time. The question is: what’s going to be essential in 10 years’ time?”

Ringer also brings up battery power, though on a more utility-scale basis than Mills’ ForSea’s example.

“In previous years, battery storage was not commonly thought of as a viable option,” he says. “Not because it wasn’t viewed as an opportunity, but because the business model in virtually every country wasn’t suitable for infrastructure investors. That is now changing, in the UK in particular but also elsewhere. I think it will change further, but the question for us is: do we invest before that change happens?”

Pauline Thomson, an investment manager within Ardian‘s infrastructure team, is also unfazed by the short-term challenges technology poses to long-term investors. She points to car-park businesses, which several in the industry have tipped as ripe for disruption.

“We can play on the revenue side and the exit multiple thanks to new technologies,” she says. “You can build new revenue streams. That’s what we did with car-park operator Indigo, where we helped the management build a fully digital platform called OPnGO, which is linked to Indigo but also offers access to other car parks and on-street parking. If the market sees you are transforming the infrastructure in a sustainable way for the future, they will obviously give it a premium when you exit.”

Our three fund managers around the table are clearly aware of the risks they face and are using technology to mitigate the risks and take advantage of the opportunities. However, two other participants warn them their approach is not necessarily common currency.

“There’s a really big problem across the world of infrastructure in understanding the actual asset information compared with any original specifications,” says Anne-Marie Friel, partner at law firm Pinsent Masons. “That disparity can lead to actual liabilities, and having good asset information models is going to enable investors and other stakeholders to manage those risks better.”

Finding the right balance

Tim Buchner, co-founder of management solutions provider Mercatus and our Silicon Valley representative, agrees: “Advancements in new infrastructure balanced with traditional core have made it really complicated balancing scale and profits. This has caused a significant shift in mindset for managers.

“No longer able to easily leverage legacy systems, they are now having to accelerate moves to modern, more flexible enterprise investment-management solutions that can handle these new complexities.”

“We can actually think about how we can take these ideas and create new sectors for infrastructure investment”

Adam Ringer
AMP Capital

He also sees a divide between those with a forward-looking mentality and those with a more old-school approach, often within the same firm: “We see leaders implementing technology thinking more broadly about how core business functions connect across the investment lifecycle, versus the old-school way of siloed front, middle and back-office functions.”

For all its disruptive potential, technology can have practical asset-management benefits when it comes to user safety.

“If you know how to properly collect and manage your data, you can improve your maintenance,” says Thomson. “That’s what Ascendi, one of our portfolio assets managing a motorway network in Portugal, did. They have put sensors all along the motorway to try to build a digital twin of the network, which allows them to anticipate maintenance before there’s an actual failure of the infrastructure.”

Friel points to the regulation that has come into effect for high-rise buildings in the UK following the Grenfell disaster, when a fire in June 2017 killed 72 people in a tower block in west London. Mills also describes the impact the regulation has had on infrastructure investments.

“One of our electricity businesses has developed a safety technology that will put a brake on all electrical mains arising from those high-rise towers, something which we would advocate for broader use of,” he explains. “It’s a fail-safe, really hi-tech device, and mandating it would make a huge difference.”

“If you can monitor the state of your infrastructure in real time and do the maintenance before it breaks, of course it’s an advantage in terms of cost but also for the safety of the user,” adds Thomson.

A focus on safety will also be increasingly important in our ESG-centred world, especially as the latter moves beyond a purely reputational concern.

“All successful businesses of the future will have to be managing data one way or another”

Anne-Marie Friel
Pinsent Masons

“At the moment, looking at ESG is the right thing to do and you will get reputational benefits,” says Friel. “But it’s inconceivable to me that this is not going to be an area for increased regulation, especially on the environmental side.

“I can see there being an increased number of ‘hard targets’ in some jurisdictions in terms of energy performance, particularly as we require increased digital infrastructure such as data centres. There will also be what you could call ‘soft targets’ in terms of the conditions needed for environmental consents and planning permits.”

All of which means ESG performance will need proper measuring – and that, Friel concludes, will also require adequate implementation of digital technology.

Buchner agrees and warns that a top-down approach will be needed if asset managers are to comply with regulation and show an ESG effect.

“For our market, I think it’s the convergence of being able to say just how sustainable or socially impactful a company is [which requires] centralised data,” he explains. “Technology is playing an essential role in facilitating this integration, access and reporting.”

Team building

Much of the discussion at our roundtable revolves around asset managers needing to think differently. This will, of course, mean employing differently too.

“One of our electricity businesses has developed a safety technology that will put a brake on all electrical mains … It would make a huge difference by mandating this”

Niall Mills
First State Investments

It was this need to shift focus that prompted AMP Capital in March to hire Thomas Preising from Apple, where he had been a global business operations director, to lead the firm’s technological efforts.

Making the most of new technology also requires a more joined-up way of working, argues Ringer: “Connecting people who have a certain skill of making operating companies better and bringing them together with people who have other skill-sets is where value is created in anything.”

His comments bring nods of agreement across the table and Buchner suggests a reversal in the way fund managers work.

“The companies that we see emerging as leaders in technology have aligned around core data pillars across operational, financial, risk and ESG,” he says. “We have found these organisations much more equipped in delivering holistic views to growing investor demands.”

The correct recruitment and day-to-day management processes will eventually lead to the right outcomes, according to Friel.

“All successful businesses of the future will have to be managing data one way or another,” she says. “So what’s the most important thing for businesses to be spending money on? If you have not already started looking at better data management, then you’ve got to start doing that just to try and drive the right behaviours.”

“The reality is there’s not a lot of consistent commitment across the manager set”

Tim Buchner
Mercatus

However, this requires a significant cultural change across the asset management world. Although Ardian has been making progress on this issue internally, it has also sourced help from external partners.

“What you need to manage data is not necessarily the same skills as you usually have in a typical investment team,” says Thomson. “We hired a data scientist in our investment team, and we try to work in collaboration with start-ups that specialise in that field to know how to build relevant models.”

The managers present at our roundtable seem to be taking the right steps in terms of people and culture – but again, when it comes to the industry as a whole, this is not always the case.

“For those driving accelerated adoption of new technology, such change has most commonly come from strong leadership and consistent commitment to scale,” warns Buchner. “Much of the industry, however, is plagued by being consensus-driven. Such ‘group think’ – where it only takes one’s fear of failure versus planning for and committing to success – has stalled many. It’s clear that data and tech must drive new efficiencies for survival.”

He adds that Mercatus and State Street recently surveyed 218 managers, around 70 percent of which said they were either in the process of or giving priority to implementing new technological solutions. Buchner says if the research had been conducted even two years ago, the figure would have been closer to 30 percent.

This process also requires some degree of honesty from those at the top. “It is important for the boardroom chairs to occasionally say, ‘I don’t know’,” says Mills. “This will encourage debate, allowing others with relevant expertise to provide explanations and guidance.

“There will be generational differences in the understanding of pieces of hi-tech which are beyond the realms of understanding for particular companies.”

Mills also believes that “regulation needs to think forwards as well”, a sentiment that is met with agreement from Friel.

“I think regulators in most cases are struggling to keep up with the pace of change,” she says. “I think this pace is immense and they’ve got a lot to keep up with. We absolutely do need to get them involved in the conversation and tell them what they need to know.”

As we wrap up our discussion, it is clear we are merely at the beginning of a conversation that will rumble on for years. But it is also clear that industry participants that have not yet upped their technological game have already fallen behind.

AROUND THE TABLE

Niall Mills, partner, First State Investments
Mills is a partner in the infrastructure investments team, based in London. Prior to joining in 2008, he spent 20 years working in infrastructure businesses across various sectors, including water, airports, electricity and railways. Mills has held senior roles with Southern Water, Honeywell, Bechtel and United Utilities. His infrastructure and engineering/project management experience dates back to 1987.

Pauline Thomson, investment manager, Ardian
Thomson is an investment manager within Ardian’s infrastructure team in Paris. Before joining the firm in 2017, she had been a member of AXA Private Equity’s infrastructure team in the city. She holds a master’s degree in politics and finance from Sciences Po.

Tim Buchner, co-founder and chief operations officer, Mercatus
Buchner has more than 20 years’ experience of working in nascent markets, from wireless telecommunications to renewable energy. In 2009, he co-founded Mercatus, a cloud-based technology company with more than $540 billion in assets and investments under management globally. Mercatus has closely worked with 300-plus managers, investors and portfolio companies.

Adam Ringer, principal, AMP Capital
Ringer is responsible for origination, structuring and asset management, and has experience in transport, utility, communications, healthcare and energy deals. At AMP Capital, he has worked on the acquisitions of CMG, Regard, Axion, Adven, ESVAGT, Towercom and Newcastle Airport, among others. Prior to joining AMP Capital, Ringer worked at ABN AMRO where he was a principal with responsibility for developing structured transactions.

Anne-Marie Friel, partner, Pinsent Masons
Friel has been advising clients in the delivery of major infrastructure for more than 20 years. She specialises in complex renegotiations and the implementation of new risk-sharing approaches, including collaborative delivery models and construction joint ventures. Friel is one of Pinsent Masons’ dedicated infratech experts, looking at the impacts of digital transformation on the sector.