Where are the most exciting infratech opportunities?
Alex Villela: Software-defined infra is a key trend. To cope with increasing complexity driven by exponential data traffic and number of connected devices, the networks are going through a massive transformation to become increasingly software-defined, hyper-automated with extensive use of AI and provisioned on demand.
This massive transformation to a software-defined world is driven by a critical mass of high-growth, fast-moving companies. As part of this mega-trend, we see exciting opportunities around edge computing, 5G private networks, sky computing and software-defined data centre technologies aiming for energy savings and capex optimisation.
Christophe Petit: Infratech opportunities are multiple, and, in my view, the most exciting ones are the ones that will help make infrastructure more sustainable and efficient. In the transportation sector, electric cars, self-driving cars and AI cameras can help better manage traffic and reduce pollution. In the social sector, tech can help better manage building energy consumption.
Michael Ebner: We currently see two thrilling areas of investment. Renewable energy, although ‘on the agenda’ for more than a decade, is getting another boost as the politically and environmentally driven pace of decarbonisation requires significantly more renewables capacity globally. And then, for more opportunistic investors, energy transition assets – investments in ‘new technology’ – allow the integration of renewable energy into the energy sector at lower cost.
Tibor Schwartz: Improving the organisational capabilities of infrastructure operators and promoting an innovation culture focused on facilitating the net-zero journey are among the most exciting opportunities in infratech. In embracing innovation culture, we see tremendous potential in collaborating across our portfolio companies and working with world-class innovators who can assist them. Other promising opportunities we see are in digital twinning, greater use of sensors to uncover new insights to optimise asset operations based on actual performance, and AI’s role across many aspects of infrastructure design, planning, construction and operations.
Managing director and head of sustainable infrastructure, KGAL Investment Management
Co-founder and president, Star America Infrastructure Partners
Senior adviser – asset management, QIC Global Infrastructure
Head of venture capital, DigitalBridge
What is the biggest challenge facing investors?
ME: Global uncertainty. Uncertainty always slows down investment decision processes. And there is much uncertainty around inflation, rising interest rates, direct and indirect consequences of the ongoing Ukraine war and, last but not least, the still-existing covid-19 pandemic.
CP: Whether the technology can be monetised and profitable one day, time to earnings and regulatory barriers are the biggest challenges.
TS: Investors need to transform themselves into change agents and embrace the opportunities presented by the fast pace of technology evolution. Otherwise, innovation will happen to them, and they may or may not be able to capture the value created when new business models are adopted. A good example is the global transportation logistics chain, where ports, if collaborating across global value chains, could play a key role in improving global logistics flows.
AV: Infratech is a dynamic, fast-moving sector. Therefore, investors need to be deeply specialised to shape and communicate a credible vision of how a specific industry and sector dynamic will evolve over time. This is not easy.
How do you ensure today’s investments are fit for tomorrow?
CP: Technology evolves quickly so it is an important question that investment managers must consider carefully. As it is hard to predict tech cycles, lifecycle costs are probably a good way to mitigate the risk. If the lifecycle costs are reduced, it can be easier to make a shift later on.
ME: Running a sound investment process with influence on design and procurement of investments and minimising margin skimming by third parties.
AV: The stage and deal characteristics are essential to ensure long-term fit. Our approach is to invest in companies with proven business models, well-mitigated technology risk, healthy unit economics, well-incorporated sustainability practices, and that are ready to scale massively. In addition, we like to invest in companies that provide mission-critical, essential products, leading to higher stickiness and lower churn.
TS: Being fit for both today and tomorrow demands active asset management, effective governance and a systematic approach to asset growth. This means that not only Horizon 1 but also Horizons 2 and 3 innovations are important to ensure that a company can strengthen its core business, expand beyond it and reinvent itself to remain relevant as we move to the net-zero future. To get there, it will be essential to develop a skilled workforce with deep digital skills, including by attracting talent from other industries, and to increase board capabilities in technology and digital domains.
What is going to be the next big infratech trend?
CP: A lot of information can be gathered in infrastructure projects and companies, but treating the information and acting on the information is not necessarily a simple task. AI in my view is what will give the ability to treat a lot of information faster and more intelligently and therefore enhance the decision-making process.
AV: Software-defined infrastructure is a hot topic for the coming 10 years – we are only at the tip of the iceberg. The infrastructure will continue to be enhanced or optimised via software, allowing service providers to have shorter innovation cycles and AWS-like automation. This transformation is also necessary for 5G to deliver its promise around highly innovative services demanding high data speeds and low latency (self-driving cars, immersive reality and many others). We also believe that the emergence of intelligent networks, AI-powered platforms automating the whole lifecycle of infra management (design, configuration, operation, troubleshooting and self-healing), represent a massive, untapped opportunity.
TS: The level of digital intelligence required to make sound decisions about capital and operational expenditures, as well as to adopt AI as a pragmatic value lever, will substantially increase in the 2020s. We believe that, with the analogue era of low or non-existent digital IQ in the past when it comes to expensive physical infrastructure, a company’s digital IQ must improve to deliver strong long-term returns. In 10 years, replacing a $100 million bridge at the end of its projected life based on inferior understanding of its condition will not be acceptable to investors.
ME: Hydrogen, hydrogen and hydrogen… however, there will certainly also be new technologies making their way (eg, new battery technology).
Managers in the infratech space have long had business, finance or engineering backgrounds, but are new skill sets required?
ME: Not really, but as investments are getting more and more merchant, managers should add skills for the offtake market they are acting in, and reduce blind faith in regulators’ support.
TS: Success in infratech requires a far greater digital IQ across organisations, beginning with the board, as well as new skills and capabilities in areas like AI and machine learning. Importantly, bringing these new skill sets to mature industries also calls for the ability to collaborate with people and organisations with various backgrounds and experiences.
AV: Investment managers in the infratech space need to combine skills not only in traditional areas of finance but also in technology and operations. Understanding these areas is imperative in terms of risk assessment.
CP: Both finance and engineering, I believe, are still two key skill sets: the engineering, technical [skills] from an understanding and operational side; the finance skills to ensure investment rationale and budget discipline.