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Technology transforms infrastructure investing

  • Infra investors must consider new technologies
  • Ardian invests heavily in tech across infra platform
  • “The thing you built today may not be the thing you build way out into the future”: GP

A lot can change over the life of a 10-year investment fund.

The general partner of an infrastructure vehicle launched in early 2008 probably communicated on a Blackberry or first-generation iPhone. They’d rent movies from Blockbuster and buy music at Borders or a Virgin Megastore. Yellow cabs were the cheapest ride to the airport.

The development of new technology can spur massive, irreversible changes for even the most low-maintenance investment strategies.

With the pace of innovation accelerating, infrastructure investors are starting to wonder how their allocations to transport, telecom and energy assets could be disrupted.

Consistency, low costs

Infrastructure’s hallmark consistency is central to its appeal to institutional investors, said Mathias Burghardt, who leads Ardian’s $9 billion infra platform.

“They see it as low-cost private equity,” he said. Scoping out an investment in an airport, for example, meant forecasting passenger volumes, cash flows and broader economic markers like gross domestic product or the consumer price index. “The rest was quite predictable,” Burghardt told Buyouts.

That’s no longer the case, he said. “Both energy and infrastructure have been transformed by digital technology,” Burghardt said.

The changes brought about by technology, from smartphones to ride-sharing apps, force infrastructure fund managers to address how consumers will interact with their assets.

Myriad examples relate to infrastructure, multiple sources told Buyouts. Parking lots need to be equipped to recharge electric cars. Longer-life batteries will shake up demand for power-generating wind and solar assets. A 5G high-speed wireless network will force more investments in cellular antennas — nodes — to fill customers’ unceasing demand for data.

Importantly, those changes affect which assets meet the loose definition of “infrastructure.”

“One of the ways we’ve seen managers navigate the technology risk is to look for assets that wouldn’t normally be considered infrastructure but have similar characteristics,” said Brent Burnett, one of the leaders of Hamilton Lane’s real assets team.

If you expand the definition of infrastructure to include any large, asset-heavy businesses with high barriers to entry and reliable cash flows, “your hunting ground expands,” he said.

For instance, while data centers have long been viewed as an infrastructure investment, the rapid escalation of data consumption is driving major expansions of the communications grid.

The percentage of Americans who own smartphones more than doubled over the past seven years, Pew Research Center reports.

The reliance on mobile devices for internet access pushed demand for data storage and network improvements. Both data storage and network improvements will need to accelerate as developments in artificial intelligence force changes in the auto industry and manufacturing, among other industries.

Those changes affect the investment strategies of major infrastructure firms and more traditional corporate entities, said Scott Joachim, a partner at Goodwin Procter who specializes in technology and PE dealmaking.

Joachim represented General Motors when it acquired self-driving-technology company Cruise Automation in 2015 for a reported $1 billion.

“It’s an old-line business making a big, big bet on the future,” he said, adding that as technology leads to the creation of new sectors, investors and corporate buyers “want to be in a position to represent all aspects of an economy at once.”

Infrastructure specialists took note. Last year, Blackstone Group invested in Ascenty to help the Brazilian data-services and telecom company expand. Stonepeak Infrastructure Partners acquired a majority stake in data-center company Cologix for $500 million. BC Partners formed an entirely new platform from the portfolio of data centers it bought off CenturyLink for $2.8 billion.

The same could be said of the cellular network’s transition from 4G to a faster, more efficient 5G.

The upgrade will create opportunities for investment in more “small cells” — small units that deliver cellular service to hard-to-reach areas like tunnels and stadiums — as well as expanded fiber networks, said Todd Bright, head of Partners Group’s private infrastructure team in the Americas. Partners Group acquired Canadian fiber-optics infrastructure business Axia NetMedia for $272 million in 2016.

“We’re really in the early innings of data consumption in the world,” Bright said. “The move toward artificial intelligence, we’re still in the early days of that.”

Changing the game plan

Technology’s measurable effect on shifting consumer demand has led some fund managers to reconsider their existing investment holdings. The days of a relatively low-maintenance infrastructure investment are drawing to a close.

In Ardian’s case, those efforts to modernize infrastructure assets include a 25 million euro ($29.2 million) investment in OPnGo, a digital application and subsidiary of its parking-lot operator Indigo. The application helps customers find available parking in Indigo lots throughout France, Spain, Belgium, Luxembourg and Brazil.

Airport application

The firm also partnered with the founders of a web application, Amano, to drive traffic to restaurants and shops in Ardian’s airports in Turin and London. Customers who connect to an airport’s WiFi network are provided with a web-only application that includes information on dining and shopping options in the terminal, in addition to flight information and promotional offers.

While both OPnGo and Amano are designed to improve the customer experience, they also provide Indigo and airport management with valuable information about how customers engage with their respective services.

“Before, in infrastructure, people didn’t think about the clients. Who cares if the airport’s crowded? It’s the only airport,” Burghardt said. Today, “it’s a completely different mindset.”

“We think that there’s continuing evolutions of what this marketplace can deliver,” said another infrastructure investor, who declined to speak on the record because of fundraising restrictions.

“The thing you built today may not be the thing you build way out into the future.”

Action Item: For more on Ardian, visit www.ardian.com