Disruption is a theme that has grabbed the attention of economies, markets and industries as well as government and politics, but it is technology disruption that probably has the most potential to turn infrastructure investments upside down. Take, for example, parking garages and autonomous vehicles — will those assets become obsolete for their original purpose and need to be retooled for other services? Or will the declining cost of solar and wind power do to natural gas what it did to coal, and if so, what becomes of the pipelines that transport that commodity?
But as important as the disruptions themselves, is the response to those disruptions — overacting can be as large a mistake as underreacting, and finding a happy medium and selecting the correct response is not an easy task.
According to UBS’ report, The global energy transition, infrastructure investors should focus on the energy and power sectors because they both face technological disruption and make up the largest portion of infrastructure portfolios.
“In 2017, investments in the energy [including power and midstream] and renewables sector accounted for over 60 percent of private infrastructure transactions worldwide,” the UBS report notes.
The report also reviews energy and power market sectors and makes recommendations on how investors can manage their portfolios to limit the effects of disruption: “Gas-fired power generation benefitted from the shale revolution. Natural gas is a transition fuel, and gas-fired power stations in supportive jurisdictions with high barriers-to-entry are attractive, as they help promote growth of renewables [until battery economics catch up].”
Ardian and Fabernovel, meanwhile, also have recently published research and recommendations about connectivity infrastructure — Internet and communications — and its impact on assets in its report, The augmented infrastructure new value creation levers for infrastructure in the connectivity era.
“Connectivity is the new infrastructure order,” the report states. “As a result, all stakeholders of the infrastructure value chain have initiated strategic transformations to meet end-user expectations and accelerate value creation.”
This connectivity infrastructure will have a “leveling” affect that will threaten monopoly assets, something that infrastructure investors seek for their portfolios.
“The separation of energy supply and generation from the operation of transmission and distribution networks was introduced to guarantee efficient access to the infrastructures for all operators without any discrimination,” notes the report. “Unbundling in the EU energy market was intended to create an anti-monopolistic set of rules.”
Investors making long-term allocations to infrastructure will have to grapple with disruptive forces that could change how these assets operate and generate revenue, and it may not be a one-time disruption, but perhaps ongoing disruptions over the course of their life cycles. At the heart of this disruption is the infrastructure user, notes Ardian and Fabernovel, and GAFA — Google, Apple, Facebook, Amazon — are the disruptors infrastructure investors are going to learn to work with and around. “Convergence trends are redefining a new infrastructure paradigm, putting user needs at the heart of a strategic transformation,” notes The augmented infrastructure report. “GAFA have fundamentally changed the established rules of business strategy: they ignore classic concepts of market, competition, positioning or plain goods. Instead, they have achieved a Copernican revolution, which truly places the customer at the center of their strategy.”
Innovation never rests, and for a generally sleepy asset class such as long-term infrastructure investment, today’s technology and information revolution will provide ongoing wakeup calls for asset owners.
