Disruption in the Infrastructure Sector

A number of dramatic changes are reshaping infrastructure, a sector that has always been considered by investors and asset managers as a safe harbor in the field of alternative investments. Understanding the future of infrastructure is indispensable for guaranteeing a sustainable future for our planet and the welfare of the world’s population. Enhancing our knowledge of this asset class is one important step we can take toward reaching this crucial goal.

This chapter looks at the profound transformations which are currently shaping the energy sector with the aim of providing a better understanding of their potential implications for investors, asset managers and industrial stakeholders at large. The analysis starts with an overview of the global energy balance and its evolution over time, then highlights the relevant changes taking place in all fuels, from the shale gas revolution to the rapid expansion of renewable technologies and finally focuses on the electricity industry. The latter in particular deserves specific attention because of its leading role in all decarbonisation scenarios and its greater impact on the whole energy sector. Therefore, the chapter looks at the evolution of the electricity industry and at the key trends that are driving its economic fundamentals, investment opportunities and market strategies. Moreover, the study highlights how Europe’s largest utilities are responding with different business models and technological solutions to the challenges and opportunities provided by all these radical transformations. The evidence is not clear yet as to which of these models will be better suited to compete in this new environment and prospects for investments in the energy sectors vary widely according to the considered target and time horizon. Finally, the analysis concludes that the expected value of any investment will be significantly affected by changes in climate policy (e.g. carbon targets), market design (e.g. capacity mechanisms) and regulation (e.g. the regulated cost of capital).

Transport infrastructure investments are often large, capital-intensive projects that have significant up-front costs, but the benefits or returns accrue over very long periods of time, often many decades. This longevity and the associated difficulty of ascertaining adequate returns over such a long horizon can pose a challenge to private financing and provision. Strong focus on reducing potential inefficiencies in the investment process, such as poor project selection, implementation, and monitoring, is therefore crucial in order to avoid nonproductive infrastructure, to limit the long-term output gains, and to prevent an unclear balance between private and public expenditures. This chapter focus on the future developments in the transport infrastructure sector in the perspective of the European context. The research briefly describes the main aspects affecting mobility demand trends such as demographic and trade patterns and supply trends such as technological, organisational factors or political and regulatory aspects at European level. The aim is to contribute to a better understanding of some of the major megatrends affecting the sector that could have potential implications for long-term private financial investors, with a specific focus of the probable impacts on airports, ports and railways infrastructures.

Telecommunication operators, traditionally rich and laden with financial resources, have never left much room for investment within their sector. Thanks to the impact of regulation, competition and technology, this will no longer be true. Is this an evolution that can open new prospects for potential investors in telecom infrastructures? Is it a positive evolution for investors outside the telecom business? What forms will new opportunities take? To answer these questions, we will start in the second section by analyzing the evolution of the telecom market. It is growing fast, with more people all over the world who have more connected devices which are transmitting more data with higher peaks of network utilization for uses that are increasingly critical. But all this incredible potential creates a challenge to telecom infrastructure that cannot be solved inside the traditional industry framework. In the third section we will discuss how fixed mobile networks and their hybrid forms have evolved and will continue to evolve to match this rapidly changing market. The fourth section describes how companies like Google/Alphabet, Facebook, Microsoft and Amazon, whose business is tightly linked to the evolution of telecom infrastructures, are moving to influence and channel industry transformation. In the fifth section, the investment prospects for telecom operators are analyzed in detail, especially in Europe, where regulation is taking a new direction to speed up investments and demand, while some geopolitical issues are increasingly conditioning every player in this scenario. Finally, through an in-depth exploration of changes in fixed and mobile networks, we identify and evaluate the potential investing options in the industry.

This chapter does not offer a standard innovation formula to adapt to the rapidly evolving industry ecosystem. Instead we delve into the trends driving major changes and outline options that can lead firms to embrace adaptability in their investment decisions. Investing in infrastructure today is more complex than ever before. Not only is technology changing more rapidly, but regulations, internationalization, consumer behavior, and business models can quickly shift profits and alter social and environmental impact. This chapter aims to provide an understanding of how the infrastructure industry and the profitability of markets within it are evolving. We suggest infrastructure investment firms should create an infrastructure radar to detect disruptive firms, then analyze their business models, and discuss their impact on the industry as well as on other similar firms. By identifying disrupters—i.e. firms that are driving the changes—we show that investment decisions will become more dynamic and require more intelligence in the future. We conclude by recommending that an accelerator fund should be created to allow traditional infrastructure investment funds to continue to successfully invest in infrastructure assets. Such an accelerator would use a modest portion of the total investment volume to (1) protect core investments; (2) create champions by using core investments to speed up the business of start-ups; (3) increase the profitability of investments with an acceptable level of risk.

The chapter looks at the disruptive trends reshaping the infrastructure ecosystem with the aim of drawing general implications for investors and asset managers. It starts with an overview of the current state of infrastructure investing and provides a thorough discussion of the technological and socio-cultural trends with the strongest potential impact on infrastructure investment, trends which are shown to affect multiple infrastructure sectors at the same time. This last crucial observation prompts to question the traditional business model of infrastructure asset managers based on sectorial specialization, which may therefore become inefficient and prove unable to capture those transformative trends that would guarantee investors long-term sustainable returns. This leads to the proposal of a new approach to infrastructure investing by which the traditional silos strategy, based on sectorial/industry specialization, is replaced by eligibility criteria, where infrastructure is no longer defined based on industries but on features/characteristics of the needs served by that same infrastructure. By doing so, the chapter suggests that asset managers adopt a less dogmatic view of infrastructure, stretching the very concept and embracing an investment approach closer to traditional private equity with a redefined balance between reliable income streams and capital appreciation/capital gains.

The contributions in this book provide very specific insights for the future of infrastructure, as perceived across different sectors and from diverse points of view. The findings of the authors have clear implications for incumbents, disruptors, regulators, policymakers, investors and asset managers. This final section summarizes the results of the various analyses conducted in the previous chapters, highlighting the key outcomes and connecting them in a unified framework from the standpoint of investors and asset managers.