Around 2015, leading technology companies began rolling out digital personal assistants, and people’s morning routines were never the same again.
“Hey, Google, what’s the traffic like today?”
“Alexa, check train times from London Victoria to Brighton.”
“Siri, give me directions home.”
With a voice command, the tech community made one of its first marks on how we use infrastructure, by helping us to better plot our daily routes and reduce our commute times. Now, Big Tech wants to change the assets themselves.
In August, Alphabet, parent company of Google, announced the launch of Sidewalk Infrastructure Partners, an investment firm that aims to back technologies that “pioneer innovative infrastructure systems.” SIP has attracted a marquee institutional partner: the C$201.4 billion ($153.8 billion) Ontario Teachers’ Pension Plan, which has committed an undisclosed amount from its venture and growth equity-focused Teachers’ Innovation Platform.
In a sense, SIP is a follow-on to Sidewalk Labs, an Alphabet subsidiary launched in 2015 to identify, research and develop emerging infrastructure technologies. What the new investment arm plans to do, according to Brian Barlow, one of SIP’s founders, is connect capital with tech-enabled infrastructure.
“Think about how infrastructure is financed and delivered today. The procurement process, by its very design, inhibits innovation,” Barlow explains. “Alphabet has never owned or operated complex infrastructure systems, other than those supporting its own facilities. We knew we were going to have to find partnerships in capital markets to execute this strategy.”
He says SIP is aiming to invest at least $100 million at a time in companies and projects that are innovating “scalable” technologies in mobility, energy, water and waste. Barlow and Jonathan Winer, SIP’s other co-founder, say it will be structured as a firm, not a fund.
“What SIP is designed to do is to take on a lot more risk that is otherwise excluded from more traditional procurement processes,” Barlow says. “Innovations end up on the cutting-room floor because that’s the first piece of risk that’s taken out of a project.”
Winer says that “well-priced technology risk” will weigh heavily on the investments SIP makes.
Olivia Steedman, senior managing director of the Teachers’ Innovation Platform, says: “OTPP has long pushed the frontiers of infrastructure investing, from becoming a direct investor in the early 2000s, to an investor in greenfield infrastructure a few years ago, and now tech-enabled infrastructure. SIP will help us navigate how technology can be used to leverage and improve the efficiency of traditional infrastructure and energy assets.”
However, it is noteworthy that SIP’s partnership is with OTPP’s Teachers’ Innovation Platform, rather than the pension’s infrastructure group. This shows that even a forward-looking investor like OTPP has yet to develop an appetite for technology risk in its C$17.1 billion infrastructure portfolio.
Andrew Claerhout, a senior advisor at the Boston Consulting Group and a 13-year OTPP veteran, who spent the last four-and-a half years at the pension leading its Infrastructure and Natural Resources Group, says investors in the asset class need to pay attention to technology trends and who the early movers are, lest they be left behind.
“Investors must decide whether to seize the opportunity technology enables or cede it to others and risk being disrupted,” Claerhout says. “Incumbents should leverage their strengths, including their large customer base, their access to capital and their industry knowledge and relationships to embrace technology that improves their offering.”
Risk disruption or risk a bad bet on new technology, those are the options investors must grapple with as they think about how to deploy capital. Meanwhile, Alphabet and other entrants to the infrastructure sector must figure out how to navigate thorny issues like stakeholder concerns about data and privacy.
No roadmap for the future
There’s no telling exactly how technology will change the infrastructure landscape. The best investors can do in the present is to think big on how to monetize the future.
Winer says the team at SIP, which he and Barlow have built to include both infrastructure and technology experts, has made a list of 20 assets and sectors that are at risk of disruption. Their brainstorming led to ideas such as using sensors to monitor traffic on tolled highways, machine learning to control the heating and cooling of power systems, and cybersecurity to protect wastewater management systems.
Winer admits there is “no map of how we get from where we are today” to tomorrow’s infrastructure. History has plenty of examples of technology that was initially viewed as a fad or trend but which later came to dominate an industry, a recent one being how ride-sharing firms have disrupted the taxi business.
“But what SIP has been created to do is partner with companies like Alphabet, which has access to new technologies, and with investors like OTPP, which has a large infrastructure portfolio and deep expertise, and start asking these questions on a regular basis,” Winer says.
Like many investors these days, airports have caught SIP’s attention. The key with these assets is to make them more efficient, and Barlow believes technology is the best way to bring that about.
“SIP is designed to take on a lot more risk that is otherwise excluded from more traditional procurement processes”
Sidewalk Infrastructure Partners
Where disruption is being created, he says, is in airport parking revenue. Instead of passengers driving to an airport and leaving cars in garages or renting cars on arrival, people are turning to ride-sharing services.
“That critical leg of the funding stool is under attack,” Barlow says, before offering a solution: the monetization of curbside pick-up and drop-off. He suggests using “cameras and computer-vision technology to charge ride-sharing companies for access to airports’ entrances and exits.” This would recoup one revenue stream that is currently being disrupted.
Another idea is to enhance the revenue that is already being generated. Barlow says shopping is a big driver of revenue at airports, and the biggest bottleneck keeping passengers from spending money at stores and restaurants is the security line. “The single most important determinant to how well that piece of the project does is how quickly people get through security,” Barlow says.
SIP’s solution? Use cameras and sensors to automate when and where additional security queues should open to handle an influx of passengers.
Technology is making the world turn more quickly, and investing the same way as always will be what leaves certain investors behind. Biliana Pehlivanova, managing director for technology and innovation at Macquarie Infrastructure and Real Assets, says that the advantage will come to those that embrace new ways of doing things.
“Disruption is actually an evolution of technology,” she says. “It creates a tremendous opportunity for optimization, and it enables organizations to rethink their business processes, everything from improving how they interact with clients to how they monitor and maintain the health of an asset.”
Once a great asset
Change is a constant, and infrastructure is no exception. But when contemplating what future market disruptions might look like, it is helpful to understand how the industry has already been shaken up.
The most obvious recent example is the rise of renewable energy. Over the last decade, renewables have upended power markets with distributed generation assets. They have also helped catapult environmental, sustainability and governance issues into the mainstream by turbo-charging the ‘E’ in investor’s ESG mandates. The next step in renewables’ disruptive journey is battery storage, which is starting to be introduced in energy grids around the world.
Another example, going back to the 1990s, is what Ross Israel, head of global infrastructure at Brisbane-based QIC, describes as the “containerization of trade.” He tells Infrastructure Investor, an affiliate publication of Venture Capital Journal, that the adoption of standardized shipping containers, though not a result of technological innovation, forced the port industry to change its entire approach to logistics.
“Through different types of disruption, the mindset today is to think about technology as software and sensors,” he says. “But some sectors of infrastructure have experienced different types of disruption.”
Part of the challenge that comes with disruption is the way it can creep up and make assets irrelevant. Claerhout offers the example of Chicago Parking Meters, a deal structured a decade ago by a consortium led by investment bank Morgan Stanley, which bought the lease of 36,000 parking meters in the Windy City. Despite investors having nearly made their money back (thanks to an arguably favorable 75-year concession agreement), he argues that Chicago Parking Meters is now an asset with a business model primed for disruption.
“It was viewed as a core infrastructure asset 10 years ago, but there are question marks around it now because of the risk of disruption,” Claerhout says. “Will people still be parking on the street in the future or will they use a ride-sharing service or have their autonomous vehicle drop them off curbside and park somewhere else?”
‘How you structure the investment’
Technology is also forcing investors to consider the impact on returns.
Smart Infrastructure Managers was launched this year to target investments in technology-enabled assets. Managing Partner Rob Mah says there will essentially be two opportunity sets for investors.
The first will be investments in companies developing technologies that can be applied to infrastructure.
These opportunities, he says, will remain in the realm of venture capital or private equity: “You don’t want technology risk that’s never been used before. What you do want to do is take technology that’s already existing and scale it.”
The second set of opportunities will lie in investments that maintain the hallmarks of the asset class: steady, contracted returns.
“It really comes down to how you structure the opportunity,” he says. “If you structure it with heavy support and underpinning from contracted revenue streams, you will probably attract infrastructure capital. If you invest in highly exposed revenue streams that are not underpinned by contracts, then you’re likely going to attract mostly growth equity-type investors.”
This sentiment is echoed by Claerhout: “I don’t think investing in a startup is what infrastructure capital is meant to be doing.”
This is the fine line that firms like Smart Infrastructure Managers and SIP are trying to navigate. As Winer notes, SIP’s success will be determined by its ability to find “well-priced technology risk.”
He explains that the firm will seek investments at the project level or in companies and back technologies that have been proven at a smaller scale, such as on college campuses or in local municipalities: “That’s our sweet spot. There has to be a demonstration project that can actually get enough data [for us] to be able to underwrite [it].”
‘Disruption is coming’
Mah is convinced that the coming technology disruption provides an opportunity for investors. He says that, through Smart Infrastructure Managers, he has staked his business on it.
“Technology disruption is coming,” he says. “If I didn’t think there was a strong case for doing things like this, I would be sitting back doing my old infrastructure investing, slugging it out with everybody else.”
Slugging it out with everybody else is exactly what Claerhout advises investors not to do: “I encourage infrastructure investors and management teams to look at technology, not simply as a threat, but as an opportunity, and to use the fact that they are already players in the market to exploit the opportunities available to them.”
The opportunity for SIP, as a new firm, to disrupt the asset class will come with challenges. The biggest of these could be convincing investors that this is the right opportunity for them.
Winer says: “For institutional investors with larger infrastructure portfolios, they have to ask themselves: ‘Do I also need to have exposure to technologies that may be disruptive to those legacy portfolios?’”
Barlow adds: “CIOs in particular are coming to the conclusion that there is some risk in their portfolio that they fundamentally don’t understand. They’re recognising that disruptions are happening within the asset class a lot quicker than expected, and it’s certainly happening within their holding period.”
This story first appeared in Infrastructure Investor, an affiliate publication. Reporter Jordan Stutts can be reached at firstname.lastname@example.org.
‘Hey Google, what is Sidewalk Infrastructure Partners?’
Sidewalk Infrastructure Partners, an Alphabet subsidiary backed by Ontario Teachers’ Pension Plan, is seeking to upend infrastructure with technological innovations.
Co-founders Brian Barlow and Jonathan Winer say that to achieve this the firm is being staffed with experts from infrastructure, finance and the tech industry.
Barlow and Winer both have a range of experience as well.
The former’s track record goes back to his launching of Broadview Capital Partners, a venture firm that invests in the communications, networking and fibre industries. He also worked in the public, private and structured derivative market at Scion Capital. He moved into infrastructure in 2006, when he helped launch the private equity firm American Infrastructure Funds. His most recent role was director of infrastructure investments at Sidewalk Labs, an Alphabet subsidiary focused on developing urban innovation solutions.
Winer also worked at Sidewalk Labs as the company’s head of investments. In 2009, he helped launch Nereus, a private equity fund that invests in alternative energy infrastructure in Asia. He was also a member of DE Shaw Group’s private equity team, where he assisted with growth equity investments and structured finance.