Rise of the machines – investing into a disruptive world

16 May 2019

The world is changing faster, and with greater uncertainty, than arguably at any time over the last thirty years. Technologies such as Artificial Intelligence (AI), Blockchain, Internet of things and autonomous vehicles are set to revolutionise many industries; the effects of megatrends such as urbanisation, climate change and resource scarcity are starting to bite in unpredictable ways; and a new political discourse in developed markets is starting to challenge preconceived ideas about the inevitability of globalisation and rising living standards.

As a result, Real Asset investors are starting to think through how this might impact them and their investments.

But thinking about disruption requires a different mindset. The traditional starting point for diligence or business planning is the past: understand what’s happened over the last five years, and you’re halfway to predicting the next five. But you can’t spot the impact of AI in the financial statements of a logistics business; you can’t see the impact of autonomous vehicles in the P&L of a motorway service station;  you can’t see the risk of social change in the track record of an airport or hotel. All these threats are real, and could have a material impact on the value of the assets over the next decade.

Indeed it could be argued we’re already starting to see some of these shifts - just look at the changing nature of work and jobs and its impact on the previously prime market for single tennant, long leased office blocks.

So how can investors build-in disruption thinking into their deal-doing? Here are some suggestions from some clients who are doing just that:

  1. Forget the ‘official version of the future.’
    Most activities are underpinned by the idea that there is a single, tightly defined set of financial projections that represents the target and its markets: a single, precise line picking its way through the future. The reality is that unless you are happy taking a call on what the world will be like 10 years from now, investment hypotheses need to be robust enough to survive a range of different futures.
  2. Work backwards
    If extrapolating the past only gives you a single future, you have to work backwards. Imagine some alternative futures and work back. We have developed four scenarios that we use as starting points for our clients. One, called the ‘Rise of the Machines’, shows a world where rapid technological advancement is used in a centralised way, for example for security and national self-reliance purposes. We have developed a Virtual Reality experience to immerse our clients in this scenario to let them experience and react to one possible future.  
  3. Give the team the confidence to have the conversation
    In the dry, analytical world of due diligence and valuation, having a conversation about future disruptions can feel uncomfortable. Senior staff need to encourage their teams to think in this way, and in particular to seek input from the most junior. After all, the youngest people on the team are often more closely connected to the future than the most senior. When it comes to disruptions, normal hierarchy doesn’t apply.
  4. Forewarned is forearmed
    Nobody can predict the future with certainty. But we can give investors and their investments a competitive edge by helping them to spot trends before everyone else. So once we have identified the specific scenarios or disruptions that represent threats or opportunities, we have learned to listen for the ‘weak signals’ that serve as predictors of that particular scenario.

    Asset owners, managers and operators also have an abundance of data available to them - which when connected can be used to drive insights that would have been unimaginable in the past.  For those looking at more active management, and the increasing link between value and consumer experience, collecting and interpreting this data effectively may be the key to leading the pack.     

Ultimately this is about bringing a different lens to deal-doing and asset management. Standing in the future and looking back at the target, with some informed options about what the world might be like, is not going to replace a DCF model any time soon. But it is a healthy discipline, especially for investors with long hold periods. There are plenty of tools and frameworks to help you do it effectively, but even having the conversation is a step forward.

Matthew Alabaster

Matthew Alabaster | Partner
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