Wet cityscape reflection

Inbound change

Written by Kai Karring
11/10/2021

Over the last decade, the energy and infrastructure sectors have undergone a paradigm shift in terms of digital transformation of their businesses, enabled through rapid growth in data collection, storage, processing capacity, sensor technology and connectivity. 

Despite the fears of pandemic-induced global restrictions and economic slowdowns, the energy and infrastructure sectors’ deal flows continue to grow. For green and ESG-enhancing assets, recent valuations are reaching new highs due to increasing volumes of capital availability in markets and stiffer competition amongst investors vying for quality assets. While, on the one hand, investors have to pay closer attention to the fundamentals to derive fair valuations, on the other hand, they must look beyond the traditional valuation drivers and methodologies to identify additional sources of value. Not long ago, the availability of relevant data was limited and quality was often of inadequate granularity.

The collection and subsequent analysis of data was a cumbersome exercise and led to a tendency to compromise in transactions with demanding timelines. The reliance on the 80-20 approach, complemented by expert opinion, was considered the industry standard. For energy and infrastructure transactions, there is no replacement for sound subject-matter knowledge and experience of local experts in a due diligence process. However,  in addition to these mandatory qualities, advisors must be capable users of novel digital tools and technologies. Data-driven intelligence built upon ever-growing data and sophisticated algorithms enhances complex decision-making and automates several decisions during the due diligence process that previously have been reliant on traditional assessment methods. Some examples of value addition through data-driven and digital readiness of advisor are as follows:

High confidence valuation 

The fundamentals of a business and the future value of its assets are influenced by factors like the future growth of the addressable markets, technological advancements, and the evolution of consumer behaviour. These factors are evolving rapidly and consequently the markets are changing at a faster pace with stark differences noticeable from one decade to the next. Adopting traditional tools and methodologies for evaluating the evolution of these factors on a macro-scale is likely to lead to a myopic estimation of future value of a business.   

Ever since the onset of the digital /Internet-of-Things revolution, access to high-performance computing and prevalence of Big Data, opportunities have risen that empower the deal and advisory teams to assess the drivers of the business in a more granular fashion and develop a clearer view on the future value of business within the typical time-scales of a transaction. For instance, in recent high-value district energy transactions, AFRY utilised the wealth of current open source geospatial-temporal data (satellite imagery high-granularity climate models, and high-resolution datasets on demographic, behavioural, technological and economic factors) to assess each potential customer of the district energy network at a very granular level. This enabled us to derive high-fidelity projections for addressable market growth, available customer profiles, demand for services, and competitiveness (market and technological). This way, data-driven assessment could reduce the uncertainty and bring transparency to the valuation.

Digital value propositions 

The past few years have seen a surge in energy and infrastructure deals with growing competition amongst investors for attractive assets and a greater pressure on margins. In order to position themselves for successful acquisition at a competitive price, investors are increasingly assessing additional upsides to the target businesses. This entails analysing the business beyond traditional fundamental value drivers and exploring the newer and innovative business value propositions that are frequently based on digital practices and solutions. 

One relevant example is from traditional utilities (electricity, heat, and water), which have progressively entered the consumer-end of the value chain and are developing digital retail solutions that enable consumer participation and feedback. Such solutions range from simple mobile apps that enable consumers to track their consumption and make decisions based on their individual preferences to technically advanced home energy optimisation interfaces. These retail solutions are intended to enhance the marketability of the core business and at the same time uncover short-term and long-term cost-optimisation potentials. Furthermore, such low-cost and scalable solutions often result in stronger customer proliferation and retention, as well as sizable additional revenue streams.

Experience and understanding of digital solutions and technologies relevant to a business along with a market view on the economics, marketability, readiness and customer preferences uncovers potential revenue streams beyond the traditional business models. Advisors’ knowledge and experience with digital solutions in a transaction is therefore key to derive potential upsides to the business and to support  a competitive valuation for investors.

Competitive bidding – cost-gaps

The energy and infrastructure sectors are transforming themselves towards digital operations and management practices to achieve a higher efficiency resulting in lower operating costs. This entails committed efforts to digital integration and optimisation across the entire value chain of a company, from the operating model, sourcing & procurement, operations, maintenance, trading and dispatch, support functions up to the process optimisation. 

Digital strategy implementation is inherently cross functional, necessitating large-scale changes in well-established operational models and employee behaviour, which can slow down the progress. In AFRY’s experience, while significant progress has been made towards digitalisation, the implementation and scaling of digital initiatives towards getting implementable decision-making systems has proven to be more challenging. These challenges lead to tangible gaps that in turn lead to cost inefficiencies and sub-optimal decision making. 

Our operational excellence services’ diagnosis that was already performed as part of the due diligence process has identified cost gaps in range of 5-8% across a global set of recent energy and infrastructure transactions. This additional value could be gained for a target business through a well-defined implementation plan which in turn can improve the competitiveness of bids during a transaction. 

Teamwork at play

Across the board, AFRY is using the digital capabilities of its teams globally. AFRY leverages it deep expertise in digital strategy implementation and optimisation. Our local teams have digital readiness, both in terms of knowledge and experience. AFRY offers a wide array of data-driven services as part of transaction-advisory service, with an aim to provide support in the development of a high-confidence valuation and the placement of winning bids. 

Author

Kai Karring

Managing Director, Head of AFRY Management Consulting Switzerland