With us quickly approaching the end of the year, I thought Id focus on an area that has certainly been more prominent than years gone by. Strategies with several funds I have been representing over the years having evolved; macro-economic conditions fuelling pursuit of higher returns by LPs yet still looking for the defensive benefits of infrastructure investments.
Conversations with professionals in the infrastructure market has led me to an understanding that a primary driver in strategic change (or adaptation) is a seismic shift in the European demographic; an aging population, combined with remote working (continuing to be adopted long after the dark days of COVID lockdown) and more densely populated city space. These are all spurring demand for technologies that can support remote functionality including broadband, date centres, cloud computing with an eye consciously and continually on emerging technologies such as 5G and Web3.
Opportunities and Players within Digital Infrastructure Investment
Obvious names in the “digital market” present themselves as leaders; be that the industry giants of Deutsche Telekom, Vodafone, Digital Realty or Equinix or the obvious funds committing heavily to digital infrastructure investments in Europe including KKR, I Squared, Macquarie, DigitalBridge and Brookfield (who as of summer this year acquired a majority stake in GD Towers in a deal worth €17.5bn).
With such huge amount of capital being deployed by names that need no introduction, there is a question around whether this market is being dominated by giants or whether there is still room to play for smaller funds / managers. I would say there is opportunity, through working with a number of funds who are actively seeking mid-market investments for value add propositions with double, triple and quadruple play opportunities in less touched geographies including the Nordics and Eastern Europe.
First, the unknown within Digital Infrastructure Investment
Investing in the right plays depends entirely on securing the necessary funding, the right risk appetite and a long-term view of value add returns. Key to any decision making (especially in current economic climate) appears to be an informed and educated guess on complexities of the regulatory landscape and how to navigate. Failure to do so inevitably decimating projections built on the models of Analysts and Associates who can build variations in projections based only on an understanding of where technological advancements may be 2, 5 or even further ahead. Compound that with cross border transactions, changes to net neutrality rules or data privacy regulations (hot topic) undoubtedly impacting yield of assets and things potentially get messy very quickly…yet still the attraction to this space from infra professionals currently working in core or core plus infrastructure investments continues to gain traction.
Infrastructure Assets Investment - a more familiar beast?
Aside from the technological advancements and exciting opportunity to pivot into something new, where then does the meticulous investor hedge their bets in pivoting into digital investments? My initial perception of this space being a high-risk high reward play has very quickly changed with conversations and recent articles posted comparing digital investment returns to that of core infrastructure assets. Broadband networks, data centres, and towers all providing regular income streams through rents, licence agreements or fees. Undoubtedly, the growth opportunities here are exponential but the regular income element provides any fund with an opportunity for diversification whilst maintaining projectable returns.
What of Digital Infrastructure's green sibling, Renewable Energy Investment?
Initial conversations with some funds had tied in their digital infrastructure investment strategy within a wider energy transition team, something I initially struggled to grasp but upon reflection and further education in this space, it becomes apparent. Our goals as a society to achieve net zero carbon emissions relies almost entirely on the right digital infrastructure being able to power the grid with clean energy – smart grids to distribute and integrate wind, solar and any clean energy to the power grid.
If we consider the clean energy and digital infrastructure revolutions intertwining at the exact same point of time, I predict the year of digital infra will snowball into decade if not beyond.
Ricci Sethi, [email protected]