Being connected – via the internet and mobile phones – is something most of us take for granted on a daily basis. We don’t tend to notice this kind of infrastructure until it stops working, even for just a moment.
As digital applications weave their way further into our everyday activities, seamless connectivity is becoming less of a luxury and more of a necessity – particularly since the pandemic upended education and working patterns across the world.
According to Cisco’s Annual Internet Report (2018-2023), the total number of internet users across the globe is expected to reach 5.3 billion by 2023, representing two-thirds of the population and up from 3.9 billion in 2018. Cisco’s report also predicts that fixed broadband speeds will have more than doubled in this timeframe.
The investment making this possible has grown immensely in the past few years, accelerating markedly since 2020. Data from Infrastructure Investor indicates that fundraising by both digital-specific funds ($16.9 billion) and vehicles for which digital investments are part of a wider remit ($64.6 billion) reached record highs in 2021. This was certainly boosted by the closure of DigitalBridge Partners II in December last year, which secured $8.3 billion to become the largest digital-focused fund ever raised – and by some margin.
This reflects a wider trend of sector-specific fundraising within infrastructure, with renewables funds collecting 50 percent of capital raised by sector-specific funds in 2021, and telecoms not far behind with 31 percent. In the first quarter of 2022, more capital was raised by telecoms-exclusive funds than those focused on renewable energy.
Data centre deals have been a mainstay in the headlines of the past 12 months, with the crown of largest M&A changing hands several times. Currently, it has been claimed by infrastructure giants Global Infrastructure Partners and KKR, who completed their $15 billion take-private deal for data centre company REIT CyrusOne in March. The move was also GIP’s first foray into the digital space.
Supply and demand
The need to bridge the digital divide in many regions presents a significant opportunity for investors. This is most talked about in the case of the US, where the sizeable urban-rural gap was exposed during the pandemic, leading President Biden to pledge $65 billion to develop broadband networks.
With most of this funding yet to be released, Kevin Genieser, senior partner and head of infrastructure manager Antin’s New York office, sees opportunities across the country: “There are many areas with less than 50 percent fibre penetration, so there is still an opportunity for multi-year build-outs both in terms of commercial and industrial customers, as well as domestic residences.”
Across the world, operators are investing heavily in the ‘fiberisation’ of local networks. According to the OECD, high-speed fibre subscriptions in member countries increased by 15 percent from June 2020 to June 2021. In contrast, cable grew by only 4 percent, and usage even declined in 15 countries.
The infrastructure gap is not the only source of opportunity, however. “There is also a huge skills gap,” says manager Actis’s director of sustainability, James Magor. “Unless you address affordability and digital literacy, all the potential social benefits of digital infrastructure will fail to be optimised.” Failure to do so could even exacerbate inequalities, he adds.
This example speaks to the power of digital infrastructure investments to achieve social-related Sustainable Development Goals. This is particularly pertinent in emerging markets, where extending mobile and internet connections to the digitally excluded has never been more urgent. According to mobile operator organisation GSMA, just 12 percent of mobile users in sub-Saharan Africa, for example, have access to 4G or 5G, compared with 73 percent in high-income economies. As we explore in our special report, digital infrastructure investors have a significant opportunity to bridge the social divide and create value in more ways than one.
Bigger, denser, faster
The Internet of Things, where machines and devices are seamlessly connected and applications integrate with one another via cloud-based systems, is widely touted to shape the future of our daily lives.
Despite a covid setback in IoT project rollouts, the number of IoT connections is forecast to multiply considerably this decade, according to research collected by Analysys Mason and published in the European Telecommunications Network Operators’ Association report The State of Digital Communications 2022. The ETNO report shows there were 180 million active IoT connections in Europe in 2020, and predicts this figure to rise to 854 million in 2029. Naturally, the automotive sector is set to see the most growth of any industry vertical.
5G networks will be key to facilitating the development and rollout of IoT technologies, but as 5G uptake increases, the volume of data to transport and process will soon exceed current cloud capacity. What’s more, the distances that data can travel with 5G are much shorter, and so the network needs to be denser to improve transfer speeds.
These two factors mean more ‘edge’ solutions – where the data centre is closer to the consumer – will be required. In a survey conducted by digital infrastructure solutions provider Vertiv, 34 percent of data centre industry professionals polled said they were either planning to or currently deploying new edge sites. The survey also projects that edge computing will account for 27 percent of total compute in 2026, up from 21 percent at present.
“We’ve begun to invest in edge infrastructure for video streaming hosted by telecom service provider partners,” says Rick Shrotri, founder and managing partner of Digital Alpha Advisors. “Such opportunities will continue to grow with use cases like 3D or ‘volumetric’ video and the needs of autonomous vehicles.”
Indeed, low latency is especially critical for applications like autonomous cars, says Elie Nammar, senior director at Vauban Infrastructure Partners. “Even a few milliseconds of latency could result in a collision,” he explains. “Low latency means that connectivity must be super-fast and computing power must be nearby.”
…but also greener
Data centre investment shows no signs of slowing, but we are seeing real movement to improve the sustainability credentials of these power-hungry assets. According to analysis by the IEA, despite sharp increases in internet traffic and data centre workloads in recent years, data centre energy use has remained around the 1 percent mark for the past decade as efficiencies have improved.
While managing investors’ ESG demands is always the imperative here – not to mention the incoming regulation in several regions – managers are now facing added pressure to diversify power sources away from Russian oil and gas in the wake of the invasion and ensuing energy crisis.
Using more renewable energy is, of course, an obvious solution, but operators are also thinking about design and management. Many are turning to more sustainable materials, reusing excess heat generated in the cooling process, reclaiming water, and rethinking waste and recycling.
Greening the data centre has become essential to success, argues Jennifer Gandin, principal at manager CIM Group. “Data centre owners and operators cannot simply deliver a standard property and expect a never-ending stream of potential customers,” she explains. “Those that are actively investing in new systems and technologies to reduce power and water consumption will generally be in a better competitive position to secure tenants and long-term contracts.”
Reading the risks
In this new age of flexible and hybrid working, the heightened cyber-threat is another risk that digital asset owners have to contend with. While GPs all agree that it is something to monitor carefully, there is some debate as to who is most at risk from malicious attacks.
“I question whether the risk is to the infrastructure itself or actually to its users,” says Jean-Francis Dusch, BRIDGE CIO and global head of infrastructure, real assets and structured finance and UK CEO at manager Edmond de Rothschild. “The infrastructure is neither at stake nor responsible for those attacks,” he argues, claiming that companies that use the infrastructure are those exposed to hacking.
As we explore, many firms managing critical infrastructure assets are responding to increased pressure from investors for better cyber hygiene across the portfolio – which could trickle down to operators of digital networks.
These are not the only challenges the digital infrastructure sector is facing. With inflation poised to keep rising, supply chain costs spiralling and asset prices uncomfortably high for some, to what extent are investors concerned by digital’s prospects?
Citing the billions of dollars being spent by leading telcos on 5G spectrum, the huge growth in data consumption and the emergence of sectors including outdoor small cells and wireless inbuilding, Ardian managing director Michael Obhof does not think we are in a bubble. “Valuations may be high, but they are supported by real demand and real growth prospects,” he says.
After a year of multibillion-dollar deals in the sector and a notable uptick in digital-mandated fundraising, this appears to ring true.