This article is sponsored by Digital Alpha Advisors
How would you describe the competitive dynamics in the digital infrastructure space?
Despite recent market volatility, we are seeing an influx of new participants who have spotted a value creation opportunity in light of the increased reliance on digital infrastructure for work, education and entertainment through the pandemic. The need to have the right platforms in place to support those use cases is only going to continue, and so we are seeing more traditional infrastructure investors and private equity firms wake up to the attractiveness of the sector.
That said, we haven’t seen any change in the underlying sources of our dealflow, which comes out of large enterprises, large telecom operators or government projects.
In these scenarios, there is a premium placed on domain expertise and on the ability to structure for outcomes such as a reduction in carbon emissions or other goals set by a city, business or enterprise, in addition to the provision of capital itself. In that sense, we are not being impacted by this influx of new players from a competitive perspective, although I do think they represent an opportunity for us to look at new pathways for exit and partnership.
What is it that you are looking for in a digital infrastructure investment?
We target the active digital infrastructure layer that sits above legacy infrastructure such as fibre cables and radio masts, but below the consumer layer, which includes mobile applications and social media. The advantage of this approach is that there is significantly less competition here than in the more mainstream digital infrastructure sectors.
When we started out in 2017, we were embedded in the Silicon Valley scene. We knew there would be a lot of growth in this space and that we would see highly differentiated, off-market dealflow because of our corporate partnerships with the likes of Cisco and other Silicon Valley leaders, which have been driving this transformation. In short, we believe that this is where the most value can be created.
Which areas within this active digital infrastructure space are proving most exciting for you at the moment?
The first category where we see tremendous demand is next-generation networks that take advantage of an underlying technology architecture, be it Wi-Fi 6 or 5G, but that also allow for a degree of flexibility beyond the original design.
The drivers here are things like the advent of ultra-high-definition video and changes in consumer behaviour. Today, everyone wants to watch live-action sports, they want entertainment at their fingertips, and they want mobile access. So, we are seeing a lot of opportunities to put in place these highly scalable, flexible and programmable networks of the future.
The second category I would point to involves IoT, as cities and governments recognise that they need long-term partners to help them de-risk the process of embedding technology with traditional infrastructure. We have that domain expertise as well as the capital and financial model to facilitate the transition to this new tech frontier. Specifically, we are seeing a lot of dealflow around public safety and security use cases, healthcare and smart urban services such as traffic management, lighting management and waste and water management to improve quality of life.
A third category emerges from the first two. With advanced networking and advanced IoT use cases there is tremendous data volume created that cannot always be transported, stored and processed in a traditional ‘centralised’ cloud – there is a need for solutions at the ‘edge’ of the network; we’ve begun to invest in edge infrastructure for video streaming hosted by telecom service provider partners, and such opportunities will continue to grow with use cases like 3D or ‘volumetric’ video and the needs of autonomous vehicles.
In addition to access to dealflow, what value does your Silicon Valley background bring?
Through the partnerships that we forged by doing deals on behalf of leading technology companies, we have built up the technological knowhow needed to navigate the requirements for flexible, programmable next-generation networks, for example, and to enable the emerging use cases that will drive demand. At the same time, our Silicon Valley partnerships give us the ability to scale massively. Once we bring a tech platform in house – we acquired video analytics platform DTiQ last year, for example, as an IoT investment – we can then embed their technology in solutions with our Silicon Valley partners, mitigating risk and turbocharging growth. We’ve already seen a 10x increase in average deal size from such engagement.
What changes are you seeing in how deals are being structured?
While there is a lot of capital chasing more traditional assets such as data centres and fibre plays, we are seeing a distinct opportunity to structure deals to share risk and reward with counterparties in a novel way.
For example, we have executed a model with a national telco in Europe, BT, which has enabled us to deploy an infrastructure solution – in this case, running a content streaming service over the network (as mentioned above) – while sharing in the future upside. Deploying and monetising traffic running over those networks and getting a slice of that revenue generates a healthy economic return for our investors, who can access yield faster than from traditional infrastructure projects.
Is this a model you are looking to replicate?
The ability to scale a model quickly has a premium, certainly. As an operator you may recognise that there is a real need to enable more flexible, future-proofed networks that can facilitate two-directional traffic and 8k video, but if you have to wade through multi-year capex cycles, you are going to miss the boat.
Being able to take a model such as the one we have employed with BT in the UK and replicate it in market after market is a big win for us. We have already done this in parts of South America and Western Europe and are now taking it around the world. We are able to offer a pre-packaged solution, which includes the digital infrastructure and the financial model, underpinned by economics that make sense for all parties. That powerful combination enables real alpha generation.
How do you address the ESG challenges that digital infrastructure can present?
This is an increasingly important topic for stakeholders in our space. The good news is that digital infrastructure is intrinsically green compared with other ways of doing business. The ability to interact remotely rather than always meeting in person, for example, has natural carbon benefits that we can measure and monitor.
As investors, we must ensure we maintain discipline when it comes to more energy-intensive use cases such as crypto mining, an area we tend to avoid. We must ask ourselves whether the investment is striking the right risk and return balance, both from an ESG and a financial perspective.
On balance, I am very optimistic about the role that digital infrastructure has to play in building a sustainable future for society and for the planet. Just take the need to improve access to connectivity for urban communities, for example – the need to bridge the digital divide, which is a priority for our Fixed Wireless Access portfolio company WeLink. Or measure the impact that smart transportation facilitated by digital infrastructure will have on reducing greenhouse gases. Look at the quality-of-life enhancement provided by data-driven healthcare-tracking devices. All of these are positive environmental and social impacts made possible by digital infrastructure technologies.
It is incumbent on us, meanwhile, to track that positive impact and communicate it, leveraging its power to help cities, governments and businesses meet their ESG goals in the years to come.
Which digital trends do you think are going to be most influential in shaping the investment opportunities of tomorrow?
I think we are in the midst of a super cycle for digital infrastructure. This is a long-term transition that is not going to be impacted by short-term volatility in the market. The reality is that there has been a fundamental change in the way each one of us uses and embraces digital technology, and that trend is not going to go into reverse.
Finding the right set of partners, with the appropriate domain expertise to help you navigate the use cases of the future, will inform how to build the most relevant digital infrastructure. These partners can help you take advantage of the blossoming field of artificial intelligence, applied to IoT for example, or the metaverse in which video is going to become ever richer, more immersive and more dynamic. If you identify those partners, then I think there is a very exciting future ahead in a sector that has proven itself to be resilient in a downturn and essential to the global economy.
Cyber-threat is inherent in digital infrastructure. What do you consider to be best practice when it comes to mitigating that risk?
Cybersecurity is absolutely a priority. Having our genesis in Silicon Valley, we are well aware of the threats that exist, ranging from individual bad actors to large, sophisticated counterparties. The answer to managing that risk is to be proactive. Waiting for an incident to happen and simply having a policy in place is not enough. Being proactive means actively scanning networks and having protocols and procedures designed to scrutinise the way data is being used.
The second element to this is having the right kinds of partnership in place. We work with distinguished leaders in the field of security architecture – individuals who have pioneered security management by developing standards and advising governments and businesses on this topic. Leveraging such expertise allows us to understand and manage the ever-expanding set of risk vectors out there. Finally, we believe that it is important to invest in cybersecurity tools and systems directly, so this is a key area of focus for us.