Digital funds are more than just an infra success story

Recent fund closes in the digital infrastructure sector point to a wider trend than just sector-specific vehicles making their mark.

When we learned in November that DigitalBridge had lifted its $8.1 billion hard-cap for Digital Colony Partners II, we wondered if digital fundraising would eventually see the sector-specific success enjoyed by renewable energy funds, having finally gained acceptance as an infrastructure sector.

In came 2022 and a belated new year’s party in mid-late January for digital infrastructure funds. Joining DigitalBrdge’s eventual $8.3 billion close was Melody Investment Advisors, which raised $1.95 billion for its US-focused Melody Communications Fund II, followed by Singapore-based Keppel Capital, which closed its Europe and APAC-focused Keppel Data Centre Fund II on $1.1 billion.

Obviously, the bulk of these funds were raised in the months prior, but that’s quite the month for the digital infrastructure sector. But aside from a synchronised uncorking of champagne bottles, these funds have much in common to tell us about the direction of travel of dedicated funds in this sector.

Importantly, all three were second fund vintages, emphasising the importance of track records in the space, which as Melody’s founder Omar Jaffrey told us upon the closing, “not everyone can manage and drive businesses the way we can”.

Yet the second vintages also point to another trend. For DigitalBridge, which has gone through a number of transformations – from its original Digital Bridge brand name to Digital Colony when the former was acquired by real estate titan Colony Capital in 2019, back to its original name last year, the second fund represented a clean break from Digital Colony and its real estate legacy.

“It’s an entirely new team, top to bottom. It’s an entirely new set of assets. It’s an entirely different strategy,” chief executive Marc Ganzi told us after the close. And yet, the LPs followed, with a 70 percent re-up rate on the number of investors in its $4 billion maiden fund in 2019, with many in the first fund having been tapped from Colony Capital’s real estate base.

DigitalBridge’s more than doubling of its first fund was matched by Melody, which launched its first fund, Melody Wireless Infrastructure, in 2014, raising $755 million. As Jaffrey revealed, the firm had raised about $800 million for Fund II before the outbreak of covid-19 but was propelled by the momentum in the sector which followed.

And when it came to offloading the portfolio of Fund I, some 110 parties submitted interest, despite Jaffrey admitting he would only have expected about eight when the fund was launched in 2014. The portfolio was eventually sold to tower company Diamond Communications and Sculptor Real Estate for $1.6 billion last May.

In Keppel’s case, it was only four years ago when its headline LP was the real estate arm of the Canada Pension Plan Investment Board. This time around it was the Asian Infrastructure Investment Bank, with the multilateral ploughing of $150 million to develop much-needed infrastructure.

The flurry of fundraising is certainly indicating to us that digital funds have arrived in the infrastructure space in an emphatic $11.4 billion fashion. Yet, all three funds demonstrate something bigger: what were previously real estate houses, LPs or strategies now see digital as firmly part of the infrastructure bucket. That perhaps, more than the sector-specific fund growth, is the biggest testament to where this sector sits within the asset class. If Jaffrey expressed surprise at the number of bidders for his old portfolio, that competition may well be ratcheting up a notch next time around.