Digital infrastructure’s key trends

Private capital is ready to seize opportunities in the digital future, with sustainability and connectivity in rural areas being more important.

Covid accelerates digital reliance

The need for better connectivity was already evident in pre-covid times, but the pandemic, which out of necessity herded almost everyone into an online bubble, has supercharged demand.

The hope of returning fully to pre-pandemic life has dwindled as lockdowns have remained. Many employees are continuing to work from home, and more and more firms are announcing that they will encourage staff to work flexibly post-covid. PwC’s report, Covid-19: The Remote Working Experiment, found that 69 percent of employees consider home working to be a positive experience and 51 percent would like to split their time between the office and home.

In addition, the consultancy’s January 2021 US Remote Work Survey found that 83 percent of employers in the country perceived the shift to remote working as successful for their company, up from 73 percent in June 2020.

It is clear, then, that digital assets will become the essential fuel that will power the future global economy. It hardly needs stating how desirable digital infrastructure assets have become to private capital.

Top of LPs’ wish list

LPs and fund managers are acutely aware of the role they can play in supporting digitisation and ensuring the essential infrastructure is in place to make the world future-ready.

Findings in Infrastructure Investor’s LP Perspectives 2021 Study, published in February, bear this out. When asked how the disruption from covid-19 would impact their investment strategy across the key infrastructure sectors, digital infra was the number one target, with almost 60 percent reporting they would invest more capital in the sector in 2021.

No respondents said they were intending to invest less.

Infrastructure Investor’s Q1 fundraising data, however, show a sluggish start to 2021 when just $1.88 billion was raised from two fund closes.

However, there remain some big funds in market with digital mandates, including EQT’s Infrastructure Fund V, which is targeting $14.66 billion, and Digital Colony Partners II, a telecoms-only fund targeting $6 billion.

It may well also be the case that funds which raised capital in 2019 – the sector’s zenith year, when institutions allocated just over $50 billion to pure or part digital-focused funds – may now be in the deployment stage.

Certainly, the anecdotal evidence throughout Infrastructure Investor’s coverage of the asset class in recent months, and in this report, is that digital infra is the sector LPs are eyeing.

Climate friend or foe?

There are question marks about whether investing in digital assets is compatible with the sector’s carbon-neutral commitments. Data centres in particular consume a lot of energy to store a burgeoning amount of data. Can these assets really be green?

The answer is ‘yes’ – at least according to our feature on digital’s sustainable footprint, which highlights how owners are turning to renewables to power these centres.

Ricardo Salgado, CEO of dstelecom, describes how his company has invested in solar panels for its telecoms centres, which has reduced energy consumption by 20 percent. Going digital need not mean compromising on green footprints.

Social impact

Covid-19 has also highlighted the urgency to improve broadband connectivity outside our main metropolises. Remote working necessitates bringing digital infrastructure closer to the growing number of end users living in suburbs and rural areas.

This is not only an investment opportunity for private capital, but an opportunity to support the economies of local communities. “We see very clearly in our own digital business that as soon as rural areas are connected, job creation follows,” says Vauban CEO Gwenola Chambon.

Expect to see edge data centres become a focus of interest as investors muscle in on the need for broadband for all.

Battle for territory

Digital assets are infrastructure assets, right? It may not be so cut and dried: there are a growing number of GPs in the real estate space that believe digital assets, and data centres especially, belong in their patch.

Certainly, the sector has been attracting more of their attention at a time when investor allocations to other real estate strategies have slowed significantly.

Competition for capital between real estate and infra funds seems primed to heat up. What is more likely, however, is that there will be room for both to meet future digital demands.

This view was shared by Harrison Street’s managing director and head of digital real estate, Michael Hochanadel, in our May Big Debate on who is best placed to manage data centres: “The binary framing of the investment approach [as] either one or the other is overly simplistic. The optimal approach [involves] a synthesis of real estate and infrastructure perspectives.”