This article is sponsored by DigitalBridge
How do you think the digital infrastructure sector will fare in a new inflationary and rising interest rate environment?
Marc Ganzi: I think it will really put a premium on asset selection and on high-quality management teams that have been through this situation before. You have to remember that inflation hasn’t really hit the global economy for almost two decades. Interest rates, meanwhile, haven’t risen in over 10 years.
Moving into an environment where the cost of capital is going up will inevitably create winners and losers, so we are being more guarded in our underwriting, and really focusing on partnering with teams that understand how to navigate these waters. We are looking to invest in assets with long leases, investment-grade counterparties and contracted cashflows that are indexed to CPI, to cover that inflationary movement in our operating cost.
At the same time, however, this new economic reality is also creating opportunities. Scarcity of capital, particularly in the mid-market, where digital infrastructure businesses are trying to reach scale, creates the potential for our credit platform, which is able to provide incremental capital to companies that are just a bit too small to access the bond or institutional securitisation markets. The key to changing circumstances is to always have a response.
How is the digital infrastructure opportunity set evolving in different markets around the world?
MG: Every theatre is different. For example, cloud computing is exploding in Europe and Asia, and so there is a chance to build cloud-based campuses to support that demand, whilst in the US that opportunity is cruising towards the maturation phase.
Meanwhile, the US is wildly underpenetrated when it comes to fibre. There is a lot of new fibre being laid to help bring broadband to the home, and to the edge, whilst in Europe we are seeing penetration north of 90 percent, and in parts of developed Asia, penetration north of 96 percent. With teams on the ground in Singapore and London, we are able to react to those opportunities on a local basis.
How is the escalation of IoT impacting digital infrastructure?
MG: We expect the evolution of edge computing will prove critical. There are around 50 billion IoT devices that connect to wireless networks today. That is going to grow to 500 billion by the end of this decade. That means a lot of heavy lifting is required and a lot of investment will be needed to build the networks of the future. We are excited to provide that capital, whether it’s in the form of equity through our flagship funds or credit through our credit platform. We have capital to pair with opportunities on a global basis, which makes our platform unique.
What do you see as the scale of the European market, in particular?
Matt Evans: A report produced by the European network operator industry group last year, concluded that, in order to get where we need to be, around €300 billion of investment will be required by 2025. That’s split across mobile and fixed telecoms but doesn’t include data centres at all.
With the European data centre market growing at around 13 percent per annum, just in terms of co-location and excluding hyperscalers, you are looking at over €6 billion a year there. And when you take into account that €14 billion has been spent on hyperscale over the past 12 months, we are looking at another $100 billion of data centre investment, at least, through 2025.
Meanwhile, Europe is currently some ways behind the US when it comes to edge, but things are starting to move quickly, and we are very excited about the opportunity. We also expect to see steady dealflow in the towers space. A number of operators are still actively spinning out towers, and there are some large assets that have already been spun out but still need to be monetised. It will take educated capital to help make that happen. Then, of course, the towers market is already mature, and so we can expect to see secondaries happening as well.
What about the opportunity presented by 5G in Europe?
ME: 5G is a huge exercise. There’s the densification of towers that is required, and then the neutral host small cell market is only just emerging. We are convinced that significant amounts of capital can be deployed in that space.
Marc mentioned that fibre penetration is far higher in Europe than in the US. But is there still work to be done there?
ME: It varies significantly market by market. Long haul is already somewhat consolidated, but there is still a bit more to do. Fibre-to-the-tower hasn’t emerged at scale yet, as it has in the US, but as operators – particularly challenger operators – progress through the 5G phase, they are going to have to think seriously about their network architecture and moving towards something similar to what Dish has done. That will drive more fibre-to-the-
Finally, there are huge variations in fibre-to-the-home across Europe. In the UK, there are still plenty of opportunities but equally there are also a lot of platforms, so choosing the right one is really important. France is pretty much done. Germany is quite fragmented but there are consolidators in that market. So, you really have to pick your regions. That said, we expect to see a huge amount of additional spending required in fibre overall – around €100 billion over the next four years.
What is the story behind your recent rebrand?
MG: Ben Jenkins and I launched DigitalBridge Holdings in 2013. The vision at that time was to build the first asset manager focused exclusively on digital infrastructure. Then, in July 2019, we merged with Colony Capital, adopting that name and creating a business with $70 billion of assets, half of which were in real estate, and the other half in digital. Fast-forward to today, and over 90 percent of the business is in digital, and so we took the decision to revert to the original DigitalBridge brand to align with our vision, our business plan and our customers. We have come full circle.
How significant was the closing of DigitalBridge Partners II for this market?
MG: It was the third largest infrastructure fund raised last year, with $8.3 billion of commitments, and the largest dedicated digital fund ever. That signals a huge level of LP interest in sector specialism, which I think is important. Our team is steeped in the history of building great digital infrastructure businesses. That operational DNA is something that I believe LPs value a lot today. Over 70 percent of our existing investors re-upped, and we were also able to attract significant new sources of capital. That is an incredible testimony to our product, our team and the huge potential that digital offers.
Dean, why do you believe the credit platform is additive to DigitalBridge?
Dean Criares: With DigitalBridge’s powerful brand presence in these markets over the years, management teams have come to the firm, articulating their growth ambitions and the capital that they require to fulfil them, for many years. But until recently, DigitalBridge didn’t have a credit platform to execute on those opportunities; we provided advice and made introductions while missing out on the chance to secure those deals ourselves. With the addition of the credit business, DigitalBridge is now able to ensure that these opportunities stay within the firm, to the benefit of these companies and to the benefit of our investors.
How is DigitalBridge’s credit business differentiated in the market?
DC: It all comes down to the team’s focus to establish DigitalBridge as a brand and thought leader in digital infrastructure. The market recognises the firm as an organisation that is thinking ahead. That allows us to go to management teams and to financial sponsors with an understanding of their business and value proposition. We go to them with solutions based on our evaluation of the company from the point of view of an operator. And in that way, we help them unlock value.
“Moving into an environment where the cost of capital is going up will inevitably create winners and losers”
It isn’t the type of client relationship where you go to them, cap in hand, asking for their latest idea. We strive to bring our own ideas and we bring innovative capital structures, based on our sector expertise. That gives us an edge when it comes to accessing opportunities in the marketplace. It also allows us to identify risks that others don’t see. The dialogue is very different to the traditional lender/borrower relationship, because of the firm’s focus on digital.
How has the team been structured?
DC: The team has been in place at DigitalBridge now for almost two years but, in actual fact, has been working together for more than 10 years. That means we have a cohesive process for originating transactions, which is led by Chris Moon, who has been covering these sectors for two decades. We then also have a team that structures and monitors investments.
Nothing about this is new to us. The team is well established, and we are busy executing on transactions for DigitalBridge as we speak.
How big do you believe this mid-market digital infrastructure credit opportunity to be?
DC: We estimate that $60 billion is spent annually in these markets. Not all of that involves mid-market players, and much might take the form of investment-grade opportunity, but we do believe that around a quarter of that $60 billion could form the type of mid-market lending that we focus on. There is a huge amount of potential, without a doubt.