If you were to go back ever so slightly in time, you would see world economies were growing, stock markets were at all-time highs and jobless rates were at all-time lows. The news of the day was preoocupied with the forthcoming US election.
Even coverage of issues such as the digital infrastructure landscape had a certain tone to it. Increasingly, streaming services such as Disney+ and Amazon Prime were demanding more time of viewers but also more from the world’s digital infrastructure capacity. The question of who would build North America’s 5G networks was very much at the forefront of discussion.
Fast forward to the present day. As the covid-19 pandemic has gripped the globe and all economies, digital infrastructure has become even more important as quarantines and working from home change from the exception to the new normal. Prior to the outbreak, only 7 percent of civilian workers in the US, or roughly 9.8 million of the country’s approximately 140 million civilian workers, had access to a ‘flexible workplace’ benefit, or telework, according to the 2019 National Compensation Survey from the US federal Bureau of Labor Statistics.
The workers who had access to it were largely managers, other white-collar professionals and highly paid employees. However, according to Global Workplace Analytics, that number will grow to 25-30 percent of the workforce working at home on a multiple-days-a-week basis within the next two years.
Even before the lockdowns and changes in business operations, high-speed fibre roll-out had been increasing across the globe. According to the OECD, nine countries, up from six in 2019, now have high-speed fibre making up 50 percent or more of their fixed internet connections. However, across the 37 countries studied by the organisation, the share of fibre in total broadband had only risen to 27 percent as of June 2019 from 24 percent a year earlier. The OECD says this reflects the wide gap that remains between countries in rolling out fibre, which enables much faster fixed and mobile internet.
It seems, however, that in light of the disruption caused by the coronavirus, the need for investment in 5G and fibre is more necessary than ever.
“In light of the current pandemic, this is an asset class that has proven to be a safe haven for investors,” says Marc Ganzi, CEO of Digital Colony, a Boca Raton, Florida-based investment firm. “Historically, institutional investors have looked at digital infrastructure over the last decade as a percentage of their overall allocation that they had to have for their infrastructure investing. Prior to this really being infrastructure, it mostly sat in the private equity bucket from 2002 to 2010.”
Over time, he notes, investors and infrastructure funds started picking up ‘digital’ as part of their allocation and strategy: “We’ve seen over the past 10 years a little more success for investors investing in the sector versus private equity. As we’ve discovered [since the pandemic began] it is mission-critical to the survival of the planet and our economy.”
It is because of that mission-critical evolution that investors see – and want – dedicated vehicles that are digital infrastructure only, as opposed to being lumped in with other infrastructure investments.
“What we learned on that journey of fundraising,” explains Ganzi, “is that investors want industry specialist allocations, and I think that is a key trend – that investors finally began to differentiate between core infrastructure and digital infrastructure.”
Even within the specialised area of digital infrastructure, there are nuanced subsets for investors to consider. For example, there are towers, fibre optic networks and data centres.
Long-term growth, in a down or flat market, is key for institutional and other investors.
Telecom towers have become the “new mainstream” according to Bruno Candès, partner with Paris-based InfraVia, although it has been happening for about 10 years. “Demand and the explosion of the portability of data is what is driving long-term growth for towers,” he says. Candès adds that fibre is also growing. ‘Fibre to the home’ is bringing point-to-point fibre access to homes within communities, which allows “resilient and reliable internet connections at home to allow greater opportunities for working from home.”
But, notes Candès, FTTH is also being driven by streaming services and online gaming, for example, which require network support and reliability.
Within the fibre market, Candès says the B2B segment has been an interesting one: “It is a smaller market and has been serviced by incumbents traditionally, but there are a lot of things you can do to develop infrastructure by building different layers of services on top of high-quality fibre infrastructure, and we think this is a very interesting segment of the digital infrastructure market as well.”
The third market segment for investors seeking digital infrastructure is data centres. Candès says there is the trend of migration of information from premises to data centres. Beyond that, there is the migration of information into the cloud. This is driving huge volumes of data and requires equivalent storage capacity – also known as ‘hyperscale’ – which is what the Microsofts and Googles of the world are in need of. The need to ensure security, reliability, resiliency and redundancy for the data centres will require significant capital expenditure, says Candès.
Within the data centre market is an evolving opportunity in “edge data centres”. Candès says these data centres are for “computing that sits at the edge of the networks and requires lower latency capacity, such as online gaming – and these services will require specific data centres”.
At this point Candès says it is unclear how the market for these new generation data centres will be structured and designed, or how investors will take advantage of the opportunity. “It is certainly a trend to watch of how you bring data centres and computing capacity closer to its usage.”
Combining all these trends under one umbrella is the creation of smart cities. Smart cities use different types of electronic Internet of Things sensors to collect data, which they use to manage assets, resources and services more efficiently. One company investing and looking at smart cities is pension investor APG Asset Management.
“As institutional investors we need to be actors of the change,” says Carlo Maddalena, senior portfolio manager with APG Asset Management. “Since 2017 we’ve put forward a fully dedicated strategy … and we view digital infrastructure as a tool to create smart cities and [are] really focusing on this concept.” He adds that industries and communities will continue to need traditional infrastructure but, moving forward, will need the digital tools to transition and grow: “We are trying to capitalise on this megatrend, and to partner with cities, communities and industry to help the digital revolution.”
Currently, he says, there is a race for spectrum and the data demands coming from customers every day: “How we see the challenge is how do we accommodate all these needs and manage the technological revolution that requires significant investment from institutional investors?”
Covid-19 and beyond
Looking at the current situation and into the future, Candès says that covid-19 is making the case for high-security, high-capacity, high-resiliency infrastructure even more compelling than it was before. He says: “The market has reached a point where investors understand the long-term nature of the business, the critical nature of the business and the essential nature of the business.”
He adds that the FTTH market is developing as we speak and really exploding in terms of interest from institutional investors. There is, he adds, a degree of caution in the market as investors wait for the dust to settle and remain in cash for the time being.
“But fundamentally, digital infrastructure as an investment proposition will emerge from the covid-19 crisis even stronger,” says Candès. “Covid-19 is a wake-up call that not having secure data or using an obsolete data centre with poor resiliency is not the right thing to do.”
Although larger institutions are well on their way to transitioning their data to the cloud, Candès says smaller and mid-size companies are still in the process, and that is why investment opportunities will remain strong: “We expect an acceleration of migration into the cloud.”
Ganzi agrees: “While the current situation is unfortunate, it is shining a light on the importance of the quality of the networks and, most importantly, the ability of networks to perform on the edge.” In other words, will networks, applications and web-based services work, not just in central business district cores, but out in the suburbs and outlying areas as well?
The digital bridge does not end in the core markets, but in all markets – to allow the agrarian economy and supply chains, for example, to perform as efficiently as possible.
In fact, according to a McKinsey & Company report, The road to 5G: The inevitable growth of infrastructure cost: “In rural and suburban areas, as well as along roadways, operators can handle increased traffic simply by ‘densifying’ existing networks with macro sites.
“In many highly populated urban areas, by contrast, they’ll need to rely on small-cell solutions for two reasons: a higher concentration of traffic, as measured by traffic load per square kilometre, and the use of higher spectrum bands (greater than 3 gigahertz).”
Prior to the pandemic, the most recent analysis of 5G spending by Greensill, a non-bank provider of working capital, stated that the total bill for the 5G rollout throughout the global supply chain was likely to top $2.7 trillion by the end of 2020 alone.
And, according to McKinsey & Company, operators have at least two options: “The first involves a lean-in strategy in which they prioritise 5G investments with the hope of accelerating commercial prospects. The second involves a more conservative approach in which they delay 5G investments as long as possible while existing networks are upgraded.
“Even if operators delay 5G investments, they will need to increase infrastructure spending to cope with growing traffic.”
Despite costs, the trends still support such high numbers once the pandemic passes. Overall, investors such as Candès say that while the trends are supportive of the importance of fibre and 5G, regulations are different in every jurisdiction and there is not a one-size-fits-all investment. “You need to look at each and every asset on its own merit,” he says.