Digital infrastructure was on participants’ minds at the Infrastructure Investor Global Summit in Berlin in March, cropping up in discussions on everything from energy to climate change, and headlining the final day of proceedings.
As the hot new sector for the asset class, conference attendees came out to hear about topics as diverse as whether telecoms can truly be thought of as fitting within infrastructure, how the European towers market compares with that of the US, and what makes fibre such an attractive investment.
The EM mindset matters
Infrastructure investors need to make better use of the de-risking tools at their disposal in order to navigate the risks that come with investing in emerging markets infrastructure. Jim Yong Kim, former president of the World Bank and current vice chairman of Global Infrastructure Partners, who spoke at the opening of the summit, cautioned that investors need to stop thinking about emerging markets as a “single risk pool”.
If investors do not follow this advice, they could end up missing out on a promising growth story. Future development in emerging markets is expected to be driven by increasing automation rather than by industrialisation.
Kim said at the summit that “it is not going to be about cheap labour anymore”. Instead, access to capital and to human expertise will be the key factors, be it for transport, energy or broadband. This provides private investors with a very attractive opportunity – if they can navigate those emerging markets infrastructure risks.
More data are needed
Wired editor-at-large Ben Hammersley told attendees just how essential data centres have become. Whereas a road can be closed without too much disruption, that is not so true with data centres, he noted.
However, data centre opportunities differ by geography. Verena Kempe, co-head of private equity at FERI Trust, made the point that the European opportunity “is very limited at the moment”, in contrast to the far more developed market in North America. Morgan McCormick, a managing director in pension fund manager OPTrust’s private markets group, pointed to the issue around shorter-term contracts and how they affect these assets’ underlying risk profiles.
Or, as BlackRock Real Assets vice-president Pauline Roteta aptly summarised it: “Not all data centres are created equal.” The legitimacy of data centres as infrastructure assets has been questioned, but they continue to grow in importance.
Energy is going digital
Digital infrastructure discussions were not confined to the Digital Infrastructure Forum, with one panel making it clear during the Energy Transition Forum that the lines between energy transition and digital infrastructure are becoming blurred. Power markets are becoming increasingly complex as grids are digitised and more renewables are incorporated.
Renewables investors were vocal about the subsector’s dramatic transformation. It is moving from a market where utilities are the main offtaker to one where anybody can be an offtaker, and where feed-in tariff regimes and long-term contracts in OECD markets are fading away as digitisation of the grid kicks in. It is a more fragmented market.
“We see a lot of new features coming into the investment thesis,” said Frédéric Palanque, managing director at Conquest Asset Management. The extent of digital infrastructure’s crossover will be a key feature of this.
“We do not invest in technology, we invest in solutions,” said Marco Van Daele, chief investment officer at SUSI Partners. “Solutions that can be monetised through long-term contracts.”
We are going higher
Digital infrastructure can continue to benefit as capital keeps getting allocated to infrastructure, notwithstanding headlines about record amounts of capital having been raised. One panel discussion saw 66 percent of the audience reject the notion that we have hit peak infrastructure and Tom Masthay, director of real assets at the Texas Municipal Retirement System, said it was a “foregone conclusion more capital is going to get allocated into infrastructure”.
Greater involvement in the asset class from US pensions could certainly play a role in pushing those record levels ever higher.
The effect on valuations will also bear watching. Robert Hardy, managing director at JP Morgan Asset Management, noted a sustained number of increasing transaction values across Europe, Australia and other markets: “There is a lot of money chasing very few assets.”
The future is foggy
Futurist Hammersley told the gathered investors that predictions beyond the next five years – if they are not related to climate change – are not worth the paper they are written on.
With that said, the rate of change has accelerated exponentially, and the driver of that change has been – and will continue to be – technology.
Investors will therefore have to become much better at identifying the early signs of what will develop into transformative changes, both in digital infrastructure and the wider market. Failure to do so could see those investors waking up to find their long-term investments becoming dangerously stuck in the past.