Sector-specific funds have truly arrived

Digital Colony’s $4bn debut digital infrastructure fund underlines how much money managers can raise with the right targeted strategy.

It took three funds for Copenhagen Infrastructure Partners to raise €3.5 billion. By the time Fund III closed last year, the manager had amassed €1.5 billion more for the vehicle than it had for its predecessor and doubled its investor count. That was after years of building up a successful track record in renewables, which coincided with the latter’s inexorable march to the mainstream of infrastructure investing.

Contrast that with the debut effort from Digital Colony Management – which raised what’s billed as the world’s first digital infrastructure fund – garnering a whopping $4.05 billion, comfortably sailing past its original $3 billion target to invest in data centres, fibre networks and the rollout of 5G, and you get a sense of how things have changed.

There is an important caveat: Digital Colony Management is not a completely new outfit. One of its constituent parts is well-known real estate manager Colony Capital, and it was not surprising to see chief executive Tom Barrack underline the “strong support from our investors” as key to the vehicle’s success. The other half of the venture is Digital Bridge, an owner and operator of telecoms assets. Between them, as chief executive Marc Ganzi told us in May, the two partners own nine platform investments, and manage 342,000 sites comprising towers, small cells and fibre, as well as 39 data centres globally. They’ve also raised more than $13 billion in capital.

But despite the partners’ pedigree – and the arguably hybrid nature of many of the assets Digital Colony is targeting – this is the first time they have embarked on a strategy targeting this particular subsector of infrastructure. The success of the fundraising therefore highlights two important trends.

The first is that the digital infrastructure space is red hot. We dedicated an entire supplement to it in May, which we encourage you to read to get the full picture, precisely because the investment opportunity is so strong. As Ganzi highlighted, there is almost $400 billion of investment lined up over the coming years to deliver 5G and digitally encrypted networks.

There’s nary a recent generalist fund out there that doesn’t have digital infrastructure in its portfolio. And, crucially, LPs are alive to the opportunity, which, as Ganzi pointed out, has migrated from a venture capital/private equity investment in the mid-1990s to an infrastructure one as we head towards 2020.

When we caught up with Carolyn Hansard, senior director at the Teacher Retirement System of Texas, in April, digital infrastructure was at the top of her list as she looked to diversify the pension’s energy-heavy infrastructure portfolio.

“Across the spectrum, telecoms are big on our list,” she told us. “You don’t go anywhere today and not expect to have wi-fi and high-speed internet. It’s just part of the way we live, and it’s an area that has a lot of growth potential.” Unsurprisingly, the pension is an LP in Digital Colony’s fund, with a $200 million commitment.

The other trend highlighted by Digital Colony’s success is the fact that, as infrastructure fundraising grows in prominence, sector- and regional-focused funds are becoming a bigger part of the asset class. In Q1, six infrastructure funds raised $20 billion. Of those, three were focused on clean energy and one was targeting Africa. Only two were generalist funds, though they were by far the largest of the six.

Average fund size has also been increasing steadily in recent years, hitting a new high of $3.3 billion in Q1, compared with $1.38 billion in the first quarter of 2018. By the time Global Infrastructure Partners and Brookfield Asset Management close their $20 billion fourth flagship funds later this year, the number will be even higher. That puts the $4.05 billion raised by Digital Colony into perspective, though it can still legitimately be regarded as a sign of a buoyant fundraising market.

What seems undeniable is just how much money managers can raise with the right targeted strategy. In that sense, Digital Colony’s fund is a milestone in the asset class’s ongoing maturation.

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