Vauban on why digital infra’s star is rising

The popularity of digital infrastructure is soaring, but there’s no pricing bubble on the horizon, says Vauban Infrastructure Partners chief executive Gwenola Chambon

This article is sponsored by Vauban Infrastructure Partners

How has covid impacted the digital infrastructure opportunity?

Gwenola Chambon
Gwenola Chambon

Before this pandemic, we could only wonder what would happen if everyone was forced to work from home, only communicating at a distance. We could only wonder how the system would stand up to all schooling and university education going online.

There was no way that any government would conduct such a large-scale experiment. But now, of course, we’ve all experienced this reality and it’s become abundantly clear that connectivity is fundamental to maintaining social cohesion.

In that sense, covid has helped everyone recognise both the importance of digital infrastructure and its resilience.

Vauban has been very active in the fibre-to-the-home segment. What are the key trends driving that industry?

We first got involved in digital infra back in 2009, at the very earliest stages of the fibre-to-the-home roll-out. Together with operator Axione, we were pioneers in the Public Initiative Networks following the launch of the first generation, ADSL technology, concessions.

The dynamics of deploying fibre-to-the-home are very different, depending on the type of area you’re operating in, of course. Clearly, it’s more expensive to lay fibre in rural areas, for example. But the population of France living in a rural environment is unusually high – 45 percent compared to an average 20 percent of households across Europe – which is why the French government placed such significance on creating a framework to support rural connectivity.

That framework offered us significant protections. It provided long-term visibility and security around regulation and contracted relationships. That was our access point to this asset class over a decade ago as we only invest in ‘core’ infrastructures with long-term contracted cashflows within regulated environments.

But the drivers of digital infra continue to evolve. It’s no longer just about addressing the connectivity of individuals, but enhancing the efficiency of all infrastructure and supporting the digital transformation that’s necessary for that existing infrastructure to cope with changes in usage.

Between the ongoing need to enhance connectivity to the home and to businesses, combined with the growing demands of a digitised infrastructure system, we expect this to remain an exceptionally busy industry over the next few years.

The Digital Agenda for Europe dictates that the majority of Europeans are connected to fibre-to-the-home networks by 2025. That will require major investments estimated by the EU Commission to range between
€65 billion to €100 billion a year.

Last year, you created a broadband platform called VIF. What was the rationale behind that move?

We started out focusing on fibre-to-the-home concessions in rural areas. But progressively, we’ve also built exposure to urban areas, once again alongside Axione in order to invest in Bouygues Telecom FTTH network in urban areas. And then in 2020, we also secured a contract to build a fibre-to-the-home network addressing mid-density areas for Bouygues Telecom. So, we decided to bring these assets together to create a mutualised infrastructure into a new platform called Vauban Infra Fibre (VIF), which became the largest national independent broadband operator in France.

The aim of the platform is to reinforce the robustness and resilience of Vauban’s existing digital assets by pooling them, and to enhance the resilience of the overall platform thanks to the diversified pool of cashflows, allowing us to raise additional firepower and reinforce its commercial strength to enable these assets to continue to support digitisation in France and Europe.

Importantly, as a mutualised infrastructure platform, VIF is also available to all operators in order to maximise digital coverage at a national level. Overall, the platform represents more than €6 billion of planned capital expenditure, enabling over 11 million fibre-to-the-home connections. It’s created a national champion that will help bridge the digital divide.

What about the data centre market? Are there interesting opportunities in that space too?

There will undoubtedly continue to be many opportunities emerging from the data centre space, whether that involves hyperscale customers, connectivity hubs, co-location services or an increased demand for edge data centres. Vauban has not yet invested in this sector, however, because we haven’t been able to identify opportunities that fulfilled the appropriate risk/return objectives for us.

We’re focused on resilient, long-term infrastructure, but the data centre deals we’ve reviewed have all either resembled real estate or a value-add investment approach. We’ve looked at several but have yet to transact. For the same reason, we’ve steered clear of towers transactions, as the opportunities we analysed in this sector tended to have an M&A growth story and were consequently not a good fit for a traditional long-term contracted cashflow model.

How would you describe competitive dynamics, now that covid has encouraged such widespread interest in the digital infra sector?

It’s certainly true that, thanks to covid, digital investment has become the infrastructure asset class’s rising star and that’s definitely created more competition on any given opportunity. However, I don’t believe that any pricing pressure that we’re experiencing right now will last into the medium term.

A lot of the enhanced competition we see is a result of many managers holding fire last year, while they waited for the dust to settle. There’s a drive to play catch up at the moment, which, I believe, is temporarily increasing competitive intensity. But I don’t think that’s here to stay.

Also, the sheer volume of opportunities in the market is immense. The scale of investment required in digital infrastructure undoubtedly exceeds current levels of firepower, so, again, I don’t think we are going to face a bubble in terms of pricing. In fact, we’re convinced there are sufficient opportunities out there to prevent the market losing sight of what makes sense in terms of valuations and those fundamental risk/return targets.

Finally, we see significant opportunities for value creation that are not built into the initial buy-in price. Public entities are going to want to adapt usage of the internet capacity we provide to help create smart cities, for example. While we manage passive networks, we’re still able to benefit from the infrastructure that gets put onto that network in the future as an enhancement of our infrastructures through the Internet of Everything.

Are there other particular challenges associated with investing in digital infra right now? And how do you overcome them?

Digital investment has claimed its rightful place within infrastructure because many assets have been able to display the resilience and capacity to predict long-term cashflows, which define the asset class. But those characteristics are not true of every sub-sector or every asset, so it’s vital to remain disciplined around your risk parameters and to scrutinise the technological risks, regulatory environment, the quality of industrial partners and the quality and length of contracted cashflows too. 

We’re also increasingly facing a new set of challenges. For example, we see opportunities to put artificial intelligence onto our infrastructure, which is exciting. Using data analysis, we can enhance our ability to efficiently perform maintenance and optimise supply, for example. However, the stewardship of that data carries real responsibility, and we must be incredibly careful to get the governance around that right.

The same is true of cybersecurity. The more connectivity there is, the more new kinds of risk emerge. We’ve recently seen cyberattacks take place on hospitals in Europe, for example, as well as on companies. We must be extremely vigilant about that and take that responsibility very seriously.

What are your views on the ESG impacts of digital infrastructure?

This is an incredibly important matter. The French government is currently launching an initiative to analyse the environmental and social impacts of digitisation. Clearly, the proliferation of digital devices, and the data centres required to house the data they produce, have a negative impact in terms of the consumption of energy, which is why it’s so important to incentivise their transition to a supply of energy based entirely on renewable energy and why we have transitioned our energy supply to 100 percent renewable energy sources as far as Axione is concerned.

Digital infrastructure also has an important role to play in energy efficiency. And, as it becomes increasingly clear that the enhanced level of connectivity we’ve experienced during covid is going to be a fixture for life, with less commuting and more video conferences in place of frequent travel, that will, in turn, have a positive impact on the carbon footprint of doing business. Also, connectivity has helped bridge the digital divide in rural areas and preserved social bonds during the pandemic. Meanwhile, in terms of social impact, we see very clearly in our own digital business, that as soon as rural areas are connected, job creation follows. Increased connectivity allows businesses to be more competitive in these regions, effectively bridging that digital gap.

How would you describe LP appetite for digital infrastructure? Is it changing?

Five years ago, there were still only a limited number of investors interested in gaining exposure to digital infrastructure. For those that did display some appetite, it was considered a nice to have in terms of added diversification. Now, it is undoubtedly considered a must have.

Covid has reminded everyone that the best way to protect yourself from any crisis is diversification. That has enhanced the tendency for investors to favour a generalist perspective. I don’t think that digital specialists will gather any major momentum while the vast majority of investors still prefer diversified strategies.

What does the future hold for digital infrastructure?

The sector is only going to grow. We’re seeing a convergence of a number of important trends. Technology is enabling increased levels of connectivity between people and a rapid evolution of use cases. It is also supporting the digitisation of all infrastructure. The only way to continue to procure essential services to communities will be to embrace that digital transition. And we’re seeing a strong ESG drive at a policy level, driven by the interests of citizens concerned about the environment.

These trends are coming together to create an incredibly positive environment for fostering the evolution of digital infrastructure. The potential is simply huge.