As we wrote in our weekly newsletter The Pipeline on Monday, Partners Group has noted the “essentiality” of digital infrastructure assets in a post-pandemic world in its private markets outlook for 2022. That, in turn, has meant such assets have become par for the course for infrastructure funds to hold. As a result, “sector valuations have skyrocketed”, Partners Group said.
Broadband assets, for example, are “extremely competitive in developed markets, with high entry valuations and overbuild risks”, the Swiss manager noted, while data centres’ “current valuations are often unattractive, at least in developed markets”. It should be noted that several sources have told Infrastructure Investor recently they don’t see much of a return premium in less developed markets in Asia, but that doesn’t entirely negate Partners Group’s point.
A similar sentiment was raised two weeks ago by Cordiant Digital Infrastructure, the London-listed vehicle managed by Canada-based Cordiant Capital. The fund acquired Czech national transmission company Ceske Radiokomunikace from Macquarie Asset Management in May. Last month, it noted the 12x EBITDA multiple it paid for the asset “stands in contrast to the significantly higher M&A multiples seen in other recent transactions in the sector”.
“Our disciplined approach focuses not just on price, but also on the commercial terms of any future relationships between the seller and the buyer and on protecting our investors, which can lead to lengthy negotiations,” Cordiant added.
Investors don’t just need protecting on the way in, though, as Partners Group and Cordiant pointed out. While the growth prospects in the sector are enticing, the high entry points being paid for present a challenge when it’s time to sell. Growth assumptions may point to an ever-increasing demand, but history teaches us these parties often reach a point when it may be time to head home.
“Ultimately, the real question we need to ask ourselves is who the next buyers of these assets are?” DigitalBridge‘s senior managing director Steven Sonnenstein said at our June Global Offsite. “If somebody is buying an asset at 30x, what multiple do they need to sell it at to achieve their targeted returns? Is it 35x or 40x? These are the questions we should all ask ourselves.”
Or, as one more cynical source put it to Infrastructure Investor recently when discussing high valuations in the renewables sector, many of those striking a deal today are a little less circumspect on this issue as they will likely be retired – or have headed to pastures new – by the time accountability season comes round.
Now, surely that’s a viewpoint that’s a little too cynical… right?