Digital infrastructure has taken off as the asset class’s hot new sector. With demand increasing for data centres and telecom towers – and fund managers sitting on large pools of capital – digital infrastructure is poised to officially enter the asset class’s mainstream.
At its simplest, digital infrastructure is the assets underpinning an increasingly connected world. Billions of dollars are needed in the coming years to support the movement of data to cloud storage and economies that operate through the internet.
According to financial services firm JLL, the cloud-managed services market will surge from $35.5 billion in 2016 to $76.7 billion in 2021. Data collected by HIS Markit show the number of internet-capable devices growing from 15.4 billion in 2015 to 75.4 billion in 2025. And between 2016 and 2021, global wireless growth is expected to jump from 96 to 278 exabytes per month.
While telecom towers, data centres and fibre-optic networks have appeared in the portfolios of infrastructure managers for more than a decade, demand for such assets is reaching an all-time high. The investment that will be needed to support this growth is, arguably, comparable to the capital needed to decarbonise the world’s economies.
Early movers have already caught on to this trend, with both large and small fund managers advertising a portion of their investment vehicles dedicated to digital infrastructure. But after a fast-paced fundraising season in 2018, next year could see investments in the sector reach new heights.
An interesting trend to watch for will be the amount of investments that come with development commitments, similar to the build-out of renewable energy portfolios.
Take KKR, for example, which raised the largest infrastructure fund of 2018, closing Global Infrastructure Investors III on $7.4 billion. In June, the firm bought a 49 percent stake in a telecom tower portfolio in France from Dutch company Altice. In addition to the 10,000 assets KKR acquired, the firm said it will help develop an additional 1,200 towers.
In July, CDPQ Infra and AMP Capital partnered for another development opportunity. The two provided $500 million – CDPQ committed $300 million and AMP Capital $200 million – to US telecoms company Tillman Infrastructure, giving the investors a stake in a 1,500-tower portfolio to be built in the US.
Considering fund managers raised just over $80 billion by 18 December, it’s not hard to see more deals like this coming in 2019.
Smaller funds that specialise in digital infrastructure will also be something to watch for next year. These vehicles are becoming more common in the industry, partly because digital infrastructure is new compared with other assets, and expertise in the sector can help fashion a specialised offering.
SDC Capital Partners – a US-based private equity firm that raised $400 million for its first fund this year – is one company following this strategy. According to Jeff Eaton, of Eaton Partners, which served as the placement agent for the fundraising, expect to see more of these vehicles.
“You are seeing some of those big generalist funds do data and IT infrastructure, but we think it’s an area that’s ripe for more specialised managers,” Eaton told us. “A lot of investors are seeing this is a big part of our economy and they don’t have exposure to it.They are starting to look for best-in-class investment opportunities.”
Other funds are being raised by both infrastructure and real estate managers, underscoring the broad appeal of the investment opportunity.
Digital Colony, for example, was created as a partnership between real estate firm Colony Capital and telecoms company Digital Bridge. The joint venture is expected to soon close its inaugural fund on more than $3 billion and has already made a handful of investments, including the full acquisition of Finnish broadcast company Digita Oy and Stratto, a UK company developing small mobile network services.
A lot of capital is likely to be invested in all types of infrastructure across the world next year. Don’t be surprised to see a sizeable portion of that going to digital assets.