The rise of digital technology has impacted all of our lives in a vast number of ways, from the Netflix streams we watch at home to the emails we answer on our smartphones, and everything else in between.
According to Hootsuite and We Are Social’s Digital 2019 report, published earlier this year, 57 percent of the world’s population is now online, with the average internet user spending more than 6.5 hours online every day – and these numbers are increasing.
In North America and Northern Europe, internet penetration has now reached as much as 95 percent, according to the report.
We have come to rely on these data networks to facilitate our daily lives, both business and personal, and they even underpin things as seemingly mundane as train and bus departure boards.
All of this means that digital infrastructure provides an essential service to keep our economy up and running.
With infrastructure capital pouring into these assets, what are the challenges and risks associated with managing them? And how will that management have to change over time as more and more people get connected to the internet?
The fundamentals underpinning digital infrastructure investments are clear: continuing strong growth in data usage among people of all ages and in all regions, which requires infrastructure to underpin its reliability and performance.
“It’s really all about the theme of data growth,” explains Matt Evans, partner, global origination at AMP Capital.
These can be summed up as the four Vs: velocity, or how fast you can download; volume, or how much you are storing and processing; variety, because as increasing amounts and different types of data are being stored and searched, greater processing power is required; and veracity, or reliability of network performance.
“All of those features together, particularly in a world where services are just an overwhelming demand factor for data, mean that existing networks, or certainly networks as they were 10 years ago, are not fit for purpose,” he says.
“That means the existing hybrid fibre copper networks will be entirely replaced by hybrid fibre wireless networks, with more and more fibre going into it.”
There are nuances to this, with wireless technology likely to play a significant role in less dense environments where fibre is uneconomic, but the overall trend will fit into this pattern.
This has major implications for the physical infrastructure itself. Evans says that an “enormous amount of money” is required to put that fibre into the ground, just as a starting point.
Bruno Candès, partner at Paris-headquartered fund manager InfraVia Capital Partners, echoes this view. “These are massive investments, so infrastructure capital is well-equipped to fund them,” he says, arguing that the long-term outlook of infrastructure investment is well-suited to this space.
Existing networks, or certainly networks as they were 10 years ago, are not fit for purpose – Evans
Digital infrastructure is generally split into three broad categories: telecoms towers, fibre, and data centres. All three come with distinct challenges, opportunities and risks.
InfraVia holds investments in all three types of assets, including B2B fibre provider Celeste, Irish telecoms tower business Cignal, and data centre businesses Green Data Centres, Etix Everywhere and NGD.
On the latter, Candès says there are two “fundamental tectonic shifts” that are underpinning the rationale for data centre investment.
“One is the move from local storage of data to co-location types of data centres – and even that is becoming outdated now with most of our data stored in the cloud,” he says. “The data centre industry is moving towards a high-reliability, high-security industry [which] provides capacity to the big global players, like Google, Amazon, Microsoft, and so on.”
Candès adds: “On the other hand, you still have smaller data centres that are much more driven by latency and providing reliable computing power, where you need to move data closer to the streets. The combination of these two things is shaping the market, and that’s what we like.”
Evans agrees that this dynamic has fuelled growth in the data centre sector, but says: “Increasingly there is a concern about what’s going to happen as we move into more cloud services – if you don’t have the customers like Amazon or Microsoft, are you going to survive as a data centre player? That’s something a lot of people are talking about in the industry.”
Candès says there is no definite best structure for data centre investments. Large global platforms can work, but taking a more regional-focused approach can also be the appropriate move depending on the needs of a given market.
“We invested in NGD, for example, while it was very much a small-cap business. And since then we’ve corporatised the business, which means we invested a lot in processes, people and connectivity to accommodate demand.”
It would now be “too expensive”, he says, to look to expand that platform overseas, so the focus has been to turn NGD into a “national champion”, with separate assets in InfraVia’s portfolio providing the global diversification it was looking for.
Fibre investments require different skills to manage and are starting to be viewed as utility services.
“We increasingly see fibre infrastructure as a new utility, akin to the traditional electricity or water networks, without which consumers cannot fully participate in society,” says Martin Lennon, co-founder and head of Infracapital, which manages a £200 million mandate from the UK government to invest in high-speed broadband infrastructure, known as Digital Infrastructure Investment Partners.
There are estimates of £33 billion to be invested in fibre infrastructure in the next 30 years, and £10 billion in the next five in the UK – Lennon
“There’s also an enormous investment need driven by the demand for improved connectivity, particularly in the rural market. There are estimates of £33 billion to be invested in fibre infrastructure in the next 30 years, and £10 billion in the next five in the UK, so there is a real opportunity for capital deployment.”
But like any investment, digital infrastructure does come with challenges and risks.
In the fibre space, Lennon says there are three main risks to consider.
“First, the ability of a company to deliver the roll-out. How long will it take and how much will it cost? Second, take-up – how many consumers will sign up for the service? And finally, how much can you charge for the services, and will this be on a wholesale or retail basis?”
Evans argues that take-up risk is the main factor to consider, particularly in the fibre-to-the-home space. In enterprise and government situations, fibre is “quite explicitly” the correct solution, he says.
But at home, where bandwidth need is measured by the number of television and gaming streams a household typically uses, some existing copper connections might be enough to manage the load.
“There is no killer app for fibre-to-the-home today,” he says. “In some markets where the copper product is poor, there’s absolutely a case for fibre, particularly where it’s relatively cheap to build – Spain has been a good example of that.
“It’s not clear to me why, in other markets where it’s either expensive to build or the copper product is quite capable of delivering 50-100MB [connections], the home consumer needs a fibre product.”
The need may come in time, if technologies like 8K television develop, but there is risk for investors if those technologies take longer than expected to arrive and take-up rates are lower than they’ve factored in.
“It’ll come, but as always with investment, it’s a question of when. If it’s 2025, people who are sinking a lot of money into fibre-to-the-home now could really struggle if they only hit 30 percent take-up rates until then,” he says.
For Infracapital, Lennon says that they examine the level of infrastructure competition in target build areas when assessing potential customer take-up, and he emphasises the value of having a hands-on management team to help with implementation.
He also points out that the need differs from country to country, particularly in Europe, where the large incumbents with legacy copper assets have invested to such an extent that most homes have fibre connections. In the UK and Germany, though, fewer than 5 percent of households have fibre, which presents an opportunity as “fibre is the key ingredient that enables all the changes in the telecoms sector to happen”.
The question now is where the right opportunities are, not whether this is infrastructure – Candès
In the mainstream
Telecoms towers are more well-understood, with infrastructure investors buying those assets for many decades now, but the advent of 5G technology poses intriguing risks.
“Frankly, the implication of 5G for towers is a question mark for us,” Candès says. “But until then, the level of sophistication we need for 4G will still need more towers and equipment, so that is good growth for the next 4-5 years.”
Evans has a similar outlook when it comes to technology risk, when it comes to considering towers and wireless technology in particular. He says: “As long as your business case works so you get a decent return over a five- to seven-year period, it’s probably OK. If you’re looking at whether you need something to go for 10-12 years, there’s a bit more risk in those models.”
However you assess the risks of the different types of digital infrastructure, one thing is clear: these assets are now commonplace in infrastructure portfolios and will continue to be an important part of the mix as the market matures further.
“This is mainstream infra right now,” Candès says. “No one is questioning it. The question now is where the right opportunities are, not whether this is infrastructure.”
As more managers see the benefits of investing in digital infrastructure, competition for assets has increased.
AMP Capital purchased Everstream in March 2018, a fibre provider with networks across the midwestern US.
“We chased Everstream very hard because at the point we bought it, relative value looked significantly better in the US than in Europe, as we’d seen some very high multiples paid in the latter. About six months after we bought Everstream, the same multiples came to the US market,” Evans says.
Competition is now strong for these assets, Evans says, arguing that it’s now more economical to build platforms up rather than buying them in an auction-type process.
“I characterised it in Europe as a bit of a gold rush. A lot of people recognised that these assets are probably more essential than transport, frankly,” he says.
“If data goes down for 24 hours it causes chaos, because everything’s so interconnected. The sector will become like a utility. and so it will, over time, represent quite low rates of return.
“But we’re not there yet, so there’s a lot of people investing in the sector who don’t have the background and expertise you need to [manage] the risks in the sector.”