To many, the internet and cell phones are as much of a necessity as water. This reality has investors competing globally to acquire the elements that allow us to be connected 24/7: cell towers, data centers, and fiber optic cables. During the inaugural Women’s Private Capital Summit in Canada on October 5th, 2023, I had the privilege of moderating a panel of senior women leaders in the digital infrastructure space, where we discussed the digital infrastructure sector. Below are my key takeaways from the discussion.
Understanding the Digital Infrastructure Landscape Today
The digital infrastructure landscape today is broad, having substantially expanded into multiple subsectors over the past decade. Initially dominated by telecommunications towers, digital infrastructure has since broadened into other areas of connectivity such as small cell networks and distributed antenna systems, data centres, and fibre networks. Fibre-to-the-home (FTTH) has been a significant new entrant in recent years. While infrastructure is characterised by the predictability of cash flows, often underpinned by contracts, a track record of customer churn and subscriber penetration rates enabled FTTH to enter the infrastructure asset class.
Even within each subsector, risk/return profiles can greatly vary. Valuations can diverge for a number of reasons, including stage of development, geographic considerations, competitive dynamics and the existence of supporting infrastructure. For example, data centers have substantial power needs and need a reliable, and increasingly renewable, source of power. Access to power is therefore a value driver for data centers, supporting stability of operations and capacity for expansion.
The role of digital infrastructure within a diversified infrastructure portfolio has also expanded over time as the asset class has matured. Digital infrastructure is now regarded as the “fourth utility”, alongside the traditional three utilities (electricity, water, and gas) as essential services. Today, digital infrastructure represents a key part of diversified infrastructure portfolios. In 2021, fund managers with digital infrastructure in their strategy represented 45% of all capital raised in the infrastructure funds market.
Certain digital assets straddle multiple asset classes. For example, data centers can be found in both Real Estate and Infrastructure funds, while FTTH can be found in both Private Equity and Infrastructure funds. At the end of the day, the labels can be blurry and ultimately the risk/return profile determines the categorization. For example, a FTTH business with a large buildout component and a limited installed network of existing customers or track record of operation would likely be categorized as Private Equity, as it lacks the stable predictable cash flows and barriers to entry typical of infrastructure.
The Ongoing Need for Digital Infrastructure Investment
Looking ahead in the digital infrastructure space, the advancement of AI will be a major driver of digital infrastructure needs. AI training requires massive amounts of data and computing power supported by cloud infrastructure and hyperscale data centres – massive mission critical facilities built to support large hyperscale companies such as Microsoft, Amazon, and Google. At the same time, AI will need to be edge delivered, meaning that the AI computations are done close to the device location (for example, autonomous cars), enabling faster response times. This will require edge data centres – smaller facilities located close to the populations which they serve. AI will also drive huge demand for power, driving the need for investment in power generation and transmission, other infrastructure verticals.
While the opportunity in digital infrastructure is clear, the need for prudent underwriting persists as it does across all infrastructure investing. Interest rates have increased, market players can behave erratically, and all asset classes go through cycles. As is the case across infrastructure, it is essential to take the time to find the right partners and back strong management teams. Additionally, the appropriate capital structure is crucial – too much debt can sink any investment. Lastly, while high growth projections are appealing, the source and quantum of capital required for that growth needs to be considered.
Accessing the Digital Infrastructure Sector
The Nicola Infrastructure and Renewable Resources Limited Partnership (NIRR) is invested in data centres, towers, and fibre networks across North America, Europe, and Asia. For example, we are invested in a North American portfolio of data centres that house computer servers and equipment for large creditworthy customers, providing power, cooling, and security under long-term contracts. We are also invested in telecommunication tower businesses in Europe and the Nordics, which operate under long-term inflation-linked contracts. As part of its global diversified infrastructure strategy and in recognition of the growing opportunity in digital infrastructure, NIRR continues to invest both across the digital infrastructure space and in its supporting infrastructure.
This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.Past performance is not indicative of future results. All investments contain risk and may gain or lose value. Please speak to your Nicola Wealth advisor for advice based on your unique circumstances. This is not a sales solicitation. This investment is intended for tax residents of Canada who are accredited investors. Residency restrictions apply. Please read the relevant documentation for additional details and important disclosure information, including terms of redemption and limited liquidity. Nicola Wealth Management Ltd. (Nicola Wealth) is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required securities commissions.
