24 September 2020
Now, in the midst of the COVID-19 pandemic, the pace of change is accelerating. As a result, so too has investor focus on increasing exposure to digital infrastructure in their portfolios alongside traditional infrastructure assets.
Internet content delivered to and from mobile-enabled devices accounts for half of all global website traffic. In the second quarter of 2020, mobile devices generated 51.5 per cent of global website traffic and this figure has hovered around the 50 per cent mark every quarter since the first quarter of 20171 . This means its pace of growth is also a good measure of how quickly digitisation is occurring.
Between 2017 and 2018, global mobile data traffic grew from 11.5 exabytes to 19.0 exabytes per month2. Pre COVID-19 this was forecast to rise to 77.5 exabytes per month by 2022. It is now estimated that mobile data usage in 2025 will be almost six times higher than the levels seen in 20183, driven by smartphone adoption and affordable high-speed network services.
We are travelling less frequently (if at all), spending more time at home, avoiding physical contact and re-thinking the way we consume goods and services.
COVID-19 hasn’t so much changed the way we live, as upended it.
In the space of six months, the pandemic has brought forward the transition from physical shopping to e-commerce by an estimated five years, IBM research shows.
The workplace has been similarly transformed. In 2019, only seven per cent of civilian workers in the US had access to flexible working. Global Workplace Analytics expects that in two years as much as 30 per cent of the US’s workforce will continue to work from home multiple days a week.
Meanwhile, as people stayed home for entertainment instead of going out, broadband usage across the United States and European Union rose 47 per cent in Q1 2020 compared to the same time last year. In the face of unprecedented demand through lockdown, Netflix and Google’s European arms were reportedly both forced to reduce transmission quality just to keep providing their service to all subscribers.
Corporate technology strategies are also changing as the need for scalable, secure data storage has driven the shift from storing data on premises to outsourced cloud providers. The Uptime Institute forecasts that half of all data centre workloads will be run by hyperscale or edge data centres via SaaS providers and the cloud by 20214.
There was a time (in the not too distant past) when digital infrastructure was a peripheral sub-sector of infrastructure investment portfolios, viewed as a specialist asset class for those looking for core plus returns. As our economy digitises, many sub-sectors within digital infrastructure have become essential to the functioning of everyday life, both for work and home, and investors have recognised the utility-like characteristics of the asset class.
COVID-19 has also proven this asset class as one that can deliver returns uncorrelated to traditional GDP linked infrastructure assets such as airports, ports and toll roads, or regulated utilities and social infrastructure. The impact of the pandemic across the broader infrastructure sector has emphasised the importance of portfolio diversification in providing investors with the resilient cash flows that many seek through infrastructure investment.
Transitioning to the new digital reality requires internet speeds to increase, coverage to expand and reliability to improve. Further investment is needed in physical infrastructure such as 5G networks, subsea cables, telco networks and towers if we hope to thrive in our increasingly digital world.
Given these thematics, it is no surprise that there has been a significant increase in the amount of capital seeking opportunities to invest in digital infrastructure, both from digitally focused funds and traditional infrastructure funds.
This weight of capital has buoyed activity in M&A markets, with the value of disclosed digital infrastructure M&A transactions between April to September 2020 reaching $A32 billion across 28 transactions, an increase of 150 per cent versus the same period in 2019. Indeed, the value of disclosed transactions for this year to date has now surpassed each of the full year totals for the past three years, despite the constraints of transacting within COVID-19 restrictions.
Source: Inframation (excludes greenfield and refinancing transactions; does not include data for those transactions where the value is not public and for which data is unavailable).
As the volume of data grows exponentially, more data centres will need to be built. All data generated requires storage and secure data centres in stable regions are vital pieces of digital infrastructure.
In the last twelve months alone, Australian investors have deployed significant capital into the data centre sector. In April 2020, Macquarie Infrastructure and Real Assets (MIRA) acquired an 88 per cent interest in AirTrunk, the owner and operator of five hyperscale data centres across Australia, Singapore and Hong Kong. In September 2019, Australia’s sovereign wealth fund, the Future Fund, made its first direct data centre investment, acquiring a 24.1 per cent stake in Canberra Data Centres.
The capital intensity of hyperscale-enabled data centres, which support cloud providers such as Microsoft Azure, Google Cloud and Amazon Web Services, is particularly attractive to pension and superannuation funds. According to Synergy Research Group, capital expenditure on hyperscale-enabled data centres totalled over $US120 billion in 2019. These investors find the ongoing capital expenditure required to grow data centre platforms to be a good match with their interest in ongoing investment over time into assets already owned and understood, given pressure to invest continual fund inflows.
Over time, we expect to see data centres become more diverse. This includes ‘edge’ data centres –smaller facilities located as close as possible to the community they serve – as well as sustainable data centres, which use electricity derived from renewable resources.
Investment in terrestrial fibre networks is also crucial to support our increasingly connected societies.
These networks can broadly be split into the ‘last mile’ capillary networks that run through our suburbs connecting our homes with high-speed internet, and enterprise point-to-point fibre networks servicing the growing data demands of government and enterprise clients.
In the last 24 months alone, there has been investor interest in both of these asset classes including the sale of NZ-based last mile fibre operator Ultrafast Fibre to First Sentier; Vodafone NZ to Morrison & Co and Brookfield Infrastructure Partners and Zayo in the US to Digital Colony and EQT.
Historically, telecommunications networks have been owned by telecommunications firms, predominantly incumbent vertically integrated players. With these firms facing mounting pressure to reduce costs, while also needing to fund 5G, fibre rollouts and further innovation, they are looking for alternative sources of capital. In addition, some listed operators are becoming increasingly aware of the ability to unlock value for shareholders by monetising parts of their infrastructure.
This has resulted in opportunities for specialist infrastructure investors to partner with telecommunications operators to derive long term, stable returns matching the liabilities of their underlying Limited Partners (pension funds and insurers).
In addition to opportunities with telecommunications firms, similar opportunities are also emerging in new digital infrastructure businesses founded by industry veterans. Data centre, terrestrial fibre and subsea cable operations, are areas where demand for capital partners is likely to continue to grow.
Assets such as data centres, fibre broadband businesses and telecom towers have dominated transaction activity. However, while physical assets may be the most obvious examples of digital infrastructure, the category is poised to broaden in scope.
For instance, digital infrastructure will increasingly be used to help traditional infrastructure assets operate more efficiently and at greater scale and capacity.
Endeavour Energy has built a ‘digital twin’ in the form of a 3D model of its power grid and the physical items surrounding it, such as trees. It uses this, along with aerial survey data to monitor its network and understand the health and status of vegetation, including potential bushfire risk. Digital twins are also already being used at airports, railways, transmission grids, wind farms and ports.
With the pace at which we are transitioning to an ever more digital world, and buoyed accelerated by the impacts of COVID-19, digital infrastructure has well and truly solidified its proven its value to role for infrastructure investors as an essential part of a well-diversified portfolio and an asset class that will continue to develop at pace.
Head of Infrastructure and Energy and Co-Head of Macquarie Capital, Australia and New Zealand
+61 2 8232 5049
Global Head of Private Capital Markets, Macquarie Capital
+61 2 8232 9906
This article is not research and has been prepared by non-research personnel of certain Macquarie Capital entities within the Macquarie Group. This article has not been independently produced by a research team. None of the Macquarie Capital entities are authorised deposit-taking institutions for the purposes of the Banking Act 1959 (Commonwealth of Australia). The obligations of these entities do not represent deposits or other liabilities of Macquarie Bank Limited ABN 46 008 583 542 (MBL). MBL does not guarantee or otherwise provide assurance in respect of the obligations of these entities.
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