Perspectives

Could digital infrastructure be the next sustainable investment opportunity?

21 October 2021

For almost two decades, the US government has classed digital infrastructure as ‘critical infrastructure’ – an integral component to the functioning of modern-day society and its economy.1

But for many households and businesses, though digital connectivity was considered a necessity in everyday life, its criticality wasn’t perhaps fully appreciated until it allowed societies and economies across the world to continue functioning by moving online during the COVID-19 pandemic.

The events of the past 18 months have, however, merely accelerated a trend that was well underway. The demand placed on communications networks and data storage and processing facilities has been growing significantly in recent years as internet and device connections and the usage of new data-intensive technologies have expanded.

Data-driven demand for capital

Unlike the industrial revolution, which began in Northern Europe and then progressively spread across the globe, the digital revolution is affecting most of the world simultaneously and at a broadly equal pace. 

Opinion is that the digital revolution has been accelerated by at least seven years2 over the past year and a half, hastening the need for the supporting infrastructure assets by a comparable period. In many parts of the world, including wealthy nations such as the US, the UK and Germany, companies are scrambling to build the networks needed to keep up with this explosion in data generation and usage.

“In both Germany and the UK, you have incumbent players who invested heavily in copper-based network infrastructure some time ago. Now we need faster speeds, and the race is on to build the infrastructure to provide it, including putting fibre into the ground,” explains Giovanni Della Pesca, Senior Vice President, Macquarie Capital.

In the UK, major telecommunications companies, such as BT, as well as alternative network providers are investing heavily in building fibre either independently or as part of a consortium, backed by infrastructure capital. The UK government estimates the cost for completing this development will total around £30 billion ($US42.5 billion).1

In the United States, the digital landscape is both similar and different, as operators have maintained vertical integration. This has led to the rise of smaller, independent wholesale challengers entering the fibre market. There are also many cable operators, whose networks are typically newer than the legacy copper-wire providers. The increased speeds these offer has led to a slower adoption of a network overhaul to full fibre.

Della Pasca says that a key driver for change in the US market is the increasing need for greater upload, as opposed to download, speeds. This is the being led by the rise of video conferencing and more interactive, social forms of online activity – such as gaming. Here, fibre and new infrastructure has the distinct advantage over cable networks. As a case in point, in March 2021, RVA reported that over $US60 billion of investment is expected in fibre-to-the-home (FTTH) in the US over the next 5 years, which is “about twice the size of any previous FTTH forecast from the firm.”3

Oliver Bradley, Managing Director of Digital Infrastructure Investing at Macquarie Capital, notes that, “building these fibre networks quickly requires enormous amounts of capital as well as industrial scale resource. In some markets, this has driven telecommunication companies to partner with infrastructure investors to help share the burden of this capital expenditure, and ease the pressure on their balance sheets”.

But the investment is necessary. Not only is greater data consumption a result of more commercial and household connections, but machine-to-machine (M2M) connections – themselves largely a result of the increased take-up of the internet of things – is also growing. By 2023, IBM anticipates that M2M connections, such as smart meters, video surveillance, healthcare monitoring, transportation and package or asset tracking, will account for around half of all devices and connections.3 This, IBM says, will be made possible by the increasing of 5G networks, as well as cellular advances and widescale Wi-Fi upgrades.

Traditionally, what we classified as infrastructure involved facilitating movement of key assets and people, increasingly society is focused on enabling the movement of data in the form of zeros and ones”. 

John Ghirardelli, Senior Vice President, Macquarie Capital 

Digital comes of age as an asset class

Increasingly comfortable with its growth trajectory, maturing business models and the stability of cashflow, more infrastructure investors now see digital infrastructure as a core asset class and are ready to step in with the private capital necessary to fund the networks of the future.

Macquarie Capital’s Senior Vice President John Ghirardelli explains that “traditionally, what we classified as infrastructure involved facilitating movement of key assets and people, increasingly society is focused on enabling the movement of data in the form of zeros and ones”. With this significant change in attention and view of what constitutes essential services, “investors now look at digital infrastructure as a mission critical asset class – the same way traditional infrastructure has been viewed for the past 50 or more years.  Data is set to become the fourth utility for most ecosystems”.

Digital infrastructure can provide low risk, steady returns in line with how you would expect a core infrastructure asset to behave. In that sense, I guess, it’s becoming a boring asset, as it should be.”

Oliver Bradley, Managing Director, Macquarie Capital

 

“The COVID-19 pandemic accelerated the trend we were already seeing in terms of the attractiveness of digital infrastructure as an investment class for long term focused investors,” agrees Bradley.

“Provided you understand the sector and some of its challenges, particularly in terms of roll out and delivery, digital infrastructure can provide low risk, steady returns in line with how you would expect a core infrastructure asset to behave. In that sense, I guess, it’s becoming a boring asset, as it should be.”

Given the highly capital-intensive environment, Sam Southall, Macquarie Capital Senior Vice President, says alternative funding models are emerging which can help ensure that projects can be delivered with appropriate returns.

“Infrastructure can be owned and operated by ‘neutral’ wholesalers who provide non-discriminatory ‘access’ to this infrastructure to several service providers,” he says.

This, Southall explains, should lead to significantly higher overall utilisation of these assets, which, in turn, can reduce cost burden for any single individual user – and make projects economically viable when they may not have been under a single, integrated ownership model.

“This model is a phenomenon that has long existed within parts of the sector – most notably with cell towers – and is becoming the norm in other areas such as fibre and data centres. It could benefit to vast markets like the North America."

“Furthermore, different assets can be packaged together in creative ways to create assets with a risk profile and investment objective that align with infrastructure investors' targets.”

A good example of this approach is in Spain, where Macquarie Capital has created a wholesale-only brownfield FTTH business by combining several fibre networks covering both rural and more urban areas that were being divested by telecommunication companies. These networks increase in value when they are combined and shared with other operators. 

Green Data

In line with investor – and broader societal – environmental and sustainability expectations, owners of digital assets recognise the need to keep pace with technologies and practices that minimise their environmental impact if they are to attract ongoing investment.

This is especially the case with data centres, which can consume significant amounts of energy. Though their energy efficiency is improving rapidly – doubling every couple of years4 – those with the strongest green credentials carry the added benefit of attracting a growing number of investors wanting to put their money into sustainable assets.

Bradley explains that “Europe needs more data centres, but traditionally these have been energy intensive. As a result, we’re increasingly seeing a big push towards green data centres. This, in turn, is creating a greater convergence between the traditionally distinct infrastructure asset classes of renewables and digital infrastructure.” 

In the US, Macquarie Capital is already working  with Prime Data Centers, an emerging wholesale data centre platform, to  prioritise renewable energy as a critical component to each data centre asset’s business plan. Ghirardelli notes that Prime Data Centers has the potential to act as a barometer for the rest of the industry, “based on our experience and partnership with Prime, we are confident that data centre providers have sustainability targets in their cross-hairs. As the size and scale of data centres continues to grow, the industry needs and will likely come to rely on renewable energy solutions in order to provide the necessary supply to keep pace with the unprecedented demand of the future”.

Over the past two decades, Macquarie has built market-leading capabilities in investing directly into climate mitigation and adaptation infrastructure, and in supporting our clients to decarbonise their activities and raise capital, invest and align their portfolios with the transition to a net zero economy.

Bradley adds, “this is a key area of focus for us as an institution; bringing together expertise in digital infrastructure with our market-leading capabilities in renewables via our Green Investment Group platform, to help drive sustainable innovation and digital growth”.

  1. ‘Internet Infrastructure: DHS Faces Challenges in developing a Joint Public/Private Recovery Plan’, U.S. Government Publishing Office, 16 June 2006, https://www.govinfo.gov/.
  2. ‘How COVID-19 has pushed companies over the technology tipping point—and transformed business forever’, McKinsey & Company, 5 October 2020, https://www.mckinsey.com/.
  3. ‘2021-2025 North American Fiber Broadband Report’, RVA Market Research & Consulting, January 2021, https://www.rvallc.com/.
  4. George Kamiya, ‘The carbon footprint of streaming video: fact-checking the headlines’,  International Energy Agency (IEA), 11 December 2020, https://www.iea.org/.

 

Oliver Bradley
Managing Director 
Macquarie Capital 

John Ghirardelli
Senior Vice President
Macquarie Capital

Sam Southall
Senior Vice President
Macquarie Capital

Giovanni Della Pesca
Senior Vice President
Macquarie Capital