They were once issues kicked into the long grass, but the need to update legacy telecoms networks and expand digital access to entire populations has been brought into sharp focus by the events of the past year. Governments worldwide now recognise the necessity of investing in these areas.
Last year, China put a $US1.4 trillion ($A1.81 trillion) investment in digital infrastructure at the heart of its future economic roadmap (though estimates are that it could end up spending double that).3 The United States’ $US2 trillion ($A2.58 trillion) post-pandemic infrastructure plan – The American Jobs Plan – allocates $US100 billion ($A129 billion) to revitalising the country’s digital infrastructure.4 And the European Union has earmarked a fifth of the €750 billion ($A1.17 trillion) pandemic recovery fund it has made available to member states for digital improvements.5
While governments are stepping up and leading the way with public funds, without greater private sector involvement there is likely to be a gap between nations’ future infrastructure needs and the financial resources available to fund them.6
Safety in numbers
Among many investors, a lack of experience with the digital component in particular means the assets are still viewed with caution compared to other classes.7 Accordingly, it makes up just 3 per cent of global private infrastructure investment.8
“Digital infrastructure assets are often viewed as carrying greater risk than their traditional counterparts, due to the potential for disruption, cyber security risks, and just how quickly technological evolution is going to make them obsolete,” says Satchcroft.
But, she says, these risks are not unique to digital infrastructure.
“These questions are entirely valid, but they are just as relevant to, say the potential for microgrids to disrupt traditional electricity networks as they are to a data centre. And, because these digital assets often have a higher level of technological expertise within their leadership teams, by their very nature, they are more attuned to the risk of digital disruption and should be better equipped to evolve to address them,” she adds.
Satchcroft says the past year has shown the mission critical role that digital assets now play – an essential element to the functioning of everyday life, both for work and home – and how many of the characteristics they are demonstrating are akin to the broader infrastructure class.
She points to how digital infrastructure assets – fibre networks and data centres specifically – have proven their mettle in the pandemic as reliable and resilient in challenging economic environments.
“The visibility of cash flow, inflation-like linkage in some cases – even in difficult times, given the essential nature of services – it’s all there with digital infrastructure. It has utility-like characteristics.”
Leading the pack
After joining Macquarie Asset Management in 2016, Satchcroft led its involvement in the privatisation of the Australian land registry assets. It was a relatively new area of opportunity –but one, Satchcroft says, that was exactly the type of emerging asset class Macquarie is well placed to navigate thanks to its purpose and experience.
“An appetite to be an early mover is in Macquarie’s DNA. The Group encourages people to bring forward new ideas and provides support in proving and pursuing them.
“Data assets, such as registries were a relatively new asset class for infrastructure investors like Macquarie. But with the right vision, a strong approach to risk and by drawing on experience gained from the Group’s involvement in the broader data, as well as telecoms and utilities ecosystems, we have had the opportunity to lead and shape the sector.”
Since then, Macquarie has been evolving its portfolios to respond to the rapid pace of digitalisation by investing in the development and operation of assets that underpin it – including telco towers, fibre and wireless networks, and data centres.
Each year, its investments in digital infrastructure reach more than 110 million people. In Australia alone it manages investments in five digital infrastructure assets, three of which have been acquired in the last three years. One of these is AirTrunk, a leading Asia-Pacific hyper scale data centre provider operating in six locations across five markets.
“Our experience, five years on, is that there are more similarities than differences between digital and non-digital infrastructure assets. Upgrading operational processes, strengthening risk and compliance, embedding a focus on ESG, enhancing capital structure and strategic expansion – these principles apply just as much to both,” Satchcroft says.
One of the key differences, she adds, has been the availability of operating partners for digital assets – which are harder to find than for more established asset classes.
But, she says, the essence of managing ‘traditional’ infrastructure assets is that we should be invisible. Customers shouldn’t notice that we’re working hard in the background to improve and upgrade those assets; when they switch on the lights, turn on the taps or fire up the gas, they just expect them to work.
“And that philosophy applies just as equally to digital infrastructure, especially post-COVID – people expect to pick up a device and connect straightaway; the digital expectation is now just as entrenched as that of traditional utilities.”
“We often speak about the importance of our “social licence” to operate”, she says. “As has long been the case with roads, water and electricity, the community needs to be happy with us as the manager of assets on which they depend. It’s something Macquarie has always had a focus on, and the fact that this applies to digital infrastructure is a sign of how essential the asset class is becoming.”
The core of the digital ecosystem
As well as the sheer volume of data the world is producing continues to increase, changes in the way it is consumed will need ongoing investment in digital infrastructure to meet global demand, according to Satchcroft.
“No one deletes anything anymore!” she exclaims, before going on to highlight that although data will continue to be stored and processed centrally - for example, in hyper scale data centres - increasingly, more processing will start to occur at the “edge”, such as in smart vehicles and household appliances.
“What this means is that digital networks, which have already experienced a significant step up in load as a result of remote working and learning, will continue to see greater demand placed on them as data is generated and processed in decentralised locations before being transported back to centralised locations to be synthesised and stored. These networks will require ongoing development so as not to become a “choke point” for the community.”
Different parts of the technology value chain move at different speeds, and there are interdependencies that, in our view, mitigate against the disruptive potential of future evolutions – like 5G or low earth orbit satellites – to make digital infrastructure assets obsolete.
“There are components of the digital ecosystem which change very quickly and are capital expenditure light. But these tend to be at the edge of the ecosystem or several layers above the infrastructure backbone. When you’re talking about the infrastructure at the core of that ecosystem – the networks expected to reach and service millions of people, and the storage systems which underpin entire communities – our reliance on that infrastructure is likely to take decades to change, if at all. And, actually, a lot of the technological development itself is dependent on that backbone to flourish.”