"Digital infrastructure can alter the way communities interact and how they do commerce”
PUBLISHER, Infrastructure Investor May 2019 - Digital Infrastructure Report
Q: What makes digital infrastructure an exciting investment proposition?
MG: Investors understand the proposition around infrastructure and they understand the proposition around technology, but have only recently started looking at how the two come together. The intersection between the two sectors provides a unique opportunity to generate alpha as it gives investors access to the sector without assuming outsized risk.
Q: Just a couple of decades ago, telecoms was considered a risky venture capital play. How has it ended up as an infrastructure strategy?
MG: In the mid-nineties, when venture capital firms started looking at towers, microwave networks and fibre optics, those investments were considered incredibly risky. Then, as the years went by and we came through the dotcom crash and balance sheets began to normalise, we saw private equity firms start to deploy hundreds of billions of dollars into the space to create new platforms centred around data cen-tres, towers and fibre. As the cycle matured, some of those companies migrated to the public markets. Today, there are 57 publicly listed companies that trade in that ecosystem.
As we head towards 2020, the asset class is rotating again – this time from private equity into infrastructure. As carriers’ needs have increased and as the market has become more competitive, investors are willing to pay big prices for these assets. It has become clear that one of the only ways to justify high-single-digit or low-teens returns is to turn to infrastructure capital.
Q: Which sub-sectors are most interesting?
MG: It depends on the risk profile you are targeting. On the far left of the risk spectrum, you have more passive infrastructure such as towers and hyperscale data centres. In the middle, you have co-location data centres and small cell networks. And then as you move towards the far right of the spectrum, there is an added operational component and more risk. That’s where you have enterprise-facing fibre and managed cloud or hybrid-cloud services. Investors can choose the risk they are willing to accept. Sophisticated LPs and GPs understand how to walk investors through that value and risk proposition.
Q: Do different geographies also present different levels of risk?
MG: Absolutely, each of the five regions that exists today in communications infrastructure – North America, Latin America, Europe, the Middle East and Africa, and Asia – presents a very different narrative and risk profile.
North America is the most mature market given the capex cycle, consumer profile and device adaptation, and how the region thinks about machine-to-machine connections and IoT networks. Next in the evolution curve are Europe and Asia which are in roughly the same place. On the mobile side, the two regions present use cases that may be ahead of the US, but they both lag the US in fibre assets and hyper-scale computing, which is a byproduct of the fact that most of the cloud providers are US-based.
The markets within Latin America and the Middle East and Africa are all progressing at different speeds. As an investor, one of the trends we get excited about in these regions is landline replacement; many developed economies are replacing copper with fibre, but in these areas there are still communities that copper never even reached.
There are towns without landlines, or even electricity or running water, where people are walking around with cell phones on a 3G or 4G network. When you see that, you understand the impact wireless connectivity can have on a community. Digital infrastructure can alter the way communities interact and how they do commerce.
The social impact of connectivity is one of the beauties of this sector. As investors, we want to do what we can to ensure everyone has access to technology. It’s absolutely essential to our investment thesis.
Q: What led you to set up Digital Colony?
MG: Digital Bridge together with Digital Colony owns nine platform investments, has over $13 billion in capital raised and is a digital infrastructure owner and operator of assets including towers, data centres, small cells and fibre.
We operate, own and manage over 342,000 sites and 39 data centres globally, with strong recurring cashflows. Our companies and footprint are located across Canada, the US, Mexico, South America and Europe. In 2018 we formed Digital Colony, a firm truly dedicated to investing in digital infrastructure with a global mandate. Digital Colony combines the sector knowledge of Digital Bridge and the investment expertise of Colony Capital, a leading real estate investment management firm.
Q: What are the biggest competitive challenges you face investing in this sector?
MG: The biggest competitive pressure we face is less about other investors who may be vying for similar assets and more about how can we perform for our customers. That is where this type of infrastructure is a bit different to your average bridge, highway, toll or airport. Given the technological aspect involved, we have to be precise in how we perform: making sure that the air handlers work in a data centre, that the fibre does not get cut in a small cell network, that a tower operates in sub-zero temperatures.
Our DNA is made up of 25 years of operating and building digital infrastructure businesses. Our sole mission has only ever been to build networks and deliver performance. To us, you’re only as good as the last tower you’ve built, the last connection you’ve provided or the last lease that you’ve signed. It is really about waking up every day and paying attention to your customer. We are entrusted with their network and that level of trust is something you have to earn.
Q: How important are good relationships with governments and state bodies, as well as your customers?
MG: Good relationships with public bodies are critical at every level whether with regulators in countries deploying 5G spectrum, governments passing anti-competition legislation to ensure markets are efficient, or local municipalities looking to reap the public benefits of connectivity while main-taining the fabric of their local community.
We spend a lot of time working with local municipalities, townships and villages to ensure they will be proud to say that our infrastructure exists in their community, that it is safe and that it contributes to the public good.
Q: What does the future hold for digital infrastructure and your role as investors?
MG: According to industry experts, there is over $388 billion of investment that is going to happen in this sector over the next eight years in terms of delivering 5G and new digitally encrypted networks. We have the responsibility, and privilege, to invest new capital and to continue to grow the existing businesses we have.
The future is going to require partnerships, though. It is going to require carriers to work together, investors to work with carriers, and carriers and investors to work with governments, in order to create a shared infrastructure model.
What we have learned in the first four generations of mobile networks is that they are really expensive to build and maintain. As investors, we have to think carefully about how we can help our customers, and partner to build networks in a way that delivers public benefit but also allows them to make a profit. This sector is no good if you have a bunch of customers who cannot pay their infrastructure bills. The future must be grounded in collaboration.
LPs’ changing perception of digital infra
LPs’ appetite for digital infrastructure is stronger than ever. Five years ago, nobody was even talking about digital infrastructure and it did not exist as an asset class. There was telecoms and there was real estate, but no one put a focus on the sector.
We started challenging investors to think about towers, data centres, fibre, and small cells as a new form of infrastructure. As technology advances, they will arguably be the most important form of infrastructure.
It started to resonate with investors when they understood that mixture of riding the tailwinds of telecommunication and consumer demand with the downside protection of long-term contracts and physical infrastructure. Today, I think most LPs consider digital infrastructure to be something for which they need an allocation.