Digital infrastructure is having a moment. The pandemic has shed light on the importance of fast and reliable internet not only for employees stuck at home but also for global private and public investors.
For the first time, two fund managers – Cordiant Capital and Triple Point – have made digital infrastructure fund bets on the London Stock Exchange, following a path first worn by renewable energy investors almost a decade ago. They launched yield-focused investment trusts raising a combined GBP 670m upon listing. But the trust vehicles they have used are not loved by everyone.
One of the main advantages of the trust is the access to large pools of permanent capital: they can invest in perpetuity and take more long-term investment decisions, without having to worry about liquidating assets. Returns can also be attractive: both managers are targeting net asset value returns between 9-10%.
“We think the total returns from digital infrastructure trusts are likely to exceed other infrastructure sub-sectors such as renewables and social infrastructure where the returns are now likely to be almost entirely comprising of income,” says an analyst advising one of the listed vehicles.
Private infrastructure funds think differently. Fifteen GPs including EQT and KKR have invested more than EUR 26bn into digital infrastructure between 2016 and the first quarter of this year, according to Inframation data.
These investors typically target mid-teen IRRs for closed-end funds which also invest in a range of other infrastructure sectors such as roads and hospitals. But despite some private equity specialists in US, almost all have been reluctant to launch bespoke digital infrastructure funds.
So far only one global digital infrastructure specialist has emerged: US-based DigitalBridge (formerly known as Digital Colony). As investment in data centers, telecom towers and fibre networks grows this is expected to change.
In June, Chinese private equity firm CDH Investments reached a CNY 2bn (USD 310m) final close for the country’s first-ever data centre-focused fund. Europe will be next.
“You should not have jack of all trades, master in none,” says an infrastructure fund source in Europe. “You don’t want people like that leading the next digital infrastructure transactions, you want someone who’s very experienced as it is a dynamic space.”
With both private and public vehicles on the horizon, the true test will be whether a permanent capital listed approach or a private closed-end fund will have the advantage in originating the best value assets for their portfolio.
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