We all know the charts. An amazing growth segment comes along and at some stage someone produces a chart projecting future demand growing at an exponential rate over the next few years.
Call it the red run of investment charts except that you’d be heading up a mountain of soaring, exponential growth. In most sectors I tend to treat these charts with a healthy dose of scepticism, especially when someone sticks notes on said chart which suggests compound annual growth rates in the 20-40% range.
There is though one segment where I think if anything the red run charts underestimate the life-changing changes coming our way: internet usage and, more specifically, data usage over the next decade.
Put simply, we are spending more and more time online, using data and even a cynic imagining a slowing down in both the numbers using the internet and hours spent online but still concede that the intensity of their usage might increase exponentially.
Instead of watching TV programmes on their desktop they might watch multiple episodes on their mobile phone. Then they might play a game connected to a cloud server.
You can guess the direction and speed of that trend and with growing usage in the emerging world and the emergence of the internet of things, exponential growth in data usage is a given.
The big opportunity I’m seeing in tech
That doesn’t mean that every business in this segment will experience exponential growth, but it does strongly suggest that growth in the technical infrastructure behind the internet, the subsea cables, the data centres, the masts and so on, will grow at a rapid pace.
Investors have of course cottoned on to this trend and chased up all manner of businesses in the digital space but there remains one area where flows of money, at least from private investors, has remained relatively subdued- digital infrastructure.
I have listed some of the businesses whose shares you can buy which address this space directly below. There are many other businesses, such as equipment manufacturers, that address it indirectly.
Two facts stand out.
The first is that the listed digital infrastructure space is skinny. The second is that many, if not most available vehicles, are listed in the US and probably incorporated as real estate investment trusts (Reits).
Within this segment, businesses tend to fall into two broad digital infrastructure groups: data centres and then companies which own mobile phone masts or towers, known as towercos.
A small handful of these businesses are listed in Europe, with one blockbuster imminent – Vodafone’s spin-off of its German based towerco unit, amusingly called Vantage, rumoured to be worth in the tens of billions of euros.
Some of the listed UK infrastructure funds have dabbled in this area, enticed no doubt by the headline opportunity with forecast 38% compound annual growth from 2020 to 2026 in global data demand.
International Public Partnerships (INPP) for instance has investments in the rollout of next generation fibre to the home, but so far a pure play way of playing the digital infrastructure market hasn’t existed in the UK.
That should soon be about to change.
A new fund to play the digital infratructure theme
A new fund is being readied for IPO in February/March called Digital 9 Infrastructure. The managers behind the fund, Triple Point, already run existing ‘conventional’ infrastructure funds (in the Social Housing and Energy Efficiency fields) but for this big new launch – the managers are looking to raise £400m – they have assembled a diversified basket of assets in all the key verticals within this sector.
The biggest initial chunk, roughly a third, will be in transatlantic subsea fibre – six of those thin, skinny wires to be precise.
Clients in this segment include many of the big Faangs such as Google, Facebook, Netflix, and Amazon. They have to be clients I suppose because currently 98% of the world’s data is carried by subsea fibres!
As we speak there are numerous other businesses busy laying cables across all the big oceans to service exponential growth in demand. To my knowledge there is no way that investors can currently directly access this space through a listed entity.
The proposed fund details
Digital 9 Infrastructure proposed ticker DGI9
Looking to raise £400m
Expects to be fully invested within 12 months
Targeting a dividend of 6%
Management charge 1% up to £500m falling to 0.8% over £1bn
Timescale – prospectus out mid-February, full listing mid-March
The next big slug of assets will be in data centres with a target of six independent data centres, comprising roughly 20,000 m2 of data halls around the UK. On a side note, some of these data centres are also connected to the subsea cables also inside the fund. This portfolio will be steadily built up over the next 12 to 18 months and when complete will probably comprise the biggest share of the fund’s assets.
There is also an investment in what is called an AltNet or local fibre optic broadband network in the UK. Again, you’ll probably have seen plenty of stories about this fast-growing segment as they all speak to the governments agenda to get us all connected up to at least a 10mbps service (preferably much faster) by 2025, if not earlier.
BT’s Openreach business is the dominant player in this space but has been the object of much criticism for its speed of fibre to the home rollout, although it is much improved it must be said.
Tapping into the wireless opportunity
The last segment of the fund, approaching a third of the assets, will be in a wireless business, namely an existing wireless 5G network, mainly but not exclusively built around small street-based locations.
I think this is a crucial investment. Fibre to the home, led by BT, will only ever get to a limited proportion of the UK and for many customers they will have to rely on wireless connections. I live in the countryside and I get better, more reliable connections from a 4G Vodafone tower than I do from rural BT connections.
Many small towns and even some inner-city areas also boast poor fibre connections and I think wireless broadband is a huge growth area. The existing business the fund is buying into already comprises 200+ access points, many in London boroughs such as Westminster and Bexley. Apparently one of these small cells even hangs off a lamppost outside 10 Downing Street.
We’re still to see the exact details about the fund and the assets its buying, so all the usual caveats apply. Simply because you have assets in this fast-growing infrastructure space doesn’t mean you’ll be guaranteed profits.
As an example, there have been more than a few AltNets that have struggled to gain traction and many continue to lose money as they spend a small fortune hooking up new clients.
That said, my sense is that this fund will prove hugely popular for two simple reasons. The first is that there are not that many ways of investing in this trend if you are a public markets investor – private equity, needless to say, is grabbing assets in this space at a frenetic rate. That alone will generate interest in accessing a pure play on digital infrastructure.
And then there’s also the issue of valuations. My guess is that when Vantage comes to the German market, its price to earnings ratio will be in the 20s, if not higher. Many of the existing towercos already trade at eye-watering multiples, as do the data centre businesses listed in the US.
By contrast although valuations aren’t fixed, my guess is that many of the assets in this portfolio will come into the portfolio at something between 12x and 18x earnings. In a sense that has to be the case if the manager is to hit that the 6% cash dividend target (after fees).
The catch, and yes there is a catch, is that the managers behind this fund are primarily marketing this at institutional clients which means you possibly won’t see it on any private investor-facing platforms.
That said, the fund managers have used PrimaryBid in the past, so I suppose it could make an appearance there.
This institutional focus won’t stop you buying post IPO –probably around mid-March if the fundraising is successful– but my guess is that this fund will trade quite quickly at a decent premium.
Seven listed equities to play digital infrastructure
Digital Realty: A real estate investment trust (Reit) that invests in data centres, with interests in over 200 data centre facilities. The company is listed on the New York Stock Exchange (NYSE) under the DLR ticker, and is a component of the S&P 500.
CyrusOne: Another Reit that invests in data centres. It’s the third largest provider of data centres in the US and serves 185 of the Fortune 1000 companies worldwide. CyrusOne is listed on the Nasdaq under the CONE ticker.
Equinix: It operates the world’s largest network of interconnected data centres, with over 9,700 companies and 1,800 networks globally. The company is listed on the Nasdaq under the EQIX ticker. It is also a component of the S&P 500. Equinix converted to a Reit in 2015, and the company has committed more than $20bn to the development of its data centre platform since its founding.
Switch: The company operates three data-centre campuses, including two in Nevada, and is developing a fourth in Atlanta. It is focusing on building vast ‘digital cities’ with data centres of more than 1 million square feet, offering a mix of storage, co-location, connectivity, and ‘edge’ computing power. Its ticker is SWCH.
GDS Holdings: A data centre holding firm from China, the company markets colocation and managed services, as well as direct private connections to major public cloud platforms.
NEXTDC: An Australian data centre operator. As of July 2020, the company operates 11 data centres around Australia, with facilities in Melbourne, Sydney, Brisbane, Perth, and Canberra. Two of these, B2 in Brisbane and M2 in Melbourne, operate at Tier IV standard, while the rest are Tier III.
Global X Data Center REITs & Digital Infrastructure ETF (VPN): It’s also worth noting that there is a new US-listed exchange traded fund that invests in many of these businesses in the US. Sadly, UK investors can’t readily buy these US listed ETFs. This one invests over 75% of its assets in the US, with 12% in China.
David’s daily blog is available at www.adventurousinvestor.com.
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