Originally Appeared in PEI Infrastructure Investor, May 2020
As we face covid-19, there is evident need for greater investment in digital infrastructure, a sector uniquely positioned to provide increasingly essential services, say Jack Bittan, partner and Casey Lanza, principal at InstarAGF
HOW HAS DIGITAL INFRASTRUCTURE BECOME SO IMPORTANT? WHAT IMPACT HAVE RECENT GLOBAL EVENTS HAD ON THE SPACE?
JACK BITTAN: For many years, the primary focus within digital infrastructure, particularly for investment opportunities, was centered around technology rather than the physical infrastructure itself. What we are seeing now is a shift in what services are considered essential to communities and quality of life, creating new opportunities within the digital space. This has been strongly underlined by recent events. Where bridges, roads or airports were once the key transportation hubs required for regional connectivity and increased socioeconomic opportunities, technology has made significant changes in our day-to-day lives. Now more than ever before, as medical and other professionals, government officials and teachers rely on access to reliable resilient digital infrastructure, this sector is proving itself as an essential service. According to the Fiber Broadband Association, American homes with access to all-fibre connectivity have increased nearly a thousand-fold since 2002, connecting 20.5 million households to entertainment, education, job opportunities and communities around the world. As the novel coronavirus continues to fundamentally change daily life, essential services will increasingly be viewed as those that provide safety, security and human connection. We may be physically isolated, but these services offer a way for us to all come together.
WHAT IS HAPPENING NOW IS VALIDATING THE THESIS ABOUT THE ESSENTIAL NATURE OF THE UNDERLYING ASSET
CASEY LANZA: Looking at market trends and activity in other sectors, we can see the digital infrastructure landscape leveraging resilient, re-cession-resistant assets with demand for some services actually increasing. When economic activity slows, for example, consumer internet and cable is one of the last bills to get cut off. In addition, as people brace for an economic recession, they will increasingly look to online entertainment as a more affordable, accessible alternative to in-person experiences. We can certainly see this playing out with companies – such as the video conferencing platform Zoom – seeing their stock prices go up quite a bit as a result of the pandemic. For the digital sector, what is unprecedented in what we’re seeing with covid-19 is the large-scale quarantine. People around the world are actively being told to stay home, creating an urgent demand for global information and entertainment to be available without leaving the house. All of this is having a counter-cyclical impact on the telecom industry: people are trading up to higher internet speeds and more robust video packages, driving value for the digital infrastructure sector while making online access critical to personal or company success.
IS COVID-19 UNVEILING A NEW PARADIGM FOR INVESTORS IN DIGITAL INFRASTRUCTURE?
JB: If you think about social economic resilience, what we’re seeing today and the ways in which digital infrastructure is facilitating the ability to continue to be productive as a society – in a manner that was unprecedented at any point in history up until this time – it’s actually pretty astounding. For thicker-skinned investors who have been in the space, what is happening now is validating the thesis about the essential nature of the underlying asset as well as the need to continue to provide capital to the space to grow it to meet demand. The connectivity that’s enabled by digital infrastructure is one of the fundamental elements contributing to individual ability to maintain quality of life, especially during this ongoing crisis. The economic resiliency across downturns in the marketplace is an important consideration for investors, but economic activity over next 15 years as with most essential infrastructure, the focus comes down to people and communities. Think about what connectivity leads to: it enables communities to access information, stay in communication, connect to supply chains and to have equal access to quality education. All of this is critically important in terms of the overall fabric of society. Digital infrastructure is not only broadband internet but everything from cell towers to satellite-based connectivity. Considering all the different facets of society that depend on that overall connectivity and the assets that support it, there’s virtually no one on the planet at this point that won’t be affected by the quality of their internet connection. It details just how important it is that we have good digital infrastructure.
GIVEN THE DIGITAL ADVANCEMENT OVER THE LAST 10 OR 15 YEARS, PEOPLE CAN DO ALMOST ANYTHING FROM HOME TODAY
CL: The question for long-term investors will be whether covid-19 fundamentally changes the way we live and go about business, which remains a bit of an unknown. Ultimately, the changes we are seeing now will be impacting behaviour on a global scale for quite a while. The longer stay-at-home measures persist, the more efficient people become at working remotely, and may decide to do so more often and for longer. Given the digital advancement over the last 10 or 15 years, people can do almost anything from home today. From hosting virtual dinner parties, to conducting work meetings – even a digital doctor’s visit – all can be done from a distance thanks to digital connectivity. In addition, studies have shown that that social support is an essential factor in an individual’s ability to cope with stress and maintain good physical and psychological health, so to maintain that social support, stay connected and keep busy, people have leaned on dig-ital technologies to stream video, play games, and chat face-to-face virtually.
HOW DO THE PRIVATE AND PUBLIC SECTORS FIT INTO THE FUNDING PICTURE?
JB: If you think of the responses to covid-19 by way of stimulus packages, in many countries they have included elements for future spending that will address the deficit today in terms of the overall infrastructure supporting such connectivity. I definitely think there’s a need for that. There’s a very large funding gap in terms of bringing digital infrastructure to where it needs to be in society. I think there’s a healthy role for private capital to sit alongside and supplement the public capital that’s available for such projects. There’s an investment deficit across all types of infrastructure. It’s probably unrealistic at this point in time to assume that gap can be met by public funds. It hasn’t happened because there just isn’t the capital available. By contrast, there’s a substantial amount of private capital, probably more than has ever been available, to invest specifically into infrastructure. Preqin reported that infrastructure funds raised $98 billion in 2019, bringing infrastructure dry powder to $212 billion. There’s a critical need for private capital to facilitate the growth that’s sorely needed in infrastructure and particularly in the digital space.
THERE’S A SUBSTANTIAL AMOUNT OF PRIVATE CAPITAL, PROBABLY MORE THAN HAS EVER BEEN AVAILABLE, TO INVEST SPECIFICALLY INTO INFRASTRUCTURE
CL: The digital infrastructure industry is a very intensive business for growth. Fibre growth in particular has a high capital cost associated with build-outs. We anticipate opportunities for private and public collaboration to put the right capital and experience to work connecting fibre networks to homes and metro fibre rings to small or medium-size businesses. Today, residential fibre only has 15 percent penetration in the US and enterprise fibre around 60 percent, so a lot of growth in the fibre sector will be needed to support that demand. Looking at the sector more broadly, around 25 percent of the US population lacks access to broadband speeds today, creating another gap where funding will be required to make remote work more viable for businesses. Partnering with the private sector means access to much-needed capital for cities, where there is a projected $130-150 billion funding gap for US communications infrastructure by 2024, according to Deloitte.
WHAT MAJOR TRENDS DO YOU ANTICIPATE IN THE DIGITAL INFRASTRUCTURE SPACE GOING FORWARD?
CL: The future of telecoms is 5G. It’s the next big thing. Coming to urban areas first, it’s projected to drive $13 trillion of annual global economic activity within the next 15 years. For the deployment of 5G, you need fibre and you need the small cells that will transmit 5G signals to connect the fibre. With that, there will be a lot of investment needed in the fibre space. 5G is anticipated to transform several industries, including the automotive industry and healthcare. Broadly speaking it is expected to be a platform for innovation, which will be 100 times faster than 4G. It will be rolled out in urban areas first and in areas with dense populations in the near term, because that is where it currently makes the most sense.
DESIGNED WITH A FOCUS ON CONNECTIVITY AND EQUALITY, DIGITAL INFRASTRUCTURE CAN IMPROVE THE QUALITY OF LIFE FOR PEOPLE ALL AROUND THE WORLD
JB: Digital infrastructure is a solution to a lot of the problems that we will face in the future. When you think about the food supply chain, or when you think about energy demand, it is staggering what digital infrastructure can do to improve connectivity and supply chains, provide better information, and to be more efficient. Smart grids are one obvious example: connectivity is going to continue to be more and more a part of the fabric of our society and a contributing factor toward addressing a lot of these challenges. We think about the very essential nature of the assets that we invest in. A lot of people can argue that the basic human need to be connected to energy or water, in many ways, is equal to the need to be digitally connected in this day and age. Designed with a focus on connectivity and equality, digital infrastructure can improve the quality of life for people all around the world.