Backing the infrastructure behind the digital economy
The digital economy has given rise to its own infrastructure needs, and investors are paying attention.
What is digital infrastructure?
When we think of infrastructure, the first things that spring to mind are roads and rail lines, utilities, ports and airports. These traditional building blocks help to drive economic growth and have attracted private sector investors for many years as increasingly constrained governments look for partners to invest in and operate key assets.
However, the growing demands of the digital economy have given rise to a whole new group of assets that are just now coming into view for investors as an extension of the traditional infrastructure sector.
“Infrastructure is morphing as an asset class and what we’re seeing is digital infrastructure rising in prominence,” says Phillip Mak, Global Head of Infrastructure, Corporate Finance.
Digital infrastructure includes the networks that transport data and the data centres that store it. The transition to cloud based services, big data technology and services, continued infilling of mobile spectrum and 5G network rollout, smart manufacturing and electronic payment systems are all driving increased demand for networks and storage. Government projections estimate that the direct economic contribution of communications is expected to grow to $42 billion by 2031.¹
Add to that the digital side of the consumer economy and the emergence of the Internet of Things, which includes data-heavy products such as mobile apps, smart devices and video streaming. Demand for digital connectivity in Australia is growing at an exponential rate, with data downloads nearly doubling from 2016-2017 and internet access reaching 89% (increasing to 100% for 18-34 year olds).²
Sky-high growth for cloud based services
Fibre and mobile networks and data storage centres play an important part in the digital ecosystem and provide the platform infrastructure to transport, share and store this data.
The industry expects demand for cloud service computing and for the data centres they rely on will grow strongly over coming years, far outpacing broader economic growth. The global market for cloud-managed services is forecast to more than double from USD25.5 billion in 2016 to USD69.9 billion by 2023 for an annual growth rate of 15.5 per cent³.
Financing the digital economy
NAB has emerged as a leading financier of this digital segment of the economy, arranging capital to support the development or expansion of this increasingly important infrastructure in Australia, the UK and Europe.
We’ve helped companies with growth capital to build out their mobile tower networks, expand their broadband and fibre network operations, and keep up with rapidly growing demand for cloud storage.
NAB recently supported an expanded debt package for Canberra Data Centres (CDC), the largest provider of outsourced data centre services to the Federal Government, which operates a highly secure Government accredited facility. NAB supported the expansion of these facilities to enable CDC to meet growing demand from both federal government and corporate clients, following the commencement of a significant new lease with Microsoft.
Why investors are turning to digital infrastructure
The strong growth profile for data based services and the role of digital services in the consumer economy are key attractions for institutional investors.
Another consideration is that traditional infrastructure assets are becoming increasingly sought after, especially by pension funds, sovereign wealth funds and dedicated infrastructure funds, making for a crowded and competitive market. This has led to a continued run up in the asset valuation cycle.
“Toll roads and ports and so on are heavily competed, but there are opportunities in what we call core-plus infrastructure that are very similar to typical infrastructure plays,” says Mak. Core-plus includes a diverse range of assets such as broadcast towers, fibre cable and other telecommunication infrastructure, transport assets such as ferries and rolling stock, and mid-stream energy and terminal facilities.
Mak says digital infrastructure displays many of the same characteristics that attract investors to core infrastructure projects:
- Real assets with a long lifespan
- Provision of an essential service
- Long-term stable cash-flows
- Solid growth prospects that are not correlated to financial markets
- Strong barriers to entry such as licensing or accreditation requirements or high capital cost.
“We’re excited to be part of the digital infrastructure journey, supporting a growing sector that serves the evolving data needs of corporate Australia,” he says.
¹Australian Communications and Media Authority (ACMA) The Internet of Things and the ACMA’s areas of focus Emerging issues in media and communications, Occasional Paper November 2015
²ACMA, Communications Report 2016-17