Investing in a digital tomorrow

Aside from AI, internet-of-things (IoT), industrial automation, blockchain, and virtual reality will all play a part in building the digital economy of the future. Digital infrastructure will sit in the center as the enabler of these innovations across all industry sectors.

Alex Leung, Head of Infrastructure Research & Strategy

Extracts from article in IPE Real Assets:

Digital infrastructure such as data centers, fiber networks and mobile towers provide the backbone that supports many of the technological innovations that are happening. A few years ago, these investments only accounted for a small portion of the global infrastructure deal flow. They have now grown into one of the largest infrastructure sub-sectors, with over USD 600 billion of investments in the last 4 years (see Figure 1).

Figure 1: Digital infrastructure deals closed (USD billions)

The COVID-19 pandemic put a spotlight on the importance of digital infrastructure, the long-term thesis for data growth and high speed connectivity was suddenly pulled forward. This led to a surge in investments that have both positive and negative ramifications.

On the negative side, some of these new investments came just before the supply chain disruptions and rapid rise in interest rates. Since their business models are often growth platforms, some had to revise down their original business plans due to the changing macro factors. A few markets have also seen widely reported cases of unsustainable infrastructure competition (e.g. UK fiber¹). But we are seeing a silver lining.

On the positive side, the surge in digital investments has also accelerated the maturation of the sector. Their business models have now been stress tested by both the pandemic and high interest rates, and risks are now better understood with the market becoming more rational. We are seeing a reset in expectations and an end to the previous landgrab mentality.

We believe that digital infrastructure is entering its next chapter of development, which will be driven more by fundamentals and less by speculation. Inevitably, hype will always be a part of an industry that is exposed to cutting edge technologies. It therefore important to not be caught up in the hysteria, as reported in our 2024 infrastructure outlook. Sophisticated investors should be able to look past the sensationalism and identify opportunities based on real consumer and commercial behavior.

One topic that has gotten a lot of buzz recently is artificial intelligence (AI), especially around its positive effect on data centers. We actually think there is a bigger story here. For those who have followed the sector for a while, the generative AI is simply a continuation of an ongoing investment theme – e.g. AI already made headlines in 2016 with the success of google’s AlphaGo program3.

To us, the more important takeaway from the success of ChatGPT is that it provides further validation to the long-term digitalization investment thesis – that the world will continue to innovate and keep coming out with new applications and technologies. Aside from AI, internet-of-things (IoT), industrial automation, blockchain, and virtual reality will all play a part in building the digital economy of the future. Digital infrastructure will sit in the center as the enabler of these innovations across all industry sectors.

1. UK altnets face tough year in crowded broadband market, May 2023