Riding the tailwinds

17 May 2021 | Melanie Mingas

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After its £370 million IPO in February, Cordiant Capital is assessing a pipeline of €1.5 billion in digital infra investments. Chairman of digital infrastructure, Steven Marshall, tells Melanie Mingas about the plans

When Cordiant Digital Infrastructure launched the UK’s first digital infrastructure fund the target was to raise £300 million in private equity to invest in data centres, towers and fibre.

A first for the UK – and a departure from the debt-driven private capital model traditionally pursued by investment manager Cordiant Capital – the strategy would leverage the runaway data consumption trends witnessed across the UK, US, Europe and Canada; trends Cordiant views as economic headwinds that could last a decade or more.

Targeting returns of “at least” 9% through recurring long-term contracts, often with built-in escalator clauses and predictable cashflows, the investors were happy too.

This double draw saw the fund oversubscribed by £70 million when it launched in February and Cordiant Capital has “identified and is evaluating” a pipeline of €1.5 billion in investment opportunities in US data centres, Scandinavian fibre and European mobile towers.

“The investment trust market has evolved over the last five or six years,” says Steven Marshall, the former president of American Tower Corporation (ATC) who now holds the position of chairman of digital infrastructure at Cordiant Capital.

“We have started to see other longer-term infrastructure assets utilising this vehicle – particularly renewable energy, wind farms – this is very similar to those types of investment trusts in that we are buying assets and they have long-term cashflows. In our instance, they’re organically growing cashflows, whereas in alternative energy they tend to exhibit more limited growth characteristics driven by inflationary escalators,” he continues.

In telecoms the assets aren’t at full capacity, which means network and customer growth, along with “additional inflationary escalators”, can generate stronger returns.

“So there are multiple levers of growth compared with perhaps some of the more historical investment trust propositions,” Marshall continues, and as the man who led ATC to grow into a $100 billion digital infrastructure real estate investment trust (REIT), he knows all about the trust propositions on the market.

Leaving ATC two years ago Marshall returned to the UK, “effectively retiring” as he describes, but he wanted to remain involved in the industry. “Then I met with Cordiant Capital,” he recalls.

“They had a shared vision that there is an opportunity to invest in the middle market size digital infrastructure assets across Europe, North America and the UK,” Marshall continues.

At that point Cordiant was a private capital business with an emphasis on debt. The first step in its diversification saw the launch of its Cordiant VII Infrastructure and Real Assets Debt fund; the telecoms component of which was channelled into towers in China and Brazil, and fibre networks in Africa.

“We were providing debt to digital infrastructure companies and realised there was an opportunity of also offering equity to support such companies,” Marshall says.

With a focus on long-term investment rather than mid-term returns – not to mention Marshall’s experience of the REIT-isation trend in the US – the chosen model offered a number of benefits over the alternatives, such as GP/LP funds, and the plan starting to come together.

“The assets generate long-term, stable, growing cashflows and you actually benefit from being in these assets over the long term, as opposed to trying to get out after five years because you are obliged to pay your LPs back. So that was a particular attraction.”

Reporting that “a number” of large funds feature on the investor list, Marshall adds: “That does augur well for the future. We have a portfolio of investors that have an interest in the business getting bigger and taking a larger position.”
Layers of demand

Given that share prices, IPOs and special purpose acquisition companies (SPACs) have dominated headlines of late, strong demand from the markets for a new, high-growth investment vehicle comes as little surprise. But finance markets are a double-edged sword – valuations are at record levels, entire industries have been upended by Covid, and what goes up, doesn’t always stay up.

In Marshall’s view, stable and growing cashflows mean some of those high company valuations aren’t likely to come down, just like the trend for more – and more – capacity is firmly here to stay.

“I have certainly been arguing to investors that digital infrastructure has been resilient to the effects of the pandemic and it is also likely to be a net beneficiary of the changes in working practices that we will see on an ongoing basis,” he observes.

“There has been massive underinvestment in fibre in the UK and Germany, for example, over the last five years, so there is a catch-up requirement for that infrastructure.” But at best, that will bring things up to pace – there’s still a hyper-connected future to build for.

“Research shows that demand for capacity across the internet is growing at double-digit rates, well into the next decade – 30% to 40% a year – continued growth every year over the next decade,” Marshall says.

“Not only have you got to build infrastructure to fulfil that underinvestment historically, plus you have to build the infrastructure for the new demands that will continue to come through well into the future.”

For its part, Cordiant will invest in “all those various sectors”, including rural connectivity, which Marshall says is “just another layer of demand that is going to come through and be beneficial in the future”.

It also aims to build the portfolio to a point where it can be sold up the food chain as a consolidation of the marketplace; no doubt for values that are unimaginable at present. Where the industry sits on that is a debate in itself, but Marshall says the presence of both infra builders and investors is mutually beneficial to the wider landscape – after all, operators aren’t awash with money.

“The poor mobile operators are really struggling to generate a fair return for all the effort they put in and I do feel for them,” he says, implying that government and regulators could do more to create an environment more conducive to investment.

“But the reality is that MNOs are not generating enough cash to reinvest in the business – in the latest and greatest technology. As a country we are not doing ourselves any great service; we are laggards in the growth of digital capacity and connectivity. Particularly when you compare us to the US or compare us with China and other parts of Asia.”

All change

ICT infrastructure as an asset class is one trend, but these developments play to many others. From the trend for telco execs to step into the world of finance – think Jack Waters and Digital 9 Infrastructure – to sustainability and fibre to everywhere, Cordiant’s is probably the most on-trend launch year to date.

For Marshall, the headlines to watch are carbon, latency and the demand for new applications – and these aren’t just under way, but interconnected and growing in tandem.

“The themes are that we need to reduce the carbon footprint, that’s going to mean moving to areas with renewable energy and it’s going to drive more fibre-optic networks and small cell deployment in urban areas. We are going to need inbuilding systems more now than at any time in the past, and we will need them in medium-sized buildings because 5G doesn’t travel as far,” he explains.

The next – but in no way final piece – is that in chasing the carbon, latency and new application trends, the industry’s traditional siloes will converge.

“Historically these three sectors – towers, fibre and data centres – have all been developed in silos. We’re going to see companies offering more holistic solutions, for all these reasons.

“One can view small cells as mini towers which need a fibre connection; distributed data needs fibre. Distributed data modules could be put at the bottom of mobile operators’ towers to get closer to the end customer.”

From tower companies offering distributed data and fibre connectivity to fibre companies offering small cell and data centres connected to remote distributed data facilities, Marshall says: “I think everyone is going to look to expand their basic proposition because it’s a natural extension.”

He concludes: “And increasing demand for network capacity, 5G, lower latency and reduced carbon drives it all.”