How digital infrastructure investment could support economic prosperity

As recently as 2022, nearly 42 million Americans did not have access to broadband internet, and many connected individuals often experienced poor value for money and low-quality service.¹ To help expand high-speed, high-quality, and seamless internet access in the US, in late 2023 Macquarie Capital made an investment into Mereo Networks, a bulk internet services provider to rented multi-dwelling units in the country.

A similar 'digital divide' exists across the UK, with rural communities typically being disproportionately impacted in comparison to urban dwellers.² In response to this, Macquarie Capital invested in Voneus in 2019, a broadband business which aims to connect gigabit capable fibre and fixed wireless networks to more than 400 thousand harder to reach homes across rural areas in the UK.

Along with broadband connectivity, digital infrastructure is increasing accessibility to products and services that promote economic prosperity. Maheep Jain, Managing Director of Energy and Infrastructure investments at Macquarie Capital based in Mumbai, points to the transformative impact of digital banking infrastructure in India.

"Previously, India was a very cash-driven society, which brought a lot of inefficiencies," Jain says. "But over the last two decades, it has built the world's largest real-time payment systems."

India's use of digital technology has enabled it to achieve financial inclusion for 85 per cent of its population - when only 20 per cent had access to formal banking a decade ago. ³

"Now that people are actually getting banked, we've seen innovative new products emerge that have led to significant positive socioeconomic ripple effects," says Jain.

Despite this positive momentum, Jain believes that significantly more investment in India is still required to tackle the digital divide. Hundreds of millions of people rely on mobile devices to access the internet, creating significant congestion problems for the nation's mobile operators in densely populated towns and cities in the region.⁴

In May 2023, Macquarie Capital acquired a majority stake in Excel Telesonic India Private Limited (CloudExtel), a leading Network as a Service (NaaS) provider in India. It provides solutions to telecom operators, internet service providers, data centres, enterprises and large content providers addressing the challenges emerging from the hypergrowth in data consumption in India. Macquarie Capital is continuing to support the business with further investment to fund expansion of its small cell and fibre portfolio.

"Our investment in CloudExtel is helping to address India's acute congestion problem by providing additional capacity quickly and cost effectively where it is needed", added Jain.

A persistent demand for investment

There were 5.34 billion internet users worldwide in January 2024⁵and global data volume is expected to reach 175 zetabytes (a zetabyte is a trillion gigabytes) by 2025.⁶ At these usage levels, significant ongoing investment will be required to power growth in connectivity, enable large increases in data volumes and to extend and refresh existing setups. Whether it is fibre networks, cell towers or data centres, the opportunities for capital spending are plentiful.

In addition to sheer increase in usage, digital infrastructure must also keep pace with rapid technological advancement.

"Digital infrastructure can be more capital and operationally intensive than assets within traditional infrastructure sectors. Whilst we focus on the long-lived assets with enduring value, we always need to have on eye on technological advancements to ensure that these assets will remain utilised in a dynamically evolving sector," says Southall. "For example, a data centre is a 'simple' bricks and mortar asset, but the evolution of AI demand has impacted how these facilities are used, with GPUs requiring much greater power density and cooling infrastructure to support them. This has an effect on how we design our facilities," he adds.

Macquarie Capital is playing an active role in this development across various regions. In the US, Macquarie Capital formed a strategic partnership with Prime Data Centers, which has seen 20x growth in critical power under development since Macquarie Capital's initial investment in 2021. In Europe, Macquarie Capital invested in KevlinX, a developer and operator of high-performance data centres targeting key European cities, which has commenced construction on a 32 MW site in Brussels.

In Asia, where digital infrastructure is relatively under-invested compared to European or US markets, Jain sees opportunities for Macquarie Capital being an early mover in the sector by backing businesses that have created a leading position in the market.

Jain mentions that in a rapidly evolving industry, it is very important to identify the next generation of digital infrastructure opportunities rather than simply searching for investments in established sectors, pointing towards CloudExtel as an example of this in practice.

"Small cell and fibre represent some of the emerging segments in India, due to the rapid growth in data consumption. These haven't really caught the attention of mainstream investors and present a very scalable investment opportunity," he says.

Embedding ESG and sustainability

Digital infrastructure, particularly data centres, consumes a significant amount of power. Data centres currently account for 1-2 per cent of global energy consumption, and this is expected to increase to 3-4 per cent by the end of the decade.⁹ With the advent of AI and other data-intensive technologies, power supplies are having to respond, putting pressure on electricity grids and the ability of states and the private sector to meet their environmental targets.

Macquarie Research has identified access to power as the key bottleneck to faster data centre builds. Based on silicon shipment forecasts, total data centre capacity demand is projected to grow from 49 GW in 2023 to 163 GW by 2028. This growth would push data centre power consumption demand from 438 TWh in 2023 to 1,900 TWh by 2030. That increase represents the equivalent of more than six times the amount of electricity the whole of the United Kingdom consumed in 2023.¹⁰

Consequently, and with many countries now imposing restrictions on new data centres, ESG and sustainability have quickly become a priority, compelling providers to comply with tougher environmental regulations.¹¹

Data centre providers are making big investments in renewable energy and energy transition. Amazon Web Services (AWS) announced in January 2023 that, as part of its efforts to decarbonise, it was moving to hydrotreated vegetable oil to power backup generators at its data centres in Europe.¹² In the US, Microsoft is supporting Constellation Energy in restarting its notorious three mile island, with work scheduled to begin in early 2025.¹³

In the wider digital infrastructure environment, the inevitable concerns about the impact it has on climate change can also be mitigated to a degree by the fact that fibre cables use less power than legacy networks, are more reliable and require less maintenance. Moreover, 5G mobile connectivity is more energy efficient than 4G.

A more positive outlook

The higher interest rate environment of the last two years is beginning to soften and the growth of alternative financing structures, such as securitisation, is reducing capital constraints. The use of preferred equity investments is also helping to expedite dealmaking and address differences over valuation expectations.

"As the world looks to address inequality, enhance prosperity and upward mobility, and alleviate climate change, it too recognises the fundamental importance of digital infrastructure to empower economic growth that also provides wider societal value," says Bradley. "Investors in digital assets should keep sight of long-term viability and the ability to deliver financial, social and environmental returns."

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