By Scott Wooldridge

Internet services and connections can sometimes seem to be both everywhere and nowhere at all. We refer to things being “in the cloud” as if they were as light and insubstantial as water vapor.

Yet all those services require a huge number of servers, fiber optic cables, cell towers, and the supporting equipment and facilities needed to install and keep the Internet running. Many also require building new solar power facilities or links to other sources of energy. The building boom for this infrastructure has been going on for some time and is only expected to intensify, creating a digital infrastructure industry that has drawn strong interest from investors. The growing emphasis on AI only increases the demand for in investment in this area.

“The digitalization of the global economy has required massive investment, led to rapid demand growth, and translated to substantial returns for investors since the global financial crisis. Those returns, alongside anticipation of AI’s tremendous need for computing, have coincided with more dollars from institutional investors looking to get exposure to digital infrastructure,” a recent analysis from Pitchbook said.

There is currently discussion about which countries have the best approach to such investments, and how countries with large institutional funds, such as Canada, are exploring the opportunities in this area.

A Thriving Industry—With Growing Demand

A J.P. Morgan report from this year said that digital infrastructure investments are part of a building boom. “Demand for data transmission and storage are growing dramatically. Global data traffic is projected to grow 25% per year through the end of the decade, more than tripling its 2023 levels. The digital infrastructure that exists today can’t support that demand growth,” the study said.

The Pitchbook analysis said digital infrastructure investments have a strong track record, with a cumulative $800 billion in commitments to the sector between 2014 and 2023. And its report noted the growth of “specialist” funds dedicated to investment in digital infrastructure: “The number of funds investing exclusively in digital infrastructure has continued to grow,” the report said. “Of the $800 billion in commitments to funds with some exposure to the sector, $44.0 billion was raised by specialist vehicles investing exclusively or almost exclusively in digital infrastructure.”

Experts note that the U.S. has invested more in digital technologies, especially in expanding access to broadband networks. “There’s been a focus on getting fiber optic networks to the home,” says Brandon Howald, a private equity partner at Ropes & Gray. “You hear the term ‘fiber to the home.’ That’s been an area of focus for a while, but it will continue to be an area of focus for investors in building out those networks throughout the  country, in order to meet that demand in all different geographies.”

With all the construction of hi-tech facilities, power needs have also increased, meaning that some of the projects include the construction of renewable energy sources such as solar power facilities or connections to more traditional energy sources such as fossil fuels.

Since many large investors have policies encouraging investment in green or renewable technologies, the large power requirements for some digital infrastructure investment might be seen as working against those goals.

However, Sally Davis, part of the Ropes & Grey real estate investments and transactions group, noted that it’s not an “either/or” situation. “We’re seeing data centers with their own solar plants that are built adjacent to the centers,” Davis says. “I think there’s also an acknowledgment that while we want to continue to develop renewable energy opportunities, there is a separate need to expand. So, we need to continue to rely on other energy sources we have at our disposal. I don’t see them as in conflict, I see them as parallel.”

An International Model?

A recent article at Pensions and Investment noted how other countries were using Canada’s institutional investors as a model for smart, well-run investments.

“The eight largest public sector pension funds in Canada are often held up as beacons of sophistication,” said Sophie Baker, international news editor at the site.

The ‘Canadian model,’…is that of a group of pension funds known for direct investing, internal management, and excellent governance.”

The “Maple 8,” a group of top pension funds in Canada, are also known for alternative investing—investments outside equities, fixed income, or cash, Baker says. There are variations in how funds from different countries invest in infrastructure, with Canadian funds preferring to invest in Canadian projects, while funds from the U.K. have a much larger global footprint. Baker noted that “home bias” is an area of debate—Canadian funds also take criticism for not investing enough in Canadian ventures. But with consolidation trends and the global footprint of digital business, a wider view may become the norm.

One large deal that recently drew attention: a Blackstone-led consortium that acquired data center platform AirTrunk for an enterprise value exceeding $24 billion ($16 billion), marking a large investment in the Asian/Pacific region in this case. One member of the consortium: the Canada Pension Plan Investment Board (CPP). In an interesting twist, one of the outgoing funds that were part of the AirTrunk group was Canada’s Public Sector Pension Investment Board—which owned 88% of AirTrunk.

“CPP Investments has invested in the Asia Pacific data center sector for several years, and we have witnessed significant growth in this space, fueled by a strong demand for digital infrastructure and, more recently, the increasing adoption of artificial intelligence,” said Max Biagosch, senior managing director, global head of Real Assets and head of Europe for CPP Investments.