The underpinnings of our virtual world
It’s easy to forget there are physical assets underpinning our increasingly virtual existence. Digital infrastructure including data centers, cellular towers, and fiber-optic cable support many of the activities we associate with modern life. These physical assets enable person-to-person connectivity and on-demand commerce and entertainment. They support innovation in fields ranging from transportation to healthcare. They will be essential in a future where artificial intelligence and connected devices play a greater role.
Given how critical these assets are, the digital infrastructure space is expected to see massive investment in the coming years. Spending is likely to reach into the trillions of dollars. The International Monetary Fund estimates it will cost around US$418 billion just to connect all of the world’s currently unconnected people.
And there could be a cost for economies that don’t spend enough on digital infrastructure. In one-quarter of European Union member countries, more than half the companies say a lack of digital infrastructure is an obstacle to making long-term investments, according to the European Investment Bank.
These factors help explain why institutional investors are directing capital towards digital infrastructure. In this report, we will look at two subsectors of digital infrastructure—data centers and cellular infrastructure. But first, here’s a look at why demand for these assets is soaring.
Ontario Teachers’ is investing in cell towers and data centers around the world. Learn about how the digital infrastructure space is expanding amid strong demand for more connectivity and computing power.
In developed countries, we’re using our phones in ways we hadn’t thought possible 20 years ago. Meanwhile, people in many emerging markets skipped the desktop computer phase entirely and went straight to accessing the Internet via their smartphones. Ericsson says worldwide mobile broadband subscriptions totaled almost 7.5 billion in 2023, up from 2 billion a decade earlier. The telecom giant predicts data traffic per smartphone will soar between now and the end of the decade.
The COVID-19 pandemic accelerated a trend among businesses to leverage data and digital technologies to improve productivity, and to scale and innovate. It also accelerated the adoption of cloud computing, in which businesses choose from a vast array of computing services offered by third parties over the Internet. For businesses, a key advantage of moving to the cloud is being able to access state-of-the-art computing services without having to maintain and build that infrastructure themselves.
Fifth-generation, or 5G, telecommunications networks are being deployed around the world. Compared with previous wireless standards, 5G provides faster speeds, improved capacity and extremely low latency (the delay between when information is sent and received). These attributes will help deliver unprecedented communications between people, mobile devices and other objects, and support use cases like self-driving cars. This deeply interconnected world—the Internet of Things—will also drive demand for edge computing, where data is analyzed closer to IoT devices to further reduce latency.
Businesses have used artificial intelligence applications like data analytics for a while. But the recent rise of AI’s wildly popular subset, Generative AI, is putting the technology into the hands of more workers and more consumers. Just how widespread the use of AI will become remains to be seen, but it’s clear the technology will be transformational. Increased adoption will drive demand for massive computing power and ultra-fast network responsiveness.
Strong tailwinds are driving significant investment in cellular towers and data centers. The forecast of continued strong demand is only part of the appeal. Cellular tower and data center owners typically enter multi-year, escalating contracts with their clients. That makes these assets attractive for long-term investors, such as pension funds, who seek steady, inflation-protected returns.
The criticality of these assets is another factor. Indeed, the wireless networks of which cell towers are the backbone are sometimes called the fourth utility (after electricity, water and gas) because of their importance in our daily lives. That helps shield these assets somewhat from the impact of economic downturns. The same can be said of data centers. In a data center industry survey by consultancy Turner & Townsend, 79% of respondents called their sector “recession-proof.”
A cellular tower is the vertical real estate that houses antennas and other electronic communications equipment owned by mobile network operators. Three decades ago, many wireless operators owned their towers, since building and operating an extensive wireless network conferred a competitive advantage. As coverage became more distributed among all players, that advantage faded. With pressing requirements to invest elsewhere in their networks, many U.S. carriers opted to sell their tower assets and lease them back. That gave rise to an independent “towerco” model in the U.S. that has since spread to many other global markets.
Growth in the towerco sector comes from building new towers for carriers expanding their networks. It also comes from increased co-location, in which the antennas and equipment of more than one mobile network operator are installed on the same tower. Co-location enables cell tower companies to generate more revenue from each tower. That helps keep their costs down and has the added benefit of being more sustainable and reducing the visual impact of new towers. Co-location has broader benefits too, lowering the overall cost of expanding wireless networks to underserved or rural areas.
A data center is a warehouse-like building that houses computing equipment—servers, storage systems, routers, etc.—supporting a range of business applications. Some businesses operate their own data centers; others lease computing equipment operated by a third-party operator. Still others opt for co-location, in which a data center operator hosts the infrastructure (power, cooling and so on) in a physical space in which clients run their own computing equipment. Important customers of data centers are the so-called hyperscalers—the well-known cloud providers that provide computing power and data storage on a global scale.
The model for how best to deliver critical computing power to businesses has evolved over decades, from the mainframe computers of decades ago to companies building their own data rooms after the advent of smaller, cheaper servers. The limitations of the on-premises model (including operating costs and scalability) spurred the growth of the data center industry.
Growth in the data center sector continues as more companies move their critical IT applications to the cloud and as AI supercharges demand for computing power and data storage.
Even with powerful tailwinds driving demand for digital infrastructure, the sector faces some challenges. A big one is simply fulfilling current demand, let alone preparing for a surge in future demand.
Here are other challenges that companies operating in the sector, and their investors, are working to address:
Digital infrastructure presents an attractive investment opportunity, one with a stable and contracted cash flow profile that helps insulate investors from downside risk and also offers significant growth potential. To stand out in a market attracting substantial new capital, we align with companies that have the talent and expertise to capitalize on digital transformation and exponential data growth to create long-term value.
A significant expansion of digital infrastructure will be critical if individuals, businesses, cities, and countries are to take full advantage of the economic and social opportunities arising from digital innovation. Project proponents are racing to meet growing demand while also being careful to consider the sustainability and resilience of these critical assets. Additionally, they’re working to show they can balance insatiable demand for ever-faster connectivity and computing power and community concerns about the local impact of digital infrastructure.
At Ontario Teachers’, we’ve made investments in companies that operate cellular tower and data center assets from Dallas to Mumbai. Here’s a look at four of our portfolio companies in the space and how they’re seizing on current market opportunities.
Partnering with property owners to extend connectivity
From cell tower development and co-location to indoor wireless systems, Florida-based Diamond Communications offers a full suite of wireless infrastructure solutions in all 50 states. Diamond also partners with third-party companies to improve connectivity across the U.S.
Pioneering the independent towerco model in a new market
Connexa was a key player in the evolution of New Zealand’s wireless communications infrastructure market. The specialist mobile tower operator owns about two-thirds of the cell towers in that country and has a strong pipeline of new sites.
Leveraging offsite construction to help clients expand rapidly
Princeton Digital Group has built a pan-Asian data center platform to serve some of the world’s biggest cloud companies. It’s focusing on building AI-ready data center campuses in key Asian markets.
Partnering with property owners to extend connectivity
U.S.-based Compass Datacenters offers a unique approach to design, construction and development that enables it to deliver new data centers quickly into a rapidly expanding market. Its single-tenant mega-campuses serve some of the world’s largest hyperscalers.
Because they require significant capital and planning and are operated under multi-year contracts, digital infrastructure assets like cell towers and data centers are well suited to Ontario Teachers’ long-term, active investment approach. With demand for digital infrastructure expected to outstrip supply in the coming years, investing in these assets will help us pay pensions and deliver retirement security for our members.
What’s more, we believe that, when built and operated with sustainability and resilience in mind, these assets will help unlock economic growth and innovation across countries, with broad benefits to businesses and people.
