Investment in the digital infrastructure market increases

Around $800 billion has been allocated to private funds for investment in datacenters and telecommunications infrastructure over the last decade, with funds specialising in digital infrastructure accounting for a larger share of the funds allocated in recent years. Government initiatives, along with the digitalisation of the global economy, have paved the way for growth in the sector. Now, AI points to the need for expansion, according to PitchBook.

The digitalisation of the global economy has required massive investment, led to rapid growth in demand and translated into substantial returns for investors since the global financial crisis. These returns, along with the anticipation of AI’s huge computing needs, have coincided with more dollars from institutional investors looking to gain exposure to digital infrastructure and its favourable winds.

AI-compatible datacenters differ from their counterparts in that they have much higher computing and storage requirements, and therefore higher power and cooling needs. Among the important structural differences, AI-compatible data centres are usually equipped with graphics processing units (GPUs), a type of hardware that helps accelerate parallel processing.

Some analysts point out that the total demand for datacenters, as defined by energy consumption, could reach 35 gigawatts (GW) by 2030 in the US market alone. Part of this is attributable to AI. Worldwide spending on IaaS related to Generative AI is also expected to reach $15.3 billion by 2027, according to IDC data.

Although AI often dominates the conversation, there are other technological and consumer behaviour-related headwinds that should support digital infrastructure returns in the future. For example, the increased adoption of other technologies, such as IoT applications, sensors and actuators, will require additional capacity from cell towers and datacenters. The continuation of hybrid and remote working after the COVID-19 pandemic and the videoconferencing standards it has created will also have lasting effects on the demand for both types of digital infrastructure. So will the high levels of user-generated content creation and consumption on platforms like TikTok and YouTube.

Furthermore, in addition to the technologies and trends of which we are already aware, there may be other unforeseen or less likely technological changes that will dramatically increase the need for telecommunications or datacenter infrastructure. For example, although there are some considerable obstacles in the way of the widespread implementation of smart cities or autonomous vehicles, their impact on the demand for digital infrastructure would be substantial.

For this reason, many private infrastructure investors remain optimistic about digital infrastructure, with reason to believe that other return factors will generally outweigh downward pressures such as the need to reduce energy and water consumption in datacenters.

Sustainability has become an important consideration for asset allocators and managers in recent years, putting pressure on digital infrastructure funds to reduce inefficiencies and try to solve these problems. However, even in the absence of sustainability-related investment preferences, the pressure on energy and water supplies still poses financial, service continuity and regulatory risks in several key regions.