Keynote interview with Jean-Francis Dusch, Chief Investment Officer, Infrastructure Debt at Edmond de Rothschild Asset Management
Contractual revenue arrangements, ESG criteria and location are all critical for lenders in the data centre space, says Edmond de Rothschild’s Jean-Francis Dusch.
Major fibre projects are maturing, with a greater emphasis now on network extensions and consolidation between equity owners. The towers space is less active. Yet while there are significant opportunities in these areas, the same cannot necessarily be said for data centres.
With the advent of artificial intelligence, the data centre market is particularly active. Selectivity is therefore paramount, says Edmond de Rothschild’s Global Head of Infrastructure, Jean-Francis Dusch. For infrastructure debt managers, this means a laser focus on contractual arrangements and location, particularly in Europe, where prime sites can be scarce.
Meanwhile, sophisticated debt managers with genuine digital expertise are scanning the horizon to identify the next value proposition in digital infrastructure. The jury is still out on satellite technology, with questions around quality of service and cost. However, this emerging technology could ultimately become either a competitor or a complementary offering to fibre.
What is the scale of the deployment opportunity today within the digital infrastructure market?
Digital infrastructure has represented around 20% of our portfolio for more than 10 years. As the head of digital within our team, I come from a TMT background, which is probably why we were among the first infrastructure debt managers to embrace digital as part of our investment strategy when we established our business in 2014.
Last year, however, digital infrastructure represented between 25% and 30% of our deployment. It could certainly have been higher, given the volume of dealflow we saw, but diversification is of course paramount.
How is the opportunity set for fibre evolving?
We are still seeing opportunities, although I would agree that we seem to be nearing the end of a cycle in some core European countries. The fibre-optic opportunities we see today tend to involve less major capital expenditure than in the past, and more extension of existing networks and consolidation.
We still see new fibre projects being developed in the Nordics, for example, and there is always some level of activity in other markets, including Germany, France and the Netherlands. However, there is certainly not the same degree of major roll-out that we have seen in recent years.
I do not see satellite as a threat, certainly not in the short term, but it does represent a question mark over a five- to 10-year horizon. It will depend on the quality of service provided and how cost-effective it proves to be to maintain satellites once the network has been deployed.
“It will certainly be interesting to see if satellite emerges as a viable alternative.”
Are there any lessons that the industry can learn from the challenges faced in the fibre space?
I started working in the telecoms industry when the first mobile licences were being granted outside the incumbent operators. At that time, business plans were something of a crystal-ball-gazing exercise, but the reality was that everyone ended up underestimating the market’s potential.
With fibre-optic broadband, the opposite turned out to be true, albeit not by margins large enough to discredit the sector or lending activity.
This is where experience matters. We have been, and always will be, conservative in how we size debt. There is always a buffer, and asset selection is also critical. Many parameters must be considered, including the nature of the addressable market.
I believe our prudence has paid off: our debt structures have remained viable and financial covenants have been met, even when assets have not delivered against the initial business plan. Of course, we held discussions about what we would do in the event of a default, including the risk of acceleration and enforcement of security packages. In the end, that did not happen, and the fibre assets in our portfolio continue to perform well.
It is important to remain humble and not assume that you are better than anyone else. Above all, it is important to be selective. Over the past four or five years, there have been between 10 and 15 digital infrastructure assets that we could have selected. We chose the best five or six according to a strict set of criteria, rather than pursuing every opportunity simply because digital was considered a hot sector.
How much appetite is there for towers?
We continue to see opportunities in towers through upgrades and refinancings, as well as some M&A activity. However, towers are not the primary driver of our digital infrastructure dealflow. We focus on good proprietary assets.
For example, we have participated in multi-billion-euro deals such as KKR’s acquisition of Altice’s towers in France, but we also see much smaller deals. We are agnostic on size.
By comparison, data centres have been dominating dealflow in recent months. How significant a lending opportunity do data centres represent today?
The interesting point is that, until around two to three years ago, we still had to explain data centre investments to LPs. There was a concern that data centres were more of a real estate play.
Clearly, data centres have underlying characteristics that make them eligible as infrastructure, and it is possible to structure investments so that they fulfil the necessary criteria for an infrastructure-finance-type transaction.
As AI has become a reality over the past year or so, demand for data and data centres has only grown.
“Up until around two to three years ago, we were still having to explain data centre investments to LPs.”
What do you look for in a data centre and what do you try to avoid?
First and foremost, you must be comfortable with the contractual arrangements, the quality of the counterparties and the revenue mix. There could be a single corporate customer that has entered into a long-term contract, or there may be a mix of clients.
In the latter case, we would want to ensure, for example, that the top 10 to 20 clients represent the majority of revenues and that there is a strong history of contract renewals. This all speaks to the credibility and visibility of cashflows.
Location is especially important for capital-expenditure projects. In Europe, many of the strongest sites have already been developed, and prime locations can be in short supply.
I would also highlight the importance of working with experienced sponsors: owners that you know will take a long-term view. Generally, we find that equity sponsors have been active in this space for decades and have deep expertise. They know which contractors and operators to use, and possess the technical skills required to develop and manage data centres and other digital assets.
What ESG considerations do you need to take into account when investing in data centres?
This is certainly an important consideration. First, we need to ensure that data centres are powered by renewable energy. This is the most obvious way to ensure that data centres are aligned with our ESG convictions.
However, data centres also play a broader role in the energy transition. There is a huge volume of data associated with energy efficiency and the roll-out of smart meters, for example. When it comes to EV charging, a dedicated cloud environment is almost required to manage these networks.
There is significant data management involved in these major transition initiatives. This is one reason why countries are announcing hundreds of millions, if not billions, in support for data centre development.
Is the data centre space becoming overheated?
Not really, because valuation risk is borne by equity holders. Of course, we will not pursue assets that have been overvalued, not least because in those circumstances the amount of debt we would be willing to provide might be unacceptable to the sponsor.
The debt structure is within our control. We conduct our own valuations of assets and size the debt accordingly.
What new digital infrastructure opportunities do you see on the horizon?
It will be interesting to see whether satellite technology emerges as a viable alternative. I do not see it as a threat to fibre optics at present, but it may play a role in data provision further down the line.
Having a seasoned head of digital infrastructure who has a deep understanding of these technologies, as well as strong relationships with equipment suppliers and financial sponsors across the digital infrastructure ecosystem, helps us form a view on the next value proposition in the digital space and the relevant time horizon.
On that basis, we believe it will be five to 10 years before satellite reaches a sufficient level of maturity to become a scalable investment opportunity.