Q&A - Pantheon Infrastructure: Bridging the "digital divide"

Pantheon Infrastructure (PINT) is a listed trust managed by Pantheon, a global private markets firm. PINT aims to invest in a diversified portfolio of infrastructure assets through building a portfolio of direct co-investments in infrastructure assets. The fund has been very active in digital infrastructure while also making notable deals in the power & utilities, and renewables sectors. Most recently, PINT participated in a major £870 million (€1.02bn $1.11bn) equity raise for the electrification and battery storage solutions company Zenobe, led by KKR and Infracapital.

inspiratia speaks to Ben Perkins, principal in Pantheon's global infrastructure and real assets team, where he is chiefly responsible for managing PINT. Within the digital infrastructure sector, PINT has investments across a diversified portfolio of data centres, fibre networks and towers. Perkins delves into the rationale behind some key investments, the rise of AI, and the need for strong digital infrastructure outside of major cities. 

What sectors and assets in the energy transition and digital infrastructure space is Pantheon interested in? 

Broadly speaking, we are technology agnostic in the long term. PINT is a total return vehicle. It is not seeking to compete for the same kind of shareholders as you see in the core renewable funds. We are looking for assets that have a clear growth strategy, and that can capitalise on the growth dynamics in the market. We have been very active in digital infrastructure, with just north of 40% of PINT's assets in digital, which is nicely diversified across towers, data centres and fibres. 

Then, with the recent investment in Zenobe, we have just shy of 20% in what we bracket as renewables and energy efficiency. But taking a step back from the sectors that we are targeting- we are looking at established platforms, we are looking at companies that have some downside protection through the fact that they have an existing operational portfolio, so it means that you are less sensitive to the extent to which they capitalise on that growth- there is some degree of fallback. 

So, in the case of CyrusOne, they have around 60 operational data centres. With Vantage, you have something like 20 operational data centres. For Delta Fiber in the Netherlands – when we invested in them, they had rolled out to the north of a million homes. So, we are not taking pure greenfield risk, we are investing in businesses that have an existing platform. So, you get contracted revenues from the existing fleet. These companies are well-positioned - they have access to supply chains and financing. They know their way around planning issues. Basically, these companies have already proven their ability to deliver. 

What characteristics do you look for when targeting companies to invest in? 

One of the things we want to be sure of is that these companies are operating in markets that have some clarity in terms of the political landscape. That is more relevant in the energy transition space, where we have seen a bit of noise in the UK recently, but I don't think it is going to be enough to put off would-be investors. 

 We want to see how these companies are going to execute and deliver growth over our typical five to seven-year hold period. So, the underlying business model for most of the 13 investments we have done assumes that we will exit in between five- and seven-years' time. In most cases, you have a very steep earnings growth profile during that period. Then you are ultimately taking an asset that is core-plus, value-add right now and hopefully turning into something with more core-like characteristics. 

What is the rationale behind PINT's focus on digital infrastructure companies? 

We have invested in several data centre businesses like CyrusOne and Vantage Data Centres, which are focussing on business with hyperscalers, which includes the likes of Meta, Google, Amazon Web Services - all these companies that quite simply can't get enough data centre capacity right now. We also invested in Vertical Bridge and GD Towers, which are both capitalising on regulatory-driven 5G coverage requirements. So, there are significant tailwinds in these sectors. 

For the data centre operators, where we have conviction in their ability to deliver is the fact that they have large balance sheets that demonstrate the ability to, amongst other things, land bank. Grid connections are also a big factor in digital infrastructure, certainly in data centres. These are businesses that have a proven ability to access grid connections. 

On fibre assets, we have steered clear on some of the smaller-scale operators, and we have gone for companies that have very specific characteristics. We invested in National Broadband Ireland because its PPP structure benefits from some certainties around the scope of the intervention area. Long term, you have a high degree of visibility over how their business is going to grow, their ability to deliver the CapEx programme, and ultimately get the rollout and penetration needed. The situation in these rural markets is also very different compared to urban areas, where you see more overbuilding. 

Delta Fiber operates in the Netherlands, which does not have a subsidy revenue model like NBI, but there, they have a first-mover advantage, which is accentuated because we think that they're going to move into an open-access wholesale model eventually. 

These investments demonstrate that we like assets that have an existing platform and have decent stature to go and capitalise from the tailwinds in each sector. 

The demand for digital infrastructure has soared considerably in the past few years. How has the industry been able to keep up with that demand? 

You could judge this simply from the perspective of the consumer because we are ultimately all consumers. For those of us living in the microcosm of London or other big cities, do we have access to high-speed internet? What is the latency like when we are firing up our phones and trying to get a song from Spotify? Generally, it is not so bad, so you could say the industry has been keeping track of that. 

But there are areas where the industry has not kept up. In this country, we talk about "levelling up", but there is a similar agenda across a lot of developing economies, which is bridging the digital divide in rural economies. There are players in the industry who have proven themselves to be very effective. NBI is a great example of this – it has an Irish government-backed, PPP-type structure. But it required the wherewithal and a degree of private capital to unlock that investment. It is one of the biggest electrification projects in Ireland and is looking to deliver fibre to nearly 600,000 homes across 97% of Ireland's landmass. That is a massive undertaking, and it is an example of effective government collaboration with the private sector. 

Fibre may be the more relatable example, but data centres are where there is just enormous growth. When we did the two deals, we were not really banking on AI and the impact that would have. From an investment perspective, you are looking at the hyper-scaler needs over the next ten years because that is where your business plan goes. So, we are seeing significant tailwinds there. A lot of this has been concentrated on a couple of players, especially in the US market, where Vantage and CyrusOne are focused. But I think a lot of capital has flowed into that space, both from an equity and a debt perspective. 

Speaking of this "digital divide", is there something governments can do to help make investment cases stronger? 

I would say the Irish government has been very proactive with what it has done with the National Broadband Plan, and it is hard to say what more they could do. That is delivering – NBI is on track and on budget to roll out within the milestones that have been set. But I think that is specific to Ireland. Good policy should only really intervene where it needs to intervene. Again, this is relative to the market PINT and its fibre assets are in. The private sector has been very adept at providing the capital for the infrastructure that it needs.

PINT doesn't have investments in any UK fibre asset. Other than a couple of the top players, a lot of the smaller ones have been getting crowded out, and it has proven to be a very challenging time, particularly given the recent macro trends, but that is not just an issue for the UK. 

PINT recently participated in a significant equity raise into Zenobe, led by KKR and Infracapital. What was the investment rationale there? 

We are very much looking to diversify more into renewables and energy efficiency. It is front and centre of the sustainability agenda, with PINT being an Article 8 fund, And quite frankly, if you cannot get excited by a deal like Zenobe, then I don't think sustainable investing is the right game for you to be in. If you look at what they have done to date – they are one of the largest operators of battery grid infrastructure in the UK, and the first to have done a reactive power contract. They are leading the charge, if you excuse the pun, when it comes to that type of grid infrastructure in the UK. Certainly, the other side of their business, the electrification of EV buses, is also interesting. These are sectors that are forecast to grow at 25% to 30% over the next couple of years, up to 2030, so the opportunity set is enormous. 

The business models in the battery sector have evolved a lot in the past few years. Five or six years ago, there was a lot of uncertainty around revenue stacking, and the contracts were quite short-term. Now, you can create an effective strategy that de-risks a material portion of your revenue with long-term contracts and trading revenue floors. There is still some volatility, but this sector is now one where you can have a bit more certainty over outcomes than five years ago, which is allied to the fact that you have this enormous growth potential because of decarbonisation requirements.