Brookfield Infrastructure Partners (BIP -1.17%) has created significant value for its investors over the years by acquiring and operating critical infrastructure assets like pipelines, ports, and powerlines. While the company owns these assets for the long term, it does turn over its portfolio by selling mature businesses and using those proceeds to acquire faster-growing assets. One area where it sees lots of growth potential is in data infrastructure.
CEO Sam Pollock laid out why the company wants to invest in that sector on its first-quarter conference call, including providing a detailed look at the four types of data infrastructure that Brookfield seeks to own.
The case for data infrastructure
Pollock started his deep dive into why Brookfield is investing in data infrastructure by stating that the "sector continues to offer interesting investment opportunities given the large amounts of capital that need to be deployed in the space." He pointed out that:
Data has been one of the fastest growing commodities in the world and we expect this rapid growth to persist for the foreseeable future driven by a number of factors including greater smartphone penetration, increasing data consumption, advent of 5G networks and other new and evolving uses such as Internet of Things, AI and other applications that depend on low latency. We have identified this exponential growth in data users worldwide as a significant opportunity, particularly with the large-scale infrastructure investments that will be required to support data transportation and storage.
As Pollock noted, the main reason why Brookfield wants to invest in data infrastructure is its growth potential. We're using more data across more applications, which is driving the need for the systems to transport and store all this information. That's creating a significant opportunity for companies like Brookfield to invest in building out these critical assets. The CEO commented that:
[O]ur belief is that as people, places, and objects become increasingly more interconnected, the importance of data infrastructure assets will rise. Given the ongoing evolution and innovation taking place in the telecom sector, we are seeking to detach these assets from their corporate owners and focusing on contractual arrangements that hold attractive infrastructure characteristics and bear limited technology and obsolescence risk.
Zeroing in on four specific opportunities
Brookfield's CEO then took some time to discuss how his company aims to take advantage of this opportunity by focusing its efforts on investing across four main themes:
- Wireless infrastructure, such as telecom towers
- Fiber networks, such as high-speed internet networks.
- Data centers, which store information for large corporate customers like cloud computing
- Integrated data operations, such as mobile carriers and broadband service providers
On wireless infrastructure, Pollock pointed out that the company bought 7,000 towers in France in 2015, which was its first data-related infrastructure investment. He then noted two key aspects of towers that Brookfield finds attractive.
First, Pollock said that
[G]rowth in this business is driven by the requirement for mobile network operators to increase their site coverage to meet spectrum license obligations and improve network capacity to support higher data speeds and usage. We believe investments in wireless infrastructure are attractive as these are long-life assets, which benefit from natural barriers to entry due to location scarcity and challenging permitting environments.
Next, he stated that "customers are willing to enter into the long-term contracts of up to 20 years with embedded indexation to secure capacity." As a result of those two factors, Brookfield can generate stable, growing cash flow by operating telecom towers.
Brookfield has also made some investments in fiber networks through its existing portfolio companies. Its U.K.-regulated distribution business, for example, has been deploying fiber-to-the-home in new housing developments as part of a multiutility offering, which also includes electric, gas, water, and sewer connections. Meanwhile, the company's French communications business has been building out fiber networks in that county.
The reason Brookfield is investing in building out fiber networks is that, "like traditional utilities, broadband is becoming a basic household need as society demands reliable connectivity." As such, it can generate steady cash flow on its investments to expand these networks.
Data centers, meanwhile, are a new focus area for the company. Brookfield has acquired businesses on three continents over the past year, including buying data centers from AT&T and partnering with Digital Realty to acquire data centers in South America. It likes these assets because companies continuously need more data storage capacity, which is why data center tenants typically sign "long-term take-or-pay contracts of 10 years or longer," according to Pollock. He further noted that these agreements "allow us to achieve attractive risk-adjusted returns within the initial contract term and significantly derisk the investments."
Finally, Pollock stated that:
A potential area of opportunity for us in this type of asset class is the acquisition of asset heavy integrated telecom operators. As the name implies these are businesses that provide utility like broadband and wireless services to customers through owner operated tower and fiber networks. These businesses will have customer-facing activities, similar to our distribution companies.
In other words, the company would consider acquiring a mobile carrier or broadband service provider that also owns significant infrastructure like cell towers or a large-scale fiber network. The company could then separate the infrastructure assets from the consumer-facing business or continue operating the integrated enterprise.
Expect data infrastructure to become an increasingly important growth driver
Brookfield Infrastructure has invested several hundred million dollars over the last year to build out its data infrastructure platform. Three main factors are driving these investments.
First, data infrastructure has tremendous growth potential. Second, the company can earn attractive returns on its data-focused investments. Finally, it can generate relatively steady cash flow on these assets backed primarily by long-term contracts.
This compelling blend of returns, stability, and growth should enable Brookfield to create significant value for its investors in the future as it continues pouring money into data infrastructure.