Digital infrastructure plays an essential role in our modern-day society, with the new investment trusts hoping to generate predictable and attractive returns irrespective of the state of the economy or the wider stock market.
Investments in this area include mobile communications towers, subsea fibre-optic cables, terrestrial fibre-optic networks and data centres. It is an established and fairly large asset class in its own right and although some of the open-ended infrastructure funds have an allocation, the illiquid holdings are probably better suited to investment trusts.
The demand for data continues to grow at a huge rate. Since 2010, the number of internet users worldwide has doubled, while global internet traffic has grown twelve-fold, which is equivalent to growth of around 30% per annum. It is thought that the number of mobile internet users will increase from 3.8 billion in 2019 to five billion by 2025, which means that there will need to be substantial new capacity for terrestrial and subsea bandwidth.
First mover advantage
Cordiant Digital Infrastructure (LON:CORD) is hoping to raise £300m at an issue price of 100 pence per share and if all goes to plan will be admitted to the market on February 16. It intends to borrow money to boost the amount available to invest and enhance the prospective returns with an intended debt to gross assets ratio of 20% to 35%.
Once the cash is fully invested the target is to generate NAV returns of about nine percent per annum, although the dividends will be much lower. The plan is to pay one pence per share in its first full financial year, with two to three pence in the second year, rising to at least four pence by year five, which seems pretty modest.
A more attractive feature is the award of subscription shares on a one for eight basis for the ordinary shares acquired at IPO. These will give the holders the right to buy additional ordinary shares at prices that ratchet up over time and offer a way to benefit from any outperformance.
Quick out of the blocks
The other proposed launch is of Digital 9 Infrastructure (LON:DGI9), which is looking for £400m. It will be managed by Triple Point Investment Management, which already runs investment trusts in the areas of social housing and energy efficiency.
Digital 9 is targeting total returns of ten percent per annum and aims to pay an annual dividend of six percent of the IPO price in its first financial year and then increase it thereafter. This suggests that it can start to generate cash much faster than CORD.
Cordiant has a pipeline of opportunities worth €1.5bn, some of which are existing assets, although others are at the development stage. Digital 9, however, is planning to invest £160m from the outset in Aqua Comms, the owner of 20,000km of subsea trans-Atlantic fibre that provides the backbone of the internet. It also has access to a substantial proprietary pipeline of other investments, of which one billion dollars’ worth will be available within 12 months.
Both investment trusts provide a dedicated exposure to a whole new area for most private investors and it will be interesting to see how they perform, especially in view of the ongoing elevated demand for these types of assets.