The investments that will power 30 million households by 2030

The digital world is so intertwined with our daily lives, that it’s often difficult to remember it wasn’t always the case. The ability to purchase online, conduct meetings over camera, or even conduct surgery using robotics has become the norm. But the trend is far from over, and the AI boom is simply the dawn of the next stage of digitisation.

Could investors be underestimating the opportunity available from digitisation?

Resolution Capital’s Sarah Lau believes that, when it comes to infrastructure, investors have completely underappreciated the opportunity from digitisation.

As she points out, just in terms of data centres, the opportunity set is estimated to be between 50-80 gigawatts by 2030 in the US – enough to power 30 million households if not more. A significant amount of investment and planning is required from an infrastructure perspective to get there.

She also highlights that infrastructure is a lower-risk option for exposure, compared to equities.

“We're not investing in technology risk and we're not investing in manufacturing risk. What we're investing in to take advantage of these themes are really monopolies providing critical services," she says.

In this episode of The Pitch, Lau discusses the opportunities in the global listed infrastructure sector from digitisation and how to value investments in this space. She also shares two of Resolution Capital’s best investment ideas.

Edited transcript

Digitisation is a theme you focus on in the portfolio. Why is this, and what is the opportunity set for infrastructure?

Digitisation has traditionally benefitted assets such as mobile network towers and fibre, and they will continue to benefit from this because you do need more and more communication towers, as we need more and more data.

Another set we have found will benefit immensely is actually electric utilities, and that’s really because of how power-hungry AI data-centres are. In the latest estimates out of reporting season, the data-centre opportunity set is now estimated to be between 50-80 gigawatts in the US before 2030. Now, to put this in context, that kind of electricity can power somewhere around 30 million households, if not more. That is a significant amount of electricity and it needs a lot of investment. It really needs to start now because firstly, supply chains are quite congested. But secondly, there needs to be a significant amount of planning in order to get this power for these data centres. That means this is an additional pillar for electric utilities which are already benefitting from decarbonisation and electrification.

We think the only real constraint in that growth is affordability by customers, which they can manage in the US because a lot of electric utilities own the entire value chain from generation to transmission to retail. This means they are monopolies and they are able to design the tariffs such that they can try to maintain affordability for customers. If usage increases at the same time – which we’re seeing increasingly – they are able to spread the bill over a larger customer set and it will be more affordable for them. We think this is a really underappreciated opportunity.

Why should investors be thinking about infrastructure for exposure rather than the normal equity names that you might think of?

Investors are increasingly appreciating real assets more and more, and that’s because they are inflation hedged. They are relatively resilient to economic cycles and they benefit from these themes such as digitisation.

We’re not investing in technology risk and we’re not investing in manufacturing risk. What we’re investing in to take advantage of these themes are really monopolies providing critical services. What we have seen through a couple of technology cycles is that they all, in some shape or form, need electricity and they need communications. Regardless of what the ultimate end use of that digitisation is, we need to be investing more in infrastructure and we think this is a really competitive but low-risk way of accessing the digitisation theme for investors.

It can be really difficult to value companies when you need to plan for cashflows from newer tech like this. How do you manage that challenge?

We have a very disciplined valuation approach. We only invest in newer tech when they can demonstrate there is a high barrier to entry and also, resilient cashflows to date. 

We’ve only invested in these newer tech assets when they are part of a regulated utility framework. 

For instance, there are some utilities that are investing in electric vehicle chargers that we’ve very comfortable with because this is a regulated framework. It provides resilient cashflows. But outside of that, we haven’t really seen the development of too many of these models come to the high-quality investment business model we would really gravitate towards.

Can you share some examples of some investments you've made for exposure to digitisation?

We’ve made investments in US electric utilities that are exposed to digitisation. Two of the names we really like in particular are Dominion Energy (NYSE: D) and Southern Company (NYSE: SO).

Dominion Energy’s key service area is in Virginia, which includes this little part in Northern Virginia that houses data centres.

70% of the world’s internet traffic actually goes through these data centres. We think that Atlanta, Georgia, which is part of their service territory, is emerging as the data-centre alley of the South of the US. To put that into context, electricity demand in the US has been flat for decades now because population growth has been offset by efficiency. These two names in the key service territories are actually seeing electricity demand growth at close to 9% towards the end of this decade.

In order to service that, there is a significant acceleration in investment and because they are monopolies, they are allowed to earn a fair return on these investments – they are both guiding 6-8% in terms of EPS growth. We think this could accelerate and they may be able to deliver more.

On top of this, Dominion Energy is trading on 17x PE, Southern Company is trading on 20x PE next year’s earnings. We think valuations of just one year PE don’t really take into account the long pipeline of growth these companies will have which will extend for decades.

Access to income and growth over the long-term

Sarah and the team are focused on companies which own physical assets or concessions which provide essential services. These assets typically have high barriers to entry, require significant capital investment as well as generate long dated and predictable cashflows. To learn more, visit the Resolution Capital website, or the fund profile below.

Managed Fund

Resolution Capital Global Listed Infrastructure Fund

Global Shares

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