Digital Infrastructure as a Real Asset Class

For most of the past decade, digital infrastructure occupied an awkward position in institutional portfolios. It was too technology-like for infrastructure allocators, who were accustomed to assets with regulated returns and limited technology risk. It was too infrastructure-like for technology investors, who were accustomed to the growth dynamics and exit multiples of software companies. The result was that digital infrastructure was often held in generalist private equity funds, where it was underweighted relative to its opportunity and undervalued relative to its characteristics.

That is changing. The largest institutional investors — pension funds, sovereign wealth funds, insurance companies — are increasingly recognising digital infrastructure as a distinct asset class within their real assets allocation. The reclassification reflects a genuine understanding of the asset's characteristics: long-duration contracted cash flows, inflation linkage through escalating lease structures, high barriers to entry driven by power and land constraints, and a demand driver — the exponential growth of data — that is more durable than almost any other infrastructure category.

The implications for asset pricing are significant. As institutional capital flows into digital infrastructure through dedicated vehicles, the pricing of core assets — stabilised data centres with long-term hyperscaler leases — has compressed to levels that reflect their infrastructure characteristics rather than their technology risk premium. This is good for existing asset owners, who are seeing their portfolios re-rated upward. It is challenging for new investors, who must either accept lower returns on core assets or move up the risk curve to development-stage projects and emerging markets where the infrastructure premium has not yet been fully priced in.

At Lensbridge, we have been investing in digital infrastructure since before it was recognised as a distinct asset class. Our early entry into the Asian digital infrastructure market — at a time when most institutional investors were still treating data centres as a niche technology investment — has given us a portfolio of assets and relationships that are difficult to replicate at current market prices. We continue to look for the next generation of opportunities in markets and asset types where the institutional reclassification has not yet occurred.