Pension plans deal in long-term horizons. It is the nature of our business.
For example, imagine you are a member of OPTrust, the C$20 billion ($15 billion) plan for Ontario’s blue-collar civil servants. You begin contributing to your pension at the start of your career, retire at age 65, and live to the ripe old age of 100. All told, we will have spent as many as 80 years together. That is close to a cradle-to-grave relationship.
It is for this reason that many people think of pension plans as slow-moving organisations. In fact, we are quite the opposite.
At OPTrust, our mission is paying pensions today, preserving them for tomorrow. In the example I just gave, tomorrow might be 80 years down the road. That means we are not only working in today’s economy, but constantly adapting to prepare for the economy of tomorrow as well. Our focus is not the day-to-day fluctuations of the market – we are focused on where the economy is headed in the long term.
We are working in a market that is characterised by disruption, and the best thing to do with disruption is embrace it.
In February 2018, OPTrust announced the formation of EdgeCore Internet Real Estate, a partnership with Mount Elbert Capital Partners and Singapore’s GIC that builds, owns and operates data centres across North America. We are one year into our investment, and we are rolling out campus developments across the US, including Dallas, northern Virginia, Phoenix, Reno and Silicon Valley.
While these campuses comprise buildings or real estate in the traditional sense, we classify our data centres as infrastructure in our portfolio. But it doesn’t matter how we decide to categorise them. The important thing is we now have exposure to a new and growing asset class and that asset class is data.
In the industrial age, commodities were the raw materials – what companies used to manufacture their products. In the new age of technology, knowledge and information, the raw input is data.
Data centres today are what factories were 50 years ago. They are the factories of the information economy. In the same way that a commodity such as oil would require infrastructure, like a pipeline, to reach the consumer, data centres are now what connects the sender and the recipient. If we think of a pipeline or a transmission line for electricity as infrastructure, it makes sense to think about the connectivity of data in the same way.
More than 2.5 quintillion bytes of data are created every day, and 90 per cent of the world’s data was created in the last two years. This is exponential growth. As the demand for data grows, data centres will be an integral part of the infrastructure of storage.
Despite the relatively short time OPTrust has been in this space, we believe it has the potential for significant growth. Speed matters, and location is important for getting data more quickly to users. We believe that we are still in the early innings of the growth story in terms of data demand and intensity.
Smartphones, social media and big data are driving today’s demand and we expect developing technologies such as machine learning, autonomous vehicles and the internet of things to drive demand in the future. There has also been a change in the perceived value of data. Not only are businesses and consumers tracking more data points, but also they are saving that data and continuously re-analysing it to make new, better decisions. If you have ever decided to walk the stairs instead of taking the elevator because of the step counter on your smart watch, then you know what I mean.
Data centres also offer OPTrust a means of diversification, giving exposure to growth drivers and risk factors that are different from our other assets. Security will continue to be a challenge in this space, as will environmental concerns. Rising power costs are a risk as well, so we are looking for utilities that are ahead of the curve and bringing in renewables. We are at a place in the investment cycle where valuations are high across the board, and all asset classes seem expensive. There are risk premia we can gain from development, and the growth prospects in this space are significant.
As a global investor in a broad range of asset classes, we need to ensure that we are invested in the asset classes of the future. The distinctions between infrastructure and real estate aren’t as clear as they used to be, but for us, the debate is almost philosophical. We are not going to allow ourselves to get bogged down by the terminology.
What matters is the opportunity it presents for our members.
By 2020, it is estimated that 1.7MB of data will be created every second for every person on earth. Whether you think of data centres as real estate or infrastructure, the demand for data storage is growing exponentially, and we view that as a significant asset.
James Davis is CIO at OPTrust.
