OPTrust Treating Data as an Asset Class?

Yaelle Gang of the Canadian Investment Review reports, Data is an asset class, says OPTrust CIO:

It’s been almost a year since the OPSEU Pension Trust co-launched an investment platform, EdgeCore Internet Real Estate, which builds, owns and operates North American data centres.

This was part of a partnership with Mount Elbert Capital Partners and GIC Private Ltd.

And the OPTrust is still excited about the opportunities offered by data centres. “I really strongly believe that data is an asset class,” says James Davis, chief investment officer of the pension fund. “If you think about what commodities are and how people have invested in commodities, they’re really old economy in many ways, in the sense that commodities were the raw material inputs into the industrial age, but in this new age of technology, knowledge and information, the raw input is really data.”

Since data is unique and growing in demand, data centres will be important infrastructure for storage, says Davis, noting speed matters and location is important for getting the data more quickly to users. A year into its investment, EdgeCore has land positions in Dallas, Texas; Northern Virginia; Phoenix, Ariz.; Reno, Nev.; and Silicon Valley, Calif.

“Reno is an interesting one,” says Simon Moody, director of private markets group at the OPTrust. “It’s not very close to any population centre, but it’s very cheap. So for certain internet uses you’re okay with latency if it’s cheap enough, and we think Reno has a really unique advantage that way: it’s very close to the west coast, but land is cheap and power is cheap.”

The OPTrust considers these investments exciting because of their development opportunity. “If you look across our portfolio, at this time when all assets seem really expensive, there are risk premia that you can get from development that you wouldn’t get if these assets were already constructed and in play,” says Davis.

Data centres also offer diversification and are a play on growth, he says. And, the investments are scalable, Moody adds.

But one risk in running a data centre is security, he says, noting there’s a lot of compliance work involved.

Another consideration is environmental risk and looking at where to construct the data centres and being mindful of where the power comes from, which is something tenants care about as well, says Moody. “They don’t want to have high cost of power and the risk of high cost of power in the future, so they’re looking for utilities that are ahead of the curve and bringing in renewables.”

Davis isn’t fixated on whether data centres are defined as infrastructure or real estate, although the OPTrust does classify these as infrastructure.

“I think it’s almost philosophical to start with,” he says. “If you think about data as a commodity and you think about how that commodity is actually utilized, it’s going to get utilized in a data centre. If you think about how, say, oil and gas is going to get utilized in the old economy, it goes through a pipeline and it ultimately reaches its consumer. So we think of the pipeline for oil and gas, or the transmission line for electricity, as infrastructure — why wouldn’t we think about all of the pipes and connectivity and storage of data in the same way?”

However, at the end of the day, Davis doesn’t really care how it’s defined. “What I care about is what are the risk factors that I’m being exposed to here and are they complementary to the portfolio? And in fact they are. And, it’s unfortunate for those investors who get so tied up in nomenclature that they can’t figure out if they want to invest in it because they don’t know if it’s a fit for their real estate portfolio or not.”

I agree with James Davis, it doesn't matter whether data storage goes into the real estate or infrastructure bucket, all that matters is what are the risk factors and is it complementary to the portfolio.

Not surprisingly, given the rise of e-commerce all over the world, video on demand and digitization of industries, data storage is a fast-growing sector.

Last March, I discussed how PSP acquired Vantage Data Centers, a US-based provider of data centre solutions, noting the following:

Over the last five years, everything in the IT space is about the rise of data analytics and cloud computing. Everyone from Amazon, Google, IBM, Microsoft, and a lot of other smaller technology players are investing heavily in data analytics and cloud computing, as are many other non tech companies, and they all need state of the art data centers.

Moreover, US businesses' burgeoning demand for data and video is fueling a revival in fiber optic services and data storage. Many technology companies have turned to vendors such as Vantage to host and maintain their servers in a bid to cut costs.

The players involved in this deal are experts in IT. Silver Lake is arguably the best private equity fund in this space and Digital Bridge Holgings is a top communications infrastructure investor.

I find it particularly interesting that Marc Ganzi, co-Founder and CEO of Digital Bridge, was previously the CEO and sole founder of Global Tower Partners, which was acquired by publicly traded wireless tower REIT American Tower Corporation (AMT) in October 2013.

So these data centers fall in between real estate, private equity and communications infrastructure. It's a very exciting, high growth area and it's a super hot sector right now with tremendous long-term potential.

As to whether data is an asset class, not in the sense that these data storage centers fall under an already established asset class, infrastructure, but there's no doubt this subset of infrastructure is growing fast and exhibits interesting characteristics that are hard to find in other asset classes, especially now that everything is expensive.

But the discussion of data as an economic asset class goes back years. In 2011, the World Economic Forum and Bain put out a report, Personal Data: The Emergence of a New Asset Class, which you can read here.

The crux of the report was summarized by Michele Luzi, Bain's Advisory Partner in London:

Personal data—digital data created by and about people—represents a new economic "asset class", touching all aspects of society. The abundance of personal data represents untapped opportunities for economic growth and social benefit.

This report reflects a subset of the discussion with experts and stakeholders in the context of the World Economic Forum's "Rethinking Personal Data" project. For a more comprehensive overview of the results of the project, download the full report.

While the focus is on social benefit and economic growth, the growth of digital data also presents emerging threats and privacy concerns. That's why James Davis alluded to "there's a lot of compliance involved" in running data centers.

There are other concerns with data, or more specifically, the control of data. In 2017, The Economist published an article, The world’s most valuable resource is no longer oil, but data, stating this:

A new commodity spawns a lucrative, fast-growing industry, prompting antitrust regulators to step in to restrain those who control its flow. A century ago, the resource in question was oil. Now similar concerns are being raised by the giants that deal in data, the oil of the digital era. These titans—Alphabet (Google’s parent company), Amazon, Apple, Facebook and Microsoft—look unstoppable. They are the five most valuable listed firms in the world. Their profits are surging: they collectively racked up over $25bn in net profit in the first quarter of 2017. Amazon captures half of all dollars spent online in America. Google and Facebook accounted for almost all the revenue growth in digital advertising in America last year.

Such dominance has prompted calls for the tech giants to be broken up, as Standard Oil was in the early 20th century. This newspaper has argued against such drastic action in the past. Size alone is not a crime. The giants’ success has benefited consumers. Few want to live without Google’s search engine, Amazon’s one-day delivery or Facebook’s newsfeed. Nor do these firms raise the alarm when standard antitrust tests are applied. Far from gouging consumers, many of their services are free (users pay, in effect, by handing over yet more data). Take account of offline rivals, and their market shares look less worrying. And the emergence of upstarts like Snapchat suggests that new entrants can still make waves.

You can read the rest of the article here.

However, not everyone agrees with the assertion that data is displacing oil as the world's most valuable commodity. In March 2018, Bernard Marr of Forbes explained why data is not the new oil, noting the following:

Oil requires huge amounts of resources (including oil itself) to be transported to where it is needed. Data, on the other hand, can be replicated indefinitely and moved around the world at the speed of light, at very low cost, through fiber optic networks.

Data also becomes more useful the more it is used, rather than its energy being lost as heat or light, or permanently converted into another form such as plastic, as when oil is used. Once processed, data often reveals further applications. For example, medical data collected from patients can help a doctor diagnose and treat an individual patient. After that, it can be anonymized and fed into machine learning systems to generate broader insights that can benefit many, many more.

Treating data like oil – using it once then assuming its usefulness has been depleted and disposing of it – would certainly be a mistake.

As the world’s oil reserves dwindle, extracting it becomes increasingly difficult and expensive. Conversely, data is becoming increasingly available as computer technology advances, more of our business and leisure activity moves online, and sensors become more sophisticated.

Data – particularly Big Data – also has far more variety than oil. The crude oil which is drilled from the ground is processed in a variety of ways into many different products of course, but in its raw state, it is all the same. Data can represent words, pictures, sounds, ideas, facts, measurements, statistics or anything else which can be processed by computers into strings of 1s and 0s that make up digital information.

Of course, data, like oil is a source of power. And those who control it (think of Amazon, Alibaba, Facebook or Google) are establishing themselves as masters of the universe, just as oil barons did 100 years ago. This has even led some to suggest that the data-mining giants have a responsibility to ensure that their resources are put to work for the benefit of humanity as a whole, rather than simply being allowed to enrich themselves. Unlike oil drilling, however, data mining does not intrinsically involve causing damage to the natural environment and exploitation of finite natural resources (apart from the electricity used to run the system).

Unregulated data-mining causes a whole different set of problems – privacy issues as well as the imbalance of power which is caused by information being in the hands of the few, rather than the many. Treating or thinking about data like oil only serves to encourage this dichotomy between the haves and the have-nots in the digital age.

In fact, if we are going to think about data as a power source or fuel, then it would make more sense to consider its similarities with renewable sources like the sun, wind and tides. There is an abundance of it – more than we can ever use – and rather than fencing it off and reducing the supply, we should think about how we can make it more widely available to everyone.

Data – in the quantities it is available today – is, in fact, an entirely new commodity, and the rules around how it is stored, treated and used are still being written. Comparing it to existing, old world resources makes for nice snappy soundbites but, apart from conveying the idea that it is valuable, is largely a meaningless exercise. Data will hopefully also cause less disruption and destruction of life on our planet than we have done with oil, over the last century.

It’s far more productive to consider how data is different – the myriad of ways it can be captured, used and reused, and in doing so, generate value and benefits to humans that will help us tackle big issues from education to healthcare, from reducing hunger to fighting climate change.

In similar vein, two days ago, Venture Beat published an excelent article from Reza Zadeh, an adjunct professor of artificial intelligence at Stanford University and founder and CEO of Matroid, Data is not the new oil. Professor Zadeh notes the following:

Most important, bits aren’t scarce. Today, they’re a commodity.

In the early 2000s, anyone bent on amassing a large-scale data set first had to acquire a mountain of computing and data-storage equipment. The same year Mr. Humby made his comparison, though, Amazon launched its Web Services division, offering pay-as-you-go access to hardware to anyone with an internet connection. Today startups can choose among dozens of cloud-computing services for pennies an hour, where they can cull and process data from the web on a grand scale. Meanwhile, researchers are busy assembling free data sets like ImageNet’s 14 million digital photos or Linguistic Data Consortium’s library of 63,000 spoken-English sentences.

Of course, the internet giants do have advantages, like astronomical numbers of customers and sprawling cloud networks built to their own specifications. But even when they’ve pulled ahead in a data-intensive business, they haven’t been able to maintain the lead.

Take Apple Inc.’s Siri. The first consumer-grade AI assistant was a marvel of engineering in 2011, when it introduced consumers to voice-controlled computing. Siri had unique access to a mounting archive of users’ spoken queries as well as their reactions to its answers. Yet Amazon’s Alexa promptly eclipsed Siri upon arrival three years later.

Alexa didn’t overtake Siri because Amazon had more speech samples but because Amazon devised a way to converse with the computer hands-free. “Hey Alexa!” made it possible to put the assistant in a speaker and talk to it freely. Amazon then sidelined Siri by opening the technology to other companies, fostering a broad ecosystem of Alexa-equipped products from lightbulbs to cars.

So will the data flooding into Amazon from all those devices confer a long-term advantage? Don’t bet on it. Google’s own always-listening assistant, launched two years after Alexa, not only understands verbal commands but answers questions based on a so-called knowledge graph the search giant developed to respond to queries with facts in addition to web links. Amazon’s share of the smart-speaker market recently fell by more than a third from a year ago, while Google’s nearly doubled, according to market researcher Strategy Analytics.

Amazon is still ahead in smart speakers, with 42 percent share in the second quarter to Google’s 28 percent, but for how much longer?

The same story has played out time and time again. Flight data collected by drone maker DJI hasn’t kept it safe from Skydio, which devised better algorithms for avoiding obstacles. Uber’s bumper crop of data about drivers, passengers, and routes hasn’t fended off Lyft. Facebook, even with snapshots spanning nearly a third of humanity, had to buy Instagram to neutralize an existential threat. This isn’t new: Yahoo, which in 1998 had more web-search data than anyone, got crushed by then-upstart Google.

The data advantage is short-term and getting shorter all the time. That’s true even in specialized fields where data isn’t sloshing around the net. Certainly Paige.AI’s exclusive access to Memorial Sloan Kettering Cancer Center’s library of tissue slides gives it a head start in the race to automate cancer diagnosis. But soon enough the effort will face challengers that manage to obtain slides from other institutions. Then Paige.AI — like the internet giants and the unicorn startups — will have no choice but to keep innovating.

Sitting on a pool of data doesn’t turn a company into a high-tech Saudi Arabia. In a networked world, long-term advantage comes from maintaining a pace of innovation that keeps you abreast of tech trends and ahead of customer needs.

I couldn't agree more, in the data space where comepetition is fierce, even tech giants need to innovate or they'll find their competitive advantages waning very fast.

There is something else that I haven't discussed, the ESG factor of data centers. They require enormous energy to run and their carbon footprint isn't exactly stellar, something environmental critics have highlighted.

These issues are being addressed but it's important to note that data storage centers aren't all the same from an environmental/ ESG viewpoint which might explain why some pensions like the Caisse are lukewarm on them.

Still, in an increasingly data-driven world, data is a long-term secular theme all pensions need to think about and how to best invest in public and private investments to capture the risk premiums of these data-centric investments.

Below, Jeremy Meyers, Director of Real Estate at EdgeCore Internet Real Estate, discusses why data centers are a fast-growing new asset class in commercial real estate, but they have specific needs that make them very different from other types of projects. Take the time to watch this, he does a great job going over data centers.

And Don Tapscott, author, futurist, and Associate at the Berkman Klein Center for Internet and Society at Harvard University, discusses privacy issues concerning the digital transformation.

He notes: "The digital age has been captured by some powerful forces and its largesse has been asymmetrically distributed. What's occurred is that this technology has generated a new asset class called data. This asset class may be more important than previous asset classes like land under the agrarian economy, industrial plant under the Industrial Age, or even money. This data is created by all of us quite democratically, actually, but it has been captured by a handful of companies and governments. The problem with that is not just that we can't monetize it. We can't use it to plan our lives better, and our privacy has been undermined. That fear that I had in 1994 was justified. That's where blockchain technology comes in because it's not an Internet of information, it's an Internet of value, where value can be exchanged peer-to-peer without powerful intermediaries or big companies that can capture the value."