Joshua Parrish, Managing Director, Private Credit, Structuring & Underwriting
Christopher Falzon, Managing Director, Co-Head of North America Capital Formation
Joshua Parrish, Managing Director at DigitalBridge Private Credit and member of DigitalBridge Credit's Investment Committee, and Christopher Falzon, Co-Head of North America Capital Formation, discussed the clear advantages that personal loans offer over traditional mid-market loans in the digital infrastructure sector. They underline the resilience and growth potential of the digital infrastructure sector. As the private lending landscape evolves and opportunities in the digital industry increase, DigitalBridge Credit offers a compelling case for rethinking traditional approaches to lending.
Question: Can you explain the main advantages of personal loans for digital infrastructure compared to conventional loans for SMEs?
Joshua Parrish:
We believe that personal loans for digital infrastructure provide access to a defensive, resilient and growing industry, while traditional lending to mid-market companies involves exposure to "old economy" sectors such as manufacturing and industry, which are particularly exposed to headwinds during downturns. This dynamic was clearly evident during the Covid-19 pandemic. We believe that most investors can benefit from increasing their allocation to personal loans for digital infrastructure, as business models rely on contractually secured cash flows, high transition costs and barriers to market entry, while providing mission-critical services.
Christopher Falzon:
I totally agree, Josh. I also think deal volume has been more stable due to the growth nature of the infrastructure sector and the fact that the transactions we are looking at are not LBO-driven. Instead, they are capex-driven investments to support growth, which is a more stable capital deployment for a sector-specific manager like DigitalBridge. Another interesting element is that digital infrastructure spreads have remained relatively stable since the launch of our credit strategy in 2020. We have consistently seen opportunities with spreads in the range of 700-800 basis points year-on-year, especially in years when spreads on SME loans have been declining.
Question: Do you expect this level of stability to be maintained in the future? What could change the existing dynamic?
Joshua Parrish:
We occasionally see a decline in deal flow when borrowers temporarily pause their capital expenditures. However, as these companies grow and the proceeds are used to invest in capex, there is still an opportunity to support the growth of established borrowers.
Christopher Falzon:
In a year like 2024, when spreads in traditional corporate direct lending have narrowed, there is some digital influence from lenders who don't typically invest in digital infrastructure but want to improve the return profile of their funds. However, we do not encounter these very often, as our targeted borrower profile does not reach the order of magnitude of the enterprise value that a large diversified personal loan manager would typically consider. In addition, diversified managers usually lack the industry know-how required for underwriting.
Question: What added value do personal loans for digital infrastructure offer compared to diversified infrastructure loans?
Joshua Parrish:
The digital infrastructure sector is highly fragmented in terms of ownership. We believe that sector specialists with an extensive and proprietary network have a sourcing advantage over generalist infrastructure lenders. Our origination team, as well as our network of operating partners, have served as trusted advisors and strategic sources of capital for numerous corporate and private equity-sponsored borrowers in the digital infrastructure sector.
Christopher Falzon:
I would like to come back to the resilience of spreads in the digital infrastructure space. Recently, spreads on conventional loans in the traditional energy and renewable energy sectors, where demand has been high, have narrowed. In the renewable energy sector, spreads have been artificially squeezed as lenders allocate cheaper capital to riskier assets in order to make their portfolios "greener". In comparison, spreads for digital infrastructure have remained largely stable. The companies we look at also have a relatively low risk profile, as revenues from digital infrastructure are largely contractually secured and recurring, in contrast to electricity and energy plants, which carry an indirect raw material risk.
Q: What are the specific elements of underwriting in digital infrastructure that are different from other sectors?
Joshua Parrish:
We believe that digital infrastructure specialists have an advantage in risk assessment, as defensive factors are often less measurable. The focus of our analysis is on the following elements: a) barriers to entry for new competitors driven by a first-mover advantage and physical assets that require significant investment in capex; b) business models with high customer loyalty due to high conversion costs, disruption risks and the business-critical nature of the services offered; c) the sector's significant, performance-based capex spending and the fact that generalist investors often ignore an issuer's ability to reduce leverage if discretionary capex spending is not incurred.
Christopher Falzon:
Another important aspect is the effective implementation of underwriting into protective measures within the legal documentation. Non-specialists may lack the understanding to effectively hedge their digital investments in negative scenarios. We believe that this level of underwriting requires the in-depth expertise that a digital infrastructure specialist has.
Joshua Parrish:
Our loan structuring and documentation is extremely robust. While our goal is to support the business plans of our borrowers and sponsors, we also measure and monitor actual results against our expectations and build appropriate structural safeguards into our financing. In contrast, traditional corporate loans have become less strict and borrower-friendly, rather than lender-friendly. Due to the high demand for credit, generalist lenders have focused less on documentation and more on providing capital.
Question: I know we've touched on the resilience of digital loan spreads a few times before. Can you please elaborate on how they have fared compared to mid-market loans and diversified infrastructure loans?
Joshua Parrish:
We have found that the rapid growth and limited history of digital infrastructure personal loans provide an opportunity for pricing inefficiencies and potentially higher risk-adjusted returns than in other segments of private or infrastructure lending, especially as sector specialists have an advantage over generalists in sourcing and due diligence. As a result, spreads on digital infrastructure personal loans have remained relatively constant in recent years, including an alpha premium compared to mid-market loans and diversified infrastructure loans. In traditional lending to mid-market companies, spreads have been in line with broadly syndicated loans, where pricing is often driven more by market factors such as LBO/M&A volume and capital formation of CLOs/debt funds than by credit fundamentals. In diversified infrastructure loans, investors tend to focus on large-cap stabilized or core infrastructure borrowers, where spreads remain tight and investors are forced to move the capital structure down or use fund-level leverage to meet their return targets.
Question: What opportunities will there be in the digital sector in the future that you are particularly enthusiastic about as a specialist?
Joshua Parrish:
We are seeing strong and growing demand for more, better, and faster connections, driven by secular trends such as the continued expansion of 5G networks, which will require an estimated $1.5 trillion in mobile investment globally over the next 7 years; a fast-growing artificial intelligence (AI) market that is expected to grow at a compound annual growth rate (CAGR) of 38% and is expected to reach an estimated market size of $1.8 trillion over the next seven years; and continued growth in cloud demand, which is expected to lead to an annual increase in data center spending from $300 billion today to an estimated $500 billion in 2027. Personal loans for digital infrastructure are well positioned to benefit from the development that demand for digital infrastructure exceeds existing supply. We expect this momentum to lead to a large number of addressable investment opportunities with potentially attractive and higher risk-adjusted returns than in other segments of personal or infrastructure lending.
Christopher Falzon:
When people typically think of AI, they think of data centers. As such, traditional diversified infrastructure managers and personal loan managers are focusing on data center lending to gain AI exposure. The advantage of DigitalBridge as a specialized digital infrastructure manager is that we can better assess the broader AI landscape and identify funding opportunities beyond data centers. While we continue to invest capital in data centers, there are a variety of ways to diversify a portfolio to benefit from AI investments.
Authors:
Joshua Parrish
Managing Director, Private Credit, Structuring & Underwriting
Phone: +1 646 585 6543
joshua.parrish@digitalbridge.com
Christopher Falzon
Managing Director, Co-Head of North America Capital Formation
Phone: +1 646 585 6542
christopher.falzon@digitalbridge.com
Contact:
Ersin Yorulmaz
Managing Director, Co-Head of Europe Capital Formation
Phone: +41 43 883 0008
ersin.yorulmaz@digitalbridge.com
