HMC Capital Limited (HMC, the Group, ASX: HMC) is a diversified, large-scale alternative asset manager focused on digital infrastructure, the energy transition, real estate, private credit and private equity. The Group applies its balance sheet to execute high ROE opportunities aimed at growing Assets Under Management through asset warehousing, underwriting, and M & A activity.

Significant Institutional demand for DigiCo Infrastructure REIT

HMC Capital has boosted Assets Under Management to $17.5 billion following strong demand for its latest investment offering, the $2.746 billion DigiCo Infrastructure REIT.

The success of this latest offering has seen Assets Under Management increase by 73 percent in CY24.

DigiCo REIT is a diversified owner, operator and developer of data centres, seeded with $2.5 billion of operating assets in Australia with agreements to acquire 3 North American data centres for $1.5 billion. DigiCo REIT intends to target a gearing range of 35 to 45 percent. The initial gearing ratio will be 35.1 percent.

Demand from institutional cornerstone and retail investors for the fully underwritten DigiCo Infrastructure REIT Initial Public Offering has seen the IPO upsized by $100 million to $2.746 billion.

HMC’s successful establishment of this highly scalable ASX-listed global funds management platform in the rapidly growing digital infrastructure sector is a landmark transaction by the Group. The global digital infrastructure platform is supported by 100 professionals, including an experienced management team, leaving it soundly placed to execute on the significant development pipeline in Australia and the United States.

Trading of the new securities in DigiCo REIT is expected to commence on 12 December 2024.

Digital infrastructure is an emerging asset class

The digitisation megatrend is driving the rapid increase in demand for external data storage and processing solutions worldwide. Historically, data centre demand has been driven by the shift to cloud-computing and the accompanying digital transformation of commerce, government and entertainment.

Cloud-computing is essentially internet-based computing, where networked resources, software and information is provided to computers, tablets and iPhones through the internet rather than residing on the computer itself.

Households are also contributing to growing data centre demand, notably with the proliferation of online services such as e-commerce and streaming content platforms like Netflix. These trends are expected to continue with tailwinds from Generative artificial intelligence (AI) and high-performance computing such as image generation, medical image processing, and natural language processing. Generative AI is a type of AI that can create content such as videos and images in response to user prompts. These drivers require increasingly large computational power and vast amounts of storage with a cost-effective solution that is best addressed through a shared, multi-tenant infrastructure arrangement. This is the solution provided by data centres.

Typically, this requires data centre locations that are proximate to key customers, have high network density and access to a reliable, uninterruptable power supply. These are generally highly populated metropolitan locations where there are constraints on land availability that is suitable for data centre developments.

Access to significant and continuous power with reliable back up is location dependent and requires significant investment, long term planning and interface with power and water suppliers, multiple communications carriers and internet service providers.

The other significant requirements are long-term capital, and skilled design and construction expertise across multiple suppliers and engagement with many regulatory and approval bodies. Data centres also require skilled staff to operate and maintain resilient facilities.

Customers of data centres are typically long-term, given the complexity associated with re -location and high switching costs, as well as a lack of available supply of alternative data centre infrastructure.

The opportunity for HMC

The DigiCo Infrastructure REIT will significantly increase HMC’s recurring funds management revenue base and deliver material transaction revenues from FY25.

HMC will earn an investment management fee of 0.55 percent of Gross Asset Value as well as asset acquisition and disposal fees of 1.0 percent and 0.5 percent respectively. HMC will also receive development management fees of 5 percent of development costs on the first $2.5 million of project costs and 3 percent of development costs thereafter. Tenant fees are also payable to HMC at the rate of 15 percent of the gross rent received in the first year of a lease term for a new tenant and 7.5 percent if an existing tenant enters a new lease.

The rapidly growing digital infrastructure sector combined with DigiCo’s significant development pipeline should ensure an increasing fee income stream for HMC over the long term.

Moreover, the success of the DigiCo Infrastructure $2.746 billion capital raising draws the market’s attention to HMC’s ability to execute large, complex transactions in alternate asset classes that have the potential to generate outsized returns for investors. The market is likely to reward HMC shareholders with an earnings per share multiple premium that reflects the robust long-term growth outlook for the Group’s global funds management platform.