DigitalBridge: ‘People were just investing. We underwrite.’

At its headquarters in Boca Raton, Florida, DigitalBridge is surrounded by familiar sector peers. The area is colloquially known as “tower town”, since, in addition to the specialist digital infrastructure fund manager, the city plays host to listed towers operator SBA Communications, Blackstone-backed Phoenix Tower International and turnkey tower group EasTower Communications, all located within several minutes of each other.

DigitalBridge, though, is the relative new kid on the block. That seems an odd turn of phrase for a publicly traded manager with $65 billion under management. But such has been the progression of the group since its transition from real estate investor to digital infrastructure titan, culminating in the June 2019 close of its first digital infrastructure fund – then in the guise of Digital Colony – on $4.05 billion. The close of a second fund on $8.3 billion in December 2021 marked the once-known Colony Capital as one of the largest managers in the infrastructure space. 

Smooth sailing, then? Not exactly. Legacy issues have crept up, with Tom Barrack, former chief executive and executive chairman until April 2021, indicted on lobbying charges in July of that year and acquitted last November. The charges, Infrastructure Investor understands, prevented some LPs from committing to the second fund. That did not stop DigitalBridge sailing past its $6 billion target, making chief executive Marc Ganzi more than content.

“I think we are definitely ahead of schedule from where we thought we’d be in a five-year plan,” he says. “We’ve had two years where we’ve had the ability to make the right personnel decisions and to make the right product decisions. Now, as we sit here in 2023, I think we have an incredibly clean platform. There’s no lack of clarity in terms of what this firm does and what we stand for and how we invest.”

Replicating the product-segmentation strategy of many a generalist manager, DigitalBridge has branched out into credit and core-focused strategies, while mid-market capabilities were added with last year’s acquisition of AMP Capital.

“I think the evolution of being a multi-strategy asset manager was really a function of the fact that there were certain situations where we couldn’t go, we couldn’t write the right size cheque, or we couldn’t structure the investment the right way. That frustrated me because I’ve always believed that this should be a firm about opportunity, not about specifically defining the investment playbook by a tight box,” he maintains. 

Welcoming InfraBridge

DigitalBridge emerged as a surprise winner to acquire AMP Capital’s infrastructure equity business for an initial $316 million.

The deal reached financial close in February, the same time the business was renamed InfraBridge. True, the 2017-vintage Global Infrastructure Fund II is 60 percent comprised of mid-market digital infrastructure and the sector accounts for 40 percent of the business, but it also has a multitude of airports, energy and social care assets that aren’t exactly within the DigitalBridge remit. However, Ganzi reveals this was actually an LP-led initiative.

“We shared a lot of LPs with AMP Capital and their board came to us and said, ‘Would you help us with this situation?’ And we generally like to say yes to LPs, we don’t like to say no to them,” he explains.

“We saw their push into renewables and their experience in logistics and transport was interesting because our belief is that for what we need to do over the next 10 years, we have to figure out ways to integrate more renewable energy into our digital infrastructure,” Ganzi says, adding that it would bring a digital overlay to the transport assets, in particular bringing a more digital element to the airport experience.

Ganzi also provides a surprise answer when it comes to the long-term future of the InfraBridge platform.

“What we’ve told the LPs is we’re going to work hard for Fund I and II and if the outcome is successful and our way of investing effectuates a positive outcome for those, then logically we’ll extend that strategy and keep going.”  

Low-fibre diet

That doesn’t necessarily mean DigitalBridge is hoovering up all of the digital infrastructure assets that money can buy. Indeed, an LP investing with a specialist manager would want a distinctive approach, and DigitalBridge has certainly taken a somewhat contrarian view when it comes to portfolio composition. 

Its portfolio is dominated by tower companies and data centre platforms, with fibre conspicuous by its reduced influence. That is not to say DigitalBridge is not invested in the sector – it was yet to close its first fund when it teamed up in May 2019 with EQT to buy Colorado-based Zayo for $14.3 billion – but fibre represents only about a fifth of the overall portfolio. Ganzi blames the “gold rush” following the pandemic into fibre-to-the-home broadband, sending valuations skyrocketing and making many deals unattractive.

 

 

 

 

 

 

 

“You’ve had residential fibre trading at 6-10x for 20 years and now, overnight, because a bunch of guys have a lot of money in their pocket and they need to invest in infrastructure, they go out and start paying 20x for it” 

Marc Ganzi

“We took a view. Whether it’s the right view or the wrong view, time will tell,” Ganzi says. “But during that gold rush in the residential broadband space, a lot of general infrastructure funds came into that, largely because digital infrastructure was the hot, bright, shiny new toy. What it did is it took a marketplace that was traditionally an 8x [EBITDA] multiple business and pushed it into the 20s [multiples].”

Indeed, the Zayo deal was done at an 11x multiple, while according to McKinsey, deal multiples in the fibre sector averaged about 19.7x in 2021, having stood at 16.8x in the three years prior. McKinsey, writing in December, added that in some markets, 80 percent of all households would have to subscribe to a single provider’s network over a 25-year period for an asset owner to achieve an IRR above 10 percent. 

Ganzi anticipates the next few years will be a stress test of the providers’ penetration capabilities and of the capital that has gone into these assets in recent years, against a backdrop of a lack of liquidity. DigitalBridge, he says, was prescient.

“[Those valuations] were our commercial calls four years ago. That’s what we thought was going to happen,” argues Ganzi. “We took very limited shots in fibre. We took shots that we thought were very calculated, but most importantly, we tried to stay in that value zone of 8-12x. [Zayo at 11x] was, for us, the correct purchase price for that level of risk that we’re willing to take.”

DigitalBridge, though, is not exempt from the high pricing in the digital infrastructure sector. Its tie-up with IFM Investors to delist US-based data centre group Switch – an $11 billion deal closed in December – and its partnership with Brookfield last summer to acquire 51 percent of GD Towers valued at €17.5 billion both came at multiples of about 27x. In those sectors, though, the team can see the growth.

“Data centres and towers are seeing astonishing growth and will continue to see high level of growth for the foreseeable future because the macro environment is supporting it”

Steven Sonnenstein

“Data centres and towers are seeing astonishing growth and will continue to see high level of growth for the foreseeable future because the macro environment is supporting it and we’re on the cusp of this major investment cycle,” argues senior managing director Steven Sonnenstein, who leads on towers and joined from being a senior director in the infrastructure team at Canadian pension PSP Investments.

“When we look at a transaction, yes, there’s an entry price, there’s a capital structure, but where do we see levers we can pull to create value?” asks Jon Mauck, senior managing director and data centre specialist at DigitalBridge. “There are deals that some people say are very inexpensive that we should be pursuing, that we pass on because we have a view on the risk-return profile and some transactions where we win an auction because we pay the highest price, because we see a lot of value around it. Our view is sometimes very different than the rest of the market and that comes out of a vestige of having spent 20 years building businesses in the space.”

Indeed, many members of the senior team have been working in the broader telecommunications, media and technology sectors since the turn of the century. Ganzi, for example, founded Global Tower Partners, which became one of the largest privately owned tower companies in the US, prior to starting what was then Digital Bridge Holdings. Mauck, for his part, was a partner at IO Data Centers, a privately held data centre operator spanning North America, Europe and Asia. 

Coming back to fibre, Sonnenstein calls it the “connective tissue that makes all of this stuff work, but it’s hard, it’s really hard. There’s so much money that’s poured into it over the last couple of years and there’s a lot of people that are all banking on the same penetration rates in the same geography.” 

The lack of barriers to entry is one reason why Ganzi believes fibre often doesn’t live up to the infrastructure acid test, also citing concerns around long-term cashflows, ownership of land and counterparty risk. He is well aware, though, of the heated markets that surround towers and data centres.

“Yes, it is frothy,” he admits, “but we have multiple decades of empirical data that suggest towers trade in the mid-20s and data centres trade in the high teens and mid-20s, where you’ve had residential fibre trading at 6-10x for 20 years and now, overnight, because a bunch of guys have a lot of money in their pocket and they need to invest in infrastructure, they go out and start paying 20x for it.”

‘People were just investing… we underwrite’

Ganzi is keen to stress that such views are not an indictment of what other managers do, rather an explanation of the approach DigitalBridge is taking. As the leading specialist in this sector, a watchful gaze from the market rests on the shoulders of the GP manager, something Ganzi seems acutely aware of.

“I think we’ve just gone through this amazing cycle of the last 10 years where interest rates were nothing, billions of dollars being given to fund managers and people were just investing. We underwrite,” he says. “As the tide goes out, we’ll find out what happens, but I think we feel very comfortable with our process, our team and what we do and how we underwrite the asset class.”

 

 

 

 

 

 

 

“In every situation, we look at an opportunity as a buy or build… Most of our business plans that we work with the companies, involve a road map of both development and acquisition” 

Jon Mauck

Beyond semantics, though, what does that really mean? Nearly every GP in the sector taking majority positions will claim to take the same approach.

“It’s one thing to buy digital infrastructure. It’s another thing to operate digital infrastructure,” Ganzi stresses. “There’s a difference between being a good buyer and being a good operator. You have to do both. You have to be disciplined in what you buy, but you really have to have a solid business plan for execution.”

Or two business plans, even. As Mauck explains, the underwriting approach involves looking either at potential M&A opportunities or greenfield development.

“In every situation, we look at an opportunity as a buy or build,” he outlines. “We have the ability to think about developing capacity. If it’s priced correctly on a disciplined acquisition strategy, we can make that investment. If we don’t think that’s the right entry point, we actually could look at the development strategy and we always compare those side by side. Most of our business plans that we work with the companies involve a road map of both development and acquisition.”

It’s a level of detail that three sources within the LP community say they expect of a specialist manager of this size. Those sources say that DigitalBridge exhibits a differentiated approach and a level of expertise in this sector that is difficult to find among infrastructure’s generalists. Eyebrows are then raised at the aforementioned Zayo, Switch and GD Towers deals, where DigitalBridge has teamed up with large-scale infrastructure generalists.  

Kevin Smithen, the group’s chief commercial and strategy officer, is keen to answer those questions and allay investors’ fears that even in a nominally 50:50 joint venture, DigitalBridge’s expertise plays its role.

“If there is a partner in an investment, our LPs will generally commit through our co-investment vehicles as opposed to our partners’ co-invest vehicle”

Leslie Wolff Golden

“We only focus on investments where we can have significant impact on steering that company. We want our hand on the rudder,” he states. 

“We typically work as the sole GP alongside our LPs as co-investors/partners. Historically, on about 10 percent of our deals, the equity cheque sizes of over $5 billion and timing considerations required us to work with other GPs as partners. We see fewer take-privates going forward so there may be less need to work with GP partners. Our GP partners, I think, look at us as a leader on the strategy and that’s the role we sign up for. We’re not looking to be passive or letting someone else steer the direction of that company. That’s not something we’re going to change.”

Smithen adds that the various GPs they partner with want this type of relationship, explaining that they view DigitalBridge as the value-add partner in the consortium. DigitalBridge, however, lays down the law.

“Typically, when we partner with another GP, we are the only provider of co-investment in the deal. We select the GP, but the rules of engagement are they do it out of their fund and no co-investment,” says Smithen.

“If there is a partner in an investment, our LPs will generally commit through our co-investment vehicles as opposed to our partners’ co-invest vehicle. We are co-ordinated with our partners in terms of the co-investment capital raised for each platform,” adds Leslie Wolff Golden, global head of capital formation.

Products of their time

However, while Zayo was a 2019 deal, Switch and GD Towers were both agreed in the economic turbulence of 2022. Mauck hints that those transactions may be products of their time.

“We decided to bring in some GP partners last year in a tough fundraising environment. Going forward, where we can, we will be the sole GP and alongside our LP co-investors. We have great partners in those deals, but I don’t think that that’s going to be the norm for us. I think there were two very large deals in a year where it was hard to tap our LPs consistently for more and more capital.”

Another potential product of its time is DigitalBridge’s use of continuation funds, which it has employed twice to house data centre assets. While Vantage SDC has been in a “permanent capital vehicle” since 2020, fellow US data centre platform Databank raised more than $1.5 billion for a continuation fund last year.

“In a world where interest rates are rising, I think you’re going to see continuation vehicles slow down a little bit because people want more than just 5-6 percent yield,” Ganzi reasons. “In the last two to three years, we’ve seen as many continuation vehicles as I think we’re going to see for a while. I think inflows into core funds are slowing down. Why? Because there’s other places you could put capital and get higher yield. You really need to be able to deliver 11-12 percent gross returns instead of 8-9 percent going forward to be successful raising money for core/core-plus strategies.”

 

 

 

 

 

 

 

“Our GP partners, I think, look at us as a leader on the strategy and that’s the role we sign up for. We’re not looking to be passive or letting someone else steer the direction of that company” 

Kevin Smithen

Speaking of other places, Ganzi reveals the firm is in the process of establishing an office in Abu Dhabi, as it plots expansion in the Middle East and North Africa, where large infrastructure funds have enjoyed limited success to date.

“It’s an important region. It’s not only an important region from a capital formation perspective, but also the digital transformation that’s happening in the [Gulf] is hard to ignore,” he says. “Investing in the MENA and the GCC region is probably the next frontier for us geographically.”

Lest you get the wrong impression, Ganzi rejects any suggestion that this expansion is due to dwindling returns in more mature markets, a common refrain from more generalist managers. In fact, he points to Boingo Wireless, a US-based small-cell wireless network provider DigitalBridge acquired in a $854 million deal in 2021, as Fund II’s best performing asset, doubling EBITDA in about 24 months. It was, as Ganzi explains, a misunderstood asset in the public markets, which DigitalBridge successfully took private while understanding the technology leaps it needed to take. 

Wherever it goes next, expect that kind of specialist differentiation to be the calling card DigitaBridge will be handing out.