As the investment landscape continues its upward trend, the telecom ecosystem is increasingly coming under the influence of private equity players. Asset management company Cordiant Capital is one such company.
Cordiant has four distinct investment hubs: energy transition, agriculture, infrastructure credit and a digital infrastructure team (Cordiant Digital Infrastructure).
Asked about the biggest opportunities in the digital infrastructure sector, Benn Mikula, Managing Partner and Co-Managing Director of Cordiant Capital, gives a two-pronged answer: “There is a set of investment opportunities that apply more broadly to the whole financial complex, and then there’s a set of investment opportunities that we, particularly at Cordiant, are pursuing.
In the first set of broader opportunities, he says “there is a significant increase that is needed in cloud capacity, not just for public cloud providers, but increasingly, on the wholesale side for large companies as well.
Then he says it’s fiber, not just up to the point, but ongoing investments in network backbones, whether national, metropolitan, or submarine, that all require a significant amount of capital.
Along with this, he says there is “fiber densification happening in the mobile tower network, especially with the rollout of 5G”, which will require investments in complementary technologies such as distributed antenna systems in buildings and technology at the intersection of wireless sensors, fiber and the internet. -of-objects (IoT).
However, Cordiant does not invest in everything related to digital infrastructure, says Mikula: “We are focused on providing growth capital to middle market companies by focusing on specific sub-sectors where we believe we have a investment advantage.”
These areas include interconnect, managed cloud services (“In the context of private cloud installations,” Mikula clarifies), and specific types of mid-towers. But Mikula stresses again that for his company “it’s all about growing the middle market.”
These areas all align with the biggest growth drivers seen in the space, but Mikula says there are a few areas where the financial narrative diverges from the underlying reality.
“The first thing is that you get the sense that digital infrastructure is made up of these discrete, almost isolated silos – data centers, towers, etc. – which, in fact, is not the case, particularly when you deploy 5G, for example,” he explains.
The second discrepancy is that some overarching themes take root and many nuances are omitted. “One example is this idea that public cloud providers will own everything and all data will be processed there,” says Mikula. “It’s a narrative that Cordiant would push back quite strenuously.”
Mikula says a David Attenborough-like figure is needed to come up with a taxonomy for all the different ecological niches in data centers, because looking only at public cloud providers means you’re missing a lot of the big picture.
One example is what he calls “boomerang customers” – companies that have moved to the cloud, found it’s more expensive than they imagined, and imposed a series of challenges that they don’t. could not pick up.
“We’re seeing customers moving from public cloud providers back to data centers where they can experience a high degree of on-boarding, both compute and connectivity,” he says.
Along with these growing investment activities, there is growing discussion of mergers and acquisitions, particularly with regard to consolidation in regions that have fragmented markets with a large number of independent players in the industry. infrastructure, like Europe.
Commenting on this trend, Mikula says he is seeing a “race between increasing and scaling the digital infrastructure complex and consolidating”.
“Some might argue that consolidation doesn’t necessarily increase the overall relevance of some players, because there are such large dollar investments required in new capabilities every year,” he says.
Mikula explains that valuations in the private market, especially for larger transactions that create significant consolidation, are higher than in public markets. This was partly driven by “the fact that sponsors have poured money into some very large infrastructure funds that are feeling the pressure to roll out.”
The relationship between the investment and private equity community and telecom operators can only be described as increasingly symbiotic, a development which Mikula says reflects changes in capital markets over the past 25 years. years.
Drawing on his background as an equity analyst at JP Morgan, Mikula has seen both the public and private market.
“Companies that could have gone public two decades ago cannot access public markets today. So, by definition, private equity has entered this space,” he explains.
He adds that it is not only private capital, but also private debt funds that are new sources of capital to replace the more traditional equity markets and banking market.
Next, he says that private equity funds increasingly taking on the role of owner-operators reflect the fact that digital infrastructure is a complex infrastructure asset class.
“Everything from changing data center demands to 5G and fiber backhaul is incredibly complex. These are long-lived assets, but you actually have to know what you’re doing, and that challenge means capital owners -investment need to get much more involved,” says Mikula.
Favorable regulatory conditions are always necessary to attract the best investors, whether national or international. Cordiant operates in Europe, North America and the UK, and while regulatory images vary from region to region, certain things apply across the board.
“What is usually regulated is the user of the digital infrastructure as opposed to the infrastructure itself,” says Mikula. “But we are seeing, especially in Europe, that digital assets are now subject to foreign scrutiny.”
This extra layer of scrutiny is largely aimed at China and Russia for geopolitical reasons, but it’s coming, and it’s made even worse by people now understanding that digital infrastructure is critical infrastructure.
The other thing he is witnessing is that the dialogue between regulators and industry has been informed by pro-consumer attitudes, which has had a ripple effect on investment, especially in Europe, causing a gap profitability between European and American telecom operators.
“That, in turn, has been reflected in different investment rates in the US and Europe, and that’s why Europe is lagging behind in 5G rollout,” he says. “Regulatory decisions taken in isolation to address a consumer problem can reverberate over a 10- or 15-year period and lead to chronic underinvestment.”
In addition to Europe and North America, Coridant also has a team-led infrastructure credit fund that works in consultation with its digital infrastructure team, which has seen the company invest in emerging markets. , including Africa, Asia and Latin America.
“Usually we unionize,” says Mikula. “So we come in and bring other funds with us.”
With such diversity in emerging markets, it is very difficult to generalize. But one thing he hears from limited partners is that the return on risk is often not there.
“You would think that prices in these markets are lower, but that’s often not the case,” says Mikula. “It’s a global market and global information is available. So, in some cases, you can find big companies with big management teams and happily deploy capital. But we have had opportunities presented to us where they offer the same prices as in developed markets.
As the conversation turned to the topic of sustainability, Mikula reiterated that sustainability has always been important to Cordiant’s investment activities and will remain so.
Aside from data centers, “moving electrons over fiber is also a very energy-intensive activity.” Add to that the various crypto-related activities that are becoming more and more prevalent and the much-talked about quantum era, we are heading towards an era where digital infrastructure uses two or three times the energy consumed by the airline industry.
“Unfortunately, the growth in digital demand is such that even with putting a lot of resources into sustainability, sometimes the energy drains quickly just to stay in one place,” he says.
“The ‘E’ in ESG doesn’t stand for ‘environmental’,” says Mikula. “The ‘E’ stands for energy – energy consumption per unit of transmission computing unit. It’s a race between that and growth.
With future projects including a new data center at one of its portfolio companies powered by 100% renewable energy, Mikula says Cordiant Digital Infrastructure’s roadmap includes complementarity of its core fund with “a value-added fund targeting a different group of investors, pension funds and insurers”. in the private market.
The company will also continue to develop its franchises through active investments and active fundraising.
Personally, Miukla believes Cordiant’s work is about people. He says he will continue to build his team, adding senior and junior resources. But he says this expansion has its own problem: “I’m running out of space in my London office!”
