Digital Colony sees active pipeline for first fund

Following the closure of its inaugural US$4.05bn fund – and surpassing an original US$3bn target – Digital Colony, which was founded in 2018 by Digital Bridge and Colony Capital, has cemented itself at the nucleus of communications infrastructure investment. With commitments from North and South America, Europe, Asia, and the Middle East, the investment firm is showing that appetite for communications infrastructure assets is soaring across the globe.

Talking to Thomas Simpson of TMT Finance, Marc Ganzi, managing partner and investment committee member at Digital Colony, discusses where and how the firm will invest in preparation for the implementation of 5G, IoT, AI and other forms of next generation networks.

The four billion dollar fund

The inaugural Digital Colony Partners fund will not be restricted by ticket size, according to Ganzi, and has already made five investments to date, including putting around US$60m of equity to work in London-based StrattoOpencell and recently signing a definitive agreement in partnership with EQT Infrastructure to take Zayo Group Holdings private for some US$8.2bn in cash.

“We were extremely happy by the interest in the fund,” says Ganzi. “We put the US$3bn target out there and weren’t sure what was going to happen, then we hit the hard cap of US$4bn.

“Reaching US$4bn allows us the flexibility to write small cheques as well as the big cheques, which enables us to play across a lot of different opportunities.”

Backed by capital from the US, Canada, Europe, Asia, the Middle East and Latin America, with an even distribution from pension plans, insurance companies, sovereign wealth funds, fund of funds managers and family offices, Digital Colony’s fund will focus on investing in five key verticals: macro cell towers, small cell networks, fibre infrastructure, hyperscale datacentres, and colocation interconnection datacentres.

For Digital Colony, and Ganzi, who is also co-founder and chief executive officer of Digital Bridge, the five areas represent fertile opportunities. “The five subcategories of digital infrastructure are keeping us incredibly busy and we have been hard at work investing the fund for the better part of the last six months,” he says.

Increasing European attention

In terms of geographical coverage, Digital Colony has been increasingly active in Europe, growing its portfolio to include StrattoOpencell and iWireless Solutions in the UK, and Digita Oy, an owner and operator of broadcast tower infrastructure in Finland.

“We have been very focused on Europe, North America and Latin America, which are the three key areas where we plan to spend the majority of our time in terms of new investment activities,” says Ganzi.

In comparison to the communications infrastructure space in the US, Europe has been growing at a slower rate; although, this intensifies room for investment and gives US investors an M&A edge. “For example, investment in hyperscale datacentres reached its zenith in the US in 2017 and 2018, whereas 2019 has been fairly muted. However, in Europe, interest in the assets really emerged in 2018, with 2019 looking even stronger,” says Ganzi.

Small cell networks also present a unique set of consolidatory opportunities in Europe. Ganzi states: “Digital Colony is building a huge amount of small cell networks. In London, we cannot fill orders fast enough for building the next generation of small cell networks.”

Deal pipeline

“Right now, there are roughly 30 transactions we are looking at globally across the firm,” says Ganzi, highlighting the prevalence in asset classes that drive innovation and connect devices.

“Our small cell business in the US is growing 30% organically and there are also a great deal of fibre builds taking place in LatAm, where we find a lot of wholesale opportunities to build new networks for carriers and webscalers,” he says.

Digital Colony has experienced a huge amount of capex spend from its customers in regards to datacentres, fibre, towers and small cells. The investment firm saw customers spend some US$143bn in capex on new investments in 2018 alone and expects 2019 to bring an even higher investment amount: US$150bn.

“For 2018 and 2019 there is roughly US$300bn in new opportunities in greenfield and brownfield. By 2022, we expect it is to be US$480bn,” notes Ganzi. He adds: “There is a tremendous amount of capex that needs to be put to work.”

Dating back to the formation of Digital Bridge in 2013, about 72% of the deals that Ganzi and his team have made have been proprietary. Ganzi comments that while the firm continues to participate in auction processes, Digital Colony prefers to navigate to the left of the traditional model, relying to a network of relationships to preclude bank-driven processes.

Ganzi says: “We have executed over 38,000 leases with our customers through the years and this provides us with an operational advantage.”