The investment firm Colony Capital intends to be an active player in the data center sector in 2020 and beyond. In a sign of its interest in edge computing, Colony said this week that it will invest $185 million in colocation provider DataBank, purchasing equity positions from two existing investors.
The deal is part of Colony Capital’s sharpened focus on digital infrastructure. Colony is a leading example of how the data center industry has become a magnet for large global investors. The firm is selling much of its industrial real estate holdings, and reinvesting that capital in digital infrastructure, including cell towers, data centers, fiber and small cell antennas.
In this week’s deal, Colony boosted its equity in DataBank by purchasing shares held by two minority investors. Colony will purchase an equity stake held by Edgewater Funds, as well as 50 percent of the equity owned by Allstate.
“We are thrilled to be partnering with DataBank, its management team and investor group, to continue building the premier edge/colocation data center platform in the United States,” said Justin Chang, Colony’s Global Head of Private Equity. “We look forward to supporting the business with additional capital to fund potential add-on acquisitions and greenfield edge data center developments.”
Over the past year, Colony has taken several steps to position itself as a player in technology real estate:
- In 2019 Colony Capital acquired Digital Bridge, the owner of DataBank and Vantage Data Centers, for $325 million. The firms announced that Digital Bridge CEO Marc Ganzi will succeed Thomas Barrack as CEO of Colony Capital in 2021.
- Last summer Colony raised $4 billion for its Digital Colony Partners initiative. The fund initially hoped to raise $3 billion, but was increased due to strong interest from institutional investors, including sovereign wealth funds, pension funds and insurance companies.
- Digital Colony will partner with private equity firm EQT Partners to acquire Zayo Group for $8.2 billion in cash. Zayo operates a 130,000-mile all-fiber network in North America and Europe, along with its zColo colocation business, which operates 51 data centers and more than 1 million square feet of data center space. The transaction has been approved by Zayo shareholders and is scheduled to close in the first half of 2020.
Colony believes 5G wireless will usher in a “network society” in which digital infrastructure will provide the connective tissue. With a growing portfolio and nearly $60 billion in assets, Colony has the resources to make a major splash in the data center sector. Colony’s current holdings span 38 data centers, 350,000 cell tower sites, 35,000 small cell nodes, and 130,000 route miles of fiber.
DataBank: The Edge Opportunity in Regional Data Centers
In connection with the DataBank transaction, Colony Capital shared new details with investors about its data center holdings and their positioning in the sector, and outlined its ambitions to be a major player in digital infrastructure.
DataBank is part of the Digital Bridge portfolio, and operates 19 data centers in nine markets, serving 1,800 customers. DataBank represents the first step for Colony to gain exposure to the colocation and edge computing market, with “significant organic growth and acquisition opportunities,” Colony says.
Colony said the transactions provide it with an additional 20.4 percent of the equity in DataBank, and the pricing represents a 17.6X multiple on in-place EBITDA. Colony’s investor presentation provided insight into how it views the evolution of edge computing.
“We believe the edge currently and for the foreseeable future resides in traditional data centers in secondary markets,” Colony said in a recent investor presentation, saying DataBank offered “control of key interconnection points, which drive a compelling value proposition for cloud and content players as they push workloads toward the edge.”
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“We look forward to having Colony Capital and its long-term investment vision behind DataBank as we continue to grow our platform,” said Raul Martynek, CEO of DataBank.
Digital Colony: Experienced Team Meets M&A Platform
Martynek is part of an experienced data center executive team that Colony believes will be a major asset. That team includes senior advisor Michael Foust, a founder and former CEO at Digital Realty, as well as Vantage Data Center CEO Sureel Choksi.
This week Colony announced two additional management appointments:
- Andrew Witt, Managing Director, has been promoted to the new position of Chief Operating Officer of Global Credit
- Kevin Smithen, Managing Director and Head of Strategy at Digital Bridge and Digital Colony, has been promoted to Managing Director, Global Head of Strategy and Capital Formation at Colony.
The Colony/Digital Bridge data center strategy includes targeted platforms for different business segments. DataBank is its retail colocation and edge computing vehicle, while Vantage Data Centers targets opportunities in the wholesale data center sector.
Colony says that Vantage “has consistently proven the ability to ‘punch above its weight class,’ exemplified by a track record of out-leasing much larger peers.” Colony reports that Vantage’s leasing of $66 million over the past 12 months exceeds that of several significantly larger public data center REITs.
The combination of Colony and Digital Bridge brings together a critical mass of capital and executive experience, as well as an established platform for acquiring and integrating acquisitions, as outlined in this slide from the company’s investor presentation.
The principals in Digital Colony are among the most experienced players in wireless real estate. Ganzi and Chairman Ben Jenkins founded Digital Bridge after playing similar roles for a decade at Global Tower Partners (GTP), the largest privately owned operators of telecom towers. The company was created in 2002 and built a portfolio 16,000 sites before it was acquired by American Tower for $3.3 billion in 2013.
Ganzi and Jenkins founded Digital Bridge in 2013 with a “singular focus” on owning and operating communications infrastructure companies with strong cash flow. That vision started with wireless infrastructure, but extended to a broader universe of connectivity and data storage companies, including Vertical Bridge and ExteNet Systems, which provides wireless connectivity through distributed antenna systems (DAS), small cells, WiFi and radio access networks (RAN) to extend wireless signals.
In 2021, Ganzi will take the helm of a combined firm with $60 billion in assets. That includes a $4 billion Digital Colony Partners fund solely dedicated to digital infrastructure.
“We really feel like there’s an unprecedented opportunity to deploy capital across our very valuable platforms and new platforms,” Ganzi said in Colony’s most recent earnings call. “We’re seeing over $408 billion in investment opportunity across the digital infrastructure ecosystem. We want to take balance sheet capital, put it to work behind our best logos, our best businesses, our best executives in places where we think we can deliver more total shareholder return.”