For Flexential, Success-Driven Funding Unlocks Growth Opportunities

As more investment flows into digital infrastructure, data center developers and service providers are seeking the right capital strategy to support their business model. Approaches vary, but there are now a growing number of ways for companies to fund their growth.

A good example is the recent $2.1 billion funding by Flexential, which used asset-backed securitization (ABS) and green bonds, illustrating two recent trends in data center finance:

• Success-based funding that leverages the equity and cash flow in existing data centers.
• Sustainable loans that reward borrowers who meet “green” criteria for energy efficiency or the use of renewable energy.

Chief Executive Officer Chris Downie says the financing package lays the groundwork for the next phase of Flexential’s evolution as a company.

“We are in a capital-intensive business,” said Downie, adding that the deal “was the culmination of a lot of hard work. We had to prepare the company and assess our growth story to accomplish a financing of that nature. It was an evolutionary step to be able to enter the ABS marketplace.”

Flexential is among the data center providers that have built used their development and leasing to secure the funding to expand their infrastructure and services. Here’s a look at Flexential’s journey, how the transaction evolved, and the tools the company used to match its growth strategy with the investor interest in the data center sector.

Flexential’s Journey and Growth

As it has grown beyond its roots as a regional provider, Flexential has built a national footprint and global connectivity. The company now has nearly 40 data centers and more than 3 million square feet of capacity across 20 markets. With its theme of “beyond four walls,” the company is targeting customers that need to connect across markets, and operates a private 100 GB network for its data centers.

When we checked in with Downie at the start of 2021, Flexential had a growing portfolio of services and markets, and was focused on helping enterprise customers sort out a complex IT landscape, and leading with hybrid IT options.

Downie noted the surge of investment in the data center industry in 2020 by large financial players like infrastructure funds, sovereign wealth funds and marquee Wall Street firms. These investors bring affordable capital, and Downie’s goal was to position Flexential for growth.

“We’re certainly thinking about getting access to that capital,” said Downie. “It’s accelerating capacity for a number of our similar scale brothers in the industry, so our financial strategy should incorporate that.”

Flexential was formed through the 2017 merger of Peak 10 and ViaWest to create a national network, and is backed by private equity firm GI Partners, an experienced investor in the data center industry. Peak 10 targeted second-tier markets in the Southeast, while ViaWest built a similar network in the Western U.S. The combined companies rebranded in 2018, with a focus on “the power of people in a technical world.”

In recent years Flexential has begun to invest in larger data centers to support a strategic expansion into the market for wholesale data center space, in which a tenant leases a finished suite of “turn-key” raised-floor space. Those tend to be larger deals than seen in retail colocation, Flexential’s historic focus, in which tenants buy smaller amounts of space by the cabinet or cage.

Analysts say the differences between data center business models are blurring, and customers are focused on outcomes rather than distinctions between wholesale or retail space. But the different models matter to investors, as they may bear on the risk of making a loan or investment.

Using Existing Data Centers to Raise Growth Capital

Most data center developers are constantly building new facilities, with some sites under construction, and some gradually filling with clients. There are still others that are fully leased by a single tenant, or multi-tenant buildings where most of the space is leased. These buildings are business assets that can be sold or used as collateral.

There are several ways that data center operators are using existing sites to raise growth capital:

• Joint ventures, in which a developer sells an equity interest in one or more data centers to an investor. Terms may vary, but the investor will typically buy a  stake of 50 percent or more, while the developer retains an equity position, and earns fees for managing the property. The developer can use money from the sale to fund construction of more data centers.
• Asset-backed securitization (ABS), in which a developer uses the equity and cash flow from a pool of properties to secure a loan. Because builders have data centers in various stages of development, some of these assets can qualify for a lower interest rate than the entire portfolio. The ABS process bundles assets into pools, with groupings being assigned different credit ratings based on their occupancy and cash flow. This allows the borrower to closely align these secured loans with the risk profile of investors.

The first use of ABS secured notes in the data center industry in 2018 featured Vantage Data Centers, a wholesale provider whose clients included the world’s largest and most credit-worthy companies. STACK Infrastructure, Sabey Data Centers and Aligned also used this approach to raise funds. But as of early 2021, the only data center ABS deals involved wholesale providers.

That changed last March, when DataBank raised $658 million using secured notes, a sign that investors were comfortable with asset pools including multi-tenant colocation facilities.