It is perhaps predictable that, at some point, private equity investors will start to broaden the categories of assets they seek to acquire. Some of the largest firms have already begun to invest in some assets beyond data centers, cell tower networks or optical fiber access networks.
Giant Blackstone has made some investments in software assets including artificial intelligence and cybersecurity, some might note. KKR likewise seems to have made some early steps to broaden beyond data centers and fiber networks, and into software.
Apollo Global Management likewise is making similar moves, as is Macquarie Infrastructure and Real Assets. The issue for many smaller funds and firms is that the expertise to conduct prospecting and due diligence in the newer areas requires expertise not presently onboard.
It also will be harder to find assets that offer the same predictable cash flow as the physical assets. But assets such as Intrado, which supports emergency calling capabilities, and was recently acquired by Stonepeak, provide an illustration.
Still, some investments arguably are more risky, from a predictable cash flow perspective.
Apollo Global Management, for example, recently took Intrado private, for example. Intrado is perhaps best known for supplying systems supporting emergency calling features and services. So the issue is how many more such franchises might be available in spaces adjacent to classic digital infra.
At first glance, that might be somewhat rare, though over time some quasi-franchises could develop in specialized operating systems, perhaps database management and likely security. Some might propose virtualization software used by connectivity providers as a possible future opportunity, once marketplace standardization happens.
Others might propose that dedicated internet access networks merit consideration, especially when provided by specialist firms. Content delivery networks are another possibility. And though most of the funding for artificial intelligence firms will come from venture capitalists, eventually some of those assets will mature to the point where PE gets interested.
Hedge funds arguably are more likely to take stakes in software or hardware firms than private equity. Elliott Management, properly a hedge fund, acquired Gigamon, a supplier of security products.
Firms that specialize in software deals also might be buyers of assets that could overlap with digital infra investors at some point. Coupa was acquired by Thoma Bravo, which specializes in software deals. Arguably most software investments are made by venture capital firms, at least for startups.
As a rule, the attraction includes the expectation that financial performance, and therefore asset value, can be enhanced by the private equity owners and managers. In some cases, perhaps nearly all cases, digital infra assets (which are a mix of data center, cell tower and access network assets) are valued more highly than operating businesses using their own infrastructure.
Also, firms that use platform business models (outside the connectivity businesses) also tend to have higher valuations than connectivity operating businesses. Since true platform business models are rare in the connectivity business, and tend, even when present, to represent only a smallish portion of total revenues, it remains unclear how valuations could develop.
But it might be reasonable to expect a further boost in valuation metrics of some magnitude.
Obviously, any such comparisons are suggestive, as ratios change based on other conditions such as the size of the firm, the geographies where it operates, firm growth rates, product mix and degree of competition in its markets.
That is why managed service firms in the connectivity industry, deemed to operate with higher or specialized value added, tend to earn higher valuation multiples, all other things being equal.
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