Cordiant funds the future
Cordiant Capital’s Benn Mikula speaks to Natalie Bannerman about digital infrastructure’s evolving investment landscape and where the firm is focusing its energies
As the investment landscape continues to trend upwards, the telecoms ecosystem is increasingly feeling the influence of private equity players. The asset management firm Cordiant Capital is one such firm.
Cordiant has four separate investment division: energy transition, agriculture, infrastructure credit, and a digital infrastructure team (Cordiant Digital Infrastructure).
When asked about the biggest opportunities in the digital infrastructure sector, Benn Mikula, managing partner and co-chief executive of Cordiant Capital, gives a two-pronged answer: “There’s a set of investment opportunities that applies more broadly across the financial complex, and then there’s a set of investment opportunities that we, specifically at Cordiant, are pursuing.”
Within the first set of wider opportunities, he says “there’s a significant increase that’s required in cloud capacity, not just for the public cloud providers, but increasingly, on the wholesale side for large corporates as well”.
Next, he says is fibre, not just to the premise but also continued investments in network backbones, be they national, metro or subsea, all of which require a significant amount of capital.
Adjacent to this he says there is “fibre densification happening in the mobile tower network, particularly as 5G rolls out” which will require investment in complementary technologies such as distributed antenna systems in buildings and technology at the intersection of wireless sensors, fibre and the internet-of-things (IoT).
However, Cordiant is not investing in everything to do with digital infrastructure, Mikula says: “We focus on providing growth capital to mid-market companies focusing on specific sub-sectors where we feel we have an investing edge.”
These areas include interconnect, managed cloud services (“In the context of private cloud facilities,” Mikula clarifies) and specific types of mid-sized tower assets. But Mikula again points out that for his firm “it’s all about middle-market growth”.
These areas all align with biggest growth drivers seen across the space, but Mikula says there a few areas where the financial narrative diverges from the underlying reality.
“The first thing is there’s sense that digital infrastructure is composed of these discrete, almost isolated silos – data centres, towers and the like – which, in effect, isn’t the case, particularly as you roll out 5G, for example,” he explains.
The second divergence is that certain overarching themes become entrenched and lot of nuances are missed. “One example is this idea that public cloud providers will own everything and all data will be processed there,” Mikula says. “It’s a narrative that Cordiant would push back quite strenuously.”
According to Mikula, a David Attenborough-type figure is needed to come up with a taxonomy for all the different ecological niches in data centres, because only looking at public cloud providers means you miss a lot of the bigger picture.
One example are what he calls “boomerang customers” – businesses that went to the cloud, discovered that it is more expensive than they imagined and imposed a series of challenges that they could not meet.
“We’re seeing customers actually leaving the public cloud providers to go back to data centres where they can experience a high degree of hand-holding, both on the compute and the connectivity side,” he says.
In tandem with these growing investment activities, there are more conversations about M&A, specifically regarding consolidation in regions that have fragmented markets with vast numbers of independent infrastructure players, such as Europe.
Commenting on this trend, Mikula says he is seeing a “race between the increase and the size of the digital infrastructure complex and consolidation”.
“Some could argue that the consolidation doesn’t necessarily increase the overall relevance of certain players because there’s such significant dollar investment required in new capacity every year,” he says.
Mikula goes to explain that that valuations in the private market, particularly for the larger deals that create meaningful consolidation, are higher than in the public markets. This has been partly driven by “the fact that limited partners have poured money into certain very large infrastructure funds that are feeling the pressure to deploy”.
The relationship between the investment and private equity community and telcos can only be described as increasingly symbiotic, an evolution that Mikula says reflects changes in capital markets over the last 25 years.
Leaning on his experience as an equities analyst at JP Morgan, Mikula has see both the public and private market.
“Companies that could have gone public two decades ago cannot access the public markets today. So, by definition, private equity has stepped into that space” he explains.
He adds that it is not just private equity, but also private debt funds that are new sources of capital to replace the more traditional equity capital markets and bank market.
Next, he says private equity funds increasingly taking on the role of owner-operators reflects the fact that digital infrastructure is a complicated infrastructure asset class.
“Everything from the changing demands of the data centre to 5G and fibre backhaul are all incredibly complex. These are long-lived assets, but you actually have to know what you’re doing, and this challenge means that the private equity owners have to become much more involved,” says Mikula.
Favourable regulatory conditions are always required to attract the best investors, be they domestic or international. Cordiant operates across Europe, North America and in the UK, and while regulatory pictures vary from one region to another, a few things apply across the board.
“What typically is regulated is the user of the digital infrastructure as opposed to the infrastructure itself,” says Mikula. “But we’re seeing, particularly in Europe, digital assets are now subject to foreign review.”
This extra layer of review is largely aimed at China and Russia for geopolitical reasons, but it is coming in, and it is further compounded by the fact people now understand that digital infrastructure is critical infrastructure.
The other thing he is witnessing is that dialogue between regulators and industry has been informed by pro-consumer attitudes, and this has had a ripple effect on investment, particularly in Europe, leading to a gap in profitability between European and US telcos.
“That, in turn, reflected itself in different investment rates in the US and Europe, and that’s why Europe lags in 5G deployment,” he says. “Regulatory decisions made in isolation to solve a consumer problem can reverberate over a period of 10 or 15 years and cause chronic underinvestment.”
Europe and North America aside, Coridant also has an infrastructure credit fund led by a team that works in consultation with its digital infrastructure team, which has seen the firm invest in emerging markets including Africa, Asia and Latin America.
“Usually, we syndicate,” explains Mikula. “So, we go in and we bring other funds with us.”
With so much diversity in the emerging markets, it is very hard to generalise. But one thing he hears from limited partners is that the risk return is often not there.
“You’d think that the pricing in these markets is lower, but frequently it isn’t,” says Mikula. “It’s a global market and global information is available. So, in some instances you can find great companies with great management teams and happily deploy capital. But we’ve had opportunities brought to us where they’re proposing the same pricing as in developed markets.”
As conversation turned to the topic of sustainability, Mikula reiterated the fact that sustainability has always been important in Cordiant’s investing activities and will remain so.
Data centres aside, “moving electrons over fibre is also quite an energy consumptive activity”. Add in the various crypto-related activities that are increasingly prevalent and the much talked about age of quantum, we’re heading for a time when digital infrastructure uses two or three times the energy consumed by the airline industry.
“Unfortunately, the growth in digital demand is such that even throwing a lot of resources at sustainability, sometimes the energy is running fast 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 usage per unit of computer unit of transmission. It’s a race between that and growth.”
With future projects including a new data centre at one of its portfolio companies powered by 100% renewable energy, Mikula says Cordiant Digital Infrastructure’s roadmap includes complementing its core fund with “a value-add fund targeting a different pool of investors, pension funds and insurers in the private market”.
The firm will also continue developing its franchises through active investment and active capital raising.
Personally, Miukla believes Cordiant’s work is all about the people. He says he will continue to build his team, adding both senior and junior resources. But he says this expansion has its own problem: “I’m running out of space in my London office!”