FOCUS NEW YORK
Issue 14, February/March
MONEY MEN SEEKING DATA CENTERS
Gone is the stigmatism left by the financial crisis. Investors are willing to place money with data center companies. But as Yevgeniy Sverdlik discovers, the offering has to be right, and the investment low risk
he share price performance of data center companies over the course of the recent economic downturn has attracted more lenders and private equity firms into the space. The industry now has a wider variety of sources of capital than the handful of usual suspects that have traditionally dominated the space from a capital perspective.
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Major lenders for data center players include firms such as CIT, SunTrust Robinson Humphrey, RBC Capital Markets, Toronto- Dominion, GE and CapitalSource. Key private equity sponsors include Abry Partners and Oak Hill Capital Partners, among others.
CAPITALSOURCE’S IDEAL BORROWER
Ryan Golding, director of the Technology, Media and Telecommunications group at CapitalSource, says his firm lent more than US$100m into the data center space in 2010. The year’s transactions included US$140m to Denver-based ViaWest, and US$12.5m to Toronto-based Q9, according to the company’s website. Both companies are colocation and managed services providers.
CapitalSource is mostly interested in “facility- and services-centric” types of borrowers, Golding says. For these borrowers colocation and managed services are an important part of the overall business plan.
The ideal borrowers for CapitalSource are companies that have demonstrated the ability not only to design and build a data center but also to lease the space to small, mid-size and large enterprise customers. They must have strong expansion opportunities – not excluding greenfield or brownfield development – and the ability to generate positive cash flow.
“We’re very interested in helping those types of businesses expand,” Golding says. “We want to make sure they have the capital and flexibility to expand.”
Much like its peers in the business, CapitalSource does not lend to start-ups. “We
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don’t finance pure speculative greenfield-type deals. Not if you’re starting from scratch. A pure start-up, despite equity and strong management, is unfortunately still very difficult to get financed.”
The investment community has developed a greater appreciation of the data center sector - Horace Zona, SunTrust
CIT FOCUSES ON SMALLER PROVIDERS CIT, whose first investment in the data center space was Equinix in the early 2000s, is another example of a lender that today only finances operators that have existing facilities and customers. Joe Junda is a senior director at CIT. “We like to see some cash flow,” he says about his firm’s prerequisites for a borrower in the data center industry.
CIT’s primary focus in the industry is on smaller but growing retail colocation providers. While the company’s first introduction to the space was through Equinix, today, “where we feel we can make the difference is with the smaller operators,” Junda says.
CIT’s other past data center company deals were with Paetec, to which the banking firm lent US$850m in 2007 and colocation player Telx, which got US$31m through CIT the same year, according to the firm’s website.
WHY LENDERS LIKE DATA CENTERS
Both CIT and CapitalSource continue to actively pursue opportunities in the space. Golding says CapitalSource thinks the market is currently characterized by an imbalance between supply and demand, with the scales tipped on the demand side.
“We also think that data center operators exhibit very strong credit qualities,” he adds.
The macro industry drivers are strong as well. “We continue to believe that small and medium- size businesses are looking to outsource their data center environments,” Golding says. The
types of applications businesses now need will continue to drive companies to host more data.
“Cloud computing is evolving and we think there are some exciting trends happening in the cloud that will have an effect on the underlying data center facility.”
Even though there is a healthy dose of competition for good data center deals among major lenders, the practice of pooling resources for joint deals continues.
“While we’re all technically competitors, we’ve all worked extremely well together within the sector to create debt facilities for companies,” Golding says. “In today’s debt markets, you have to work together. There’s not as much debt in the market as there used to be.”
A ‘BIGGER SANDBOX’
The number of companies looking to finance data center firms has also expanded in recent times. Horace Zona, head of the Media and Communications investment banking group at SunTrust, says his team has “seen more participants from the traditional lender market in the space”.
SunTrust has been active in the data center space since 2008, when Zona joined the company. “When I came to the firm in March 2008, one of the areas we wanted to get very active in was… internet infrastructure,” Zona says.
Data centers are part of what the company considers the internet infrastructure space.
According to Zona, the investment community has developed a greater appreciation of the data center sector, having learned about the industry’s various business models.
Golding agrees with Zona. “The sand box has gotten bigger,” he says.
See more industry articles at
www.datacenterdynamics.com/ focus/industry-news
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