Q&A: Pankaj Agrawal, Partner at Capitel

1. Tell us about Capitel and your area of expertise?

Capitel is a techno-commercial transaction advisory firm with a focus on conducting commercial due diligence and investment evaluation for major investments in digital infrastructure. We serve major global investors such as Brookfield, TPG and KKR and have advised on transactions with deal values from $300 million to $4 billion. Our geographic focus is Asia Pacific, but we have also done engagements in EMEA and the US.

I am a Partner with Capitel, and am responsible for development of new clients and opening of new markets, in addition to growing the existing business. I was born in India and have seen the technology-led transformation of emerging markets very closely. I have also had the opportunity to serve global clients and participate as a judge in global industry events such as the Mobile World Congress Barcelona and TMT Global Mobile Awards, in addition to delivering key notes at industry conferences such as TowerXchange in Asia, Europe and the Middle East.

2. What trends are you seeing across the overall TMT investor space?

Post-pandemic, we are seeing a surge in investments in the digital infrastructure space, led by the increased utility of home broadband and connectivity. This in turn is driving investments in underlying infrastructure such as data centres, fibre networks and cloud. The bulk of these investments are led by global infrastructure funds, although we are also advising private equity investors that are investing in 5G mobile operators and MVNOs, especially in high growth emerging markets.

We are also seeing very high valuation multiples. Tower transactions would typically be closed an 15x to 20x EV-EBITDA, but we recently advised on a tower transaction in Australia that was bid for 39x EV-EBITDA. Investors are looking for assets generating stable, long term cash flows that can be funded through low cost capital esp. in stable markets. Similarly, data centres in markets such as Indonesia re trading at 48x, informed by the growth expectation of the digital native businesses, adoption of Internet applications and introduction of new services such as the Metaverse.

3. How is the shift to cloud impacting legacy data centres?

The shift to cloud has been quite rapid – enterprises such as banks, telcos and airlines that were using data centres mainly for the use of their employees and select business customers, are now having to deal with millions of consumers using the mobile applications for banking, reservations and content consumption. This traffic demand can fluctuate significantly and the only option for such consumer facing businesses is to adopt public cloud. In addition to mobile applications, such businesses also have workloads that require additional security and need to be hosted on private clouds. Finally, for administrative workloads such as MIS and ERP, businesses are leasing racks in Colocation data centres. So, on an overall basis, the business demand is shifting to a hybrid cloud model that uses a mix of multiple hosting types (public cloud, private cloud, Colo wholesale), as well as a mix of different cloud vendors (such as AWS and Azure) depending on the suitability for the workload mix.

Legacy data centres are building and acquiring consulting front-ends that can help enterprises digitise their businesses and migrate the on-premise solutions to a hybrid cloud hosting mode. The backend data centres, and connectivity is provided the data centre operators, in addition to managed services and remote hands support. With the clients also demand connectivity to clouds and multiple carriers, we are also seeing investments in wholesale and hyperscale nodes, and an increased focus on network dense, ecosystem platform type of plays. Everyone wants to replicate the Equinix model for a hyperscale data centre play, with ‘connected hyperscale’ as the industry buzzword for 2021-22.

4. What areas have investors been looking for support?

The primary area of investor analysis and evaluation is on oversupply risk and its impact on pricing. There is a view that there could be a demand bubble with too much money chasing a limited amount of deals, and it’s possible that the demand may either pan out to be less than projected as there is very high dependence on the network dimensioning model of data centre operators. If data centre operators continue to churn out workload demand using subsea cables, then the overall demand for data centres and fibre in local markets may be lower than expected.

The other risk is supply – with the digital infrastructure market heating up, there are a lot of investment announcements, with supply exceeding demand by 2-3x in some markets. This will ultimately have an impact on the market pricing and returns.

The final risk is around technology and regulation. Investors need a simple understanding of evolving technology to make sure their investments do not become outdated in the near term, and there is no major disruption in technology. Governments have been rolling out personal data privacy bills and also want to regulate data centres, and assessing policy risk and ring-fencing is another big area of investor evaluation.

5. How will the Metaverse transform investments?

The ‘embodied Internet’, as Facebook likes to call the Metaverse, has integrated augmented reality and virtual reality and realistic 3D rendering. It runs on devices such as the Oculus which are expected to further evolve and proliferate in embedded avatars. The strain placed by these devices on networks is likely to be a magnitude higher than even 5G smartphones, with a need for greater throughput, concurrence and low latency. Such a Metaverse network will be responsive and haptic, allowing users to touch its layers and get immediate feedback.

Unfortunately, such a tactile network cannot be hosted in the Arctics, despite the cost savings. The Metaverse will necessitate cloud access on street cell towers and residential complexes to maintain latency and other parameters. This won’t be cheap from any standards – real estate in major cities is expensive, along with energy and manpower. On-premise 20KW capacity racks with servers are already selling at $2,000 per rack per month. Such a local cloud will also be connected on low latency and high throughput links to parent data centres in metro cities. As other cloud providers such as Microsoft also join the Metaverse bandwagon with its Mesh product, the demand for such local clouds will run into hundreds of Megawatts in major cities.

6. What predictions do you have for 2022?

We expect a high share off investments going on the edge layer to support new applications such as the Metaverse. Seasoned data centre investors and operators can see this surge of demand. New platforms such as AtlasEdge are exclusively focused on this segment. American Tower has already started adding edge nodes to its cell towers (along with its Coresite purchase), and Equinix has added an edge data centre product.

These operators understand that Facebook and other cloud providers will be forced to use local clouds and will not have the luxury of plunking all the data and content to the global warm-farms. There is also a renewed interest in high capacity data center connections, with the recent buy-out of SuperLoop’s Asia network by DigitalBridge. Other funds are also investing in building new high capacity networks (LightStorm, HyperOne) to enable a more tactile Internet. Cloudflare, a content delivery network with a 2021 revenue of $600 million is trading at a valuation of $55 billion.

We expect this trend to continue in 2022 as the Metaverse offerings, ecosystem and industry participation becomes clear.

Pankaj Agrawal is a Partner at Capitel.