DigitalBridge Group, Inc. (DBRG) Earnings Call Transcript & Summary

All right. Before we get started, for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. The taking of photographs and use of recording devices is also not allowed. If you have any questions, please reach out to your Morgan Stanley sales representative. Good morning, and thanks for joining us today at day 3 of the Morgan Stanley Financials Conference. I'm Stephanie Ma, member of the Brokers, Asset Managers and Exchanges team for Morgan Stanley Research. For our next session, it's my pleasure to welcome Ben Jenkins, President and CIO of DigitalBridge. DigitalBridge is a leading global alternative asset manager specializing in digital infrastructure investing, with $80 billion in AUM and over 100 digital infrastructure professionals. Thanks for joining us today, Ben.

Thank you. My pleasure.

Great. Maybe let's just kick off with some background of the business, for those of us around the room that are less familiar with DigitalBridge. We understand at your legacy, you were structured as a REIT with balance sheet investment. So what led to the decision to de-consolidate and focus on exclusive, the Investment Management business?

Sure. Actually, if I may, I'll start truly at the beginning, which is we were an Investment Management platform, Marc Ganzi and I formed the original DigitalBridge about 12 years ago, and we were making investments with our own personal capital, that of friends and family. And then eventually, we moved into the institutional market through a deal-by-deal format. And we raised about $4 billion, bought or started 6 companies. And around 2017, we started to think about raising a committed capital fund. And as part of that, we formed a joint venture with the former Colony Capital in. And that fund was called Digital Colony Partners. It became a $4 billion fund, raised in 2018. Then in 2019, we actually merged the 2 GPs, in effect, the 2 management entities together. The company was called Colony Capital. We had arranged for Marc to be the successor CEO, that happened in 2020. We also had committed to rotate the business to digital infrastructure and away from the traditional commercial real estate and mortgage business that Colony was in. And we completed that in 2021. We changed the name from Colony Capital back to DigitalBridge. We paid a consultant a lot of money to help us do that. But then we realized that the business was truly an investment manager. We were still technically a REIT, but it wasn't really who we were or where we were going. And so we made the decision to de-REIT as it were and solely focus on the Investment Management business, which have been growing quite substantially. We still have a couple of larger positions that the firm owns, but they are no longer consolidated in our financial statements. We think the current presentation is a more accurate reflection of our business and positions us more comparably with our peers. And so we are a pure-play alternative asset manager, focused on digital infrastructure, just as you said.

That's a great overview. And maybe a little bit on your background, Ben. We understand you're a veteran in the private markets industry. I think you've spent over a decade at Blackstone previously. As one of the founders of DigitalBridge just over a decade ago, maybe you can give us some background on yourself and how your role has evolved over time?

So you're kind to market only in decade instruments, I think it's close to 30 years now in total. But I started my career at Morgan Stanley actually, as a financial analyst, yes, class of 1993. We just had a terrific 30-year reunion organized by the firm last fall. I think there were 50 of my fellow analysts there. It was a lot of fun. I moved on to a small private equity firm that had been started by 2 guys from Morgan Stanley and then joined Blackstone after business school, spent 12, 13 years there. And interestingly, that's where I met Marc. We were looking at a new sector at the time called cell towers. And we partnered with Marc to look at a couple of deals. We didn't end up pulling those off. But finally, I just said to him one day, "Why don't we buy your company," which was Global Tower Partners, was a tiny little business, not global at all and barely had any towers, but an ambitious goal to be the largest private tower company in the United States, which we helped him achieve. We sold the business to Macquarie in 2007. And from there, I went to Hong Kong to open Blackstone's office in Asia. It's been about 5 years there. When I came back, Marc and Macquarie were in the process of selling Global Tower Partners again, this time to American Tower. And that's when we decided to get into business again and start DigitalBridge. And the idea was this was among the most attractive asset classes that we had seen. We wanted to put our personal capital to work. We wanted to create a platform for people that we had worked with over the years and then finally, to do it in a format that would allow institutional capital alongside us because we knew the opportunity was much bigger than our personal resources. Interestingly, when I first started in private equity, someone very smart actually said to me, "All the easy deals have already been done. This is a really hard business." That was 1995. And obviously, the industry has just exploded from there. And so I've been very fortunate to work at some terrific institutions and get great training. And now, we're trying to apply that same model and standard to what we think is still the most exciting asset class within alternatives, namely digital infrastructure.

Maybe going back to the evolution of the company, where would you say you are in the transformation of the business today? You've come a long way. What's left to do? And then maybe you can also give us an overview of DigitalBridge as an alternative asset manager, how you stack up versus others you would view as your peers?

Sure. So I think we've made the transition to the pure-play alternative investment manager. Now, the goal is really to scale. And $80 billion in AUM sounds like a lot. But compared to our peers, it's really not. And so we know we need a broader, deeper distribution of our products. There are some white spaces in -- whether it's asset classes or strategies that we could pursue. I think we've pretty well covered the globe geographically. And so the further growth is going to be in more products to more investors. And we're very fortunate to have a strong tailwind or some call it mega-trend at our back in digital infrastructure. So that's very helpful, and we just need to try to ride that wave to fully take advantage of the opportunity. I would say, as far as our business is concerned, we've had, historically, a fair amount of noise in the financial statements because of some of that legacy real estate, which is now gone. And so hopefully, the financial statements present a more clear and complete picture of who we are. I think that's been difficult to discern at times, and we've really worked hard to try to clarify and simplify that. And I think we're making good progress there. And you mentioned our Investor Day earlier, and we talked about how it's sort of growing and scaling the business. And I think that's really where we are at the moment.

Great. Maybe Double clicking into the mega trends you brought up earlier, the digital infrastructure angle really differentiates you guys from others in the space. So what's so compelling about this asset class as you see it? And how would you define your investable universe?

Well, I think we've always believed that it was among the most attractive sectors. But really, the pandemic kind of showed the world just how critical digital infrastructure is. I mean it's like the fourth utility, of electricity, gas, water. We simply can't function. It's become critical to our daily lives and work. And that, I think, makes it clear to everyone. And then, you see the transformation of the overall economy to digitization and now AI, and those things require enormous amounts of infrastructure to support. And that requires enormous investment. And more and more, the companies are seeking to specialize or focus on their highest-value activities. And generally speaking, that's not owning the underlying infrastructure. And so value-added trusted partners like DigitalBridge become a critical part in that growth and expansion. And so we've sort of come up with a phrase "Partner of Choice" in digital infrastructure. And that's really our focus every day. We want to be the partner of choice for Verizon and AT&T in their wireless infrastructure. We want to be a partner of choice to Amazon and Microsoft and data centers, but we also want to be a partner of choice to CalPERS and GIC and [ ADIA ] to help them in their portfolio construction, deliver compelling risk-adjusted returns. And the sort of way we phrase that is we believe we can generate, and this is in our primary DigitalBridge Partners now, a series of infrastructure equity funds, a private equity-like return with infrastructure risk. That's, I think, a very attractive proposition to institutional investors. Also, you mentioned sort of branching out or how we define our universe. The three pillars, historically, have been towers, fiber and data centers. And those will continue to be, I think, the majority of what we do, and there's plenty of growth left there. But we are branching out. We, in our first fund, had a very successful investment in a digital outdoor media business. That has a lot of similar characteristics. We have been looking recently at satellite infrastructure, not the actual constellations, but the ground-based infrastructure. There's a lot of terrestrial requirements to support the sort of historical GEO constellations and now the new LEO Satellites as well. So that's an example. And the great thing about our space is it's constantly evolving. And the technology and the business models create more opportunity, more white space for us. The other way we play it is through different asset classes. So I said our primary -- our largest business is infrastructure equity, but we also have a very successful credit business now. We got two different listed security strategies. We have a strategic asset fund, which is sort of our version of a core fund. I think there's space for a growth equity or private equity strategy. We've done a few venture investments, where we thought we have particular expertise or insight through our ecosystem. So there's multiple ways that we can play this and continue to grow and be that "Partner of Choice".

Given the attractiveness of the asset class, perhaps it's not surprising to see some of the asset managers, the Brookfield, the Blackstone, they're talking a lot more about infrastructure and a lot more about digital. How has that changed the dynamics in the ecosystem for you? And how do you see the competitive landscape evolving?

Yes. Good question. And I'd like to say, of course, we're not the only ones who figured out how attractive this is and to borrow a phrase from my former boss at Blackstone, he would often say "finance is a copycat business." And like the NFL is a copycat league. And so we've expected this. And frankly, it's been there all along in different ways. But certainly, the firms you mentioned are active and talking about digital infrastructure a lot. We see them periodically. We try, of course, where we can to avoid auctions or highly competitive situations. But there is an efficient market out there. And so we see them from time to time. I think our positioning is still much more as an owner and operator of these assets rather than purely a financial investor. And that comes from Marc's background and the legacy of being in this space for now almost 30 years. And the nature of these transactions for the seller or the counterparty is very different than just a regular way sale because, by and large, they're still relying on the company or the assets to support an important part of their business. So data centers is an easy example, where if you do a deal with Microsoft or Amazon and there's a problem in one of the data centers, then that creates a significant impact to their business or Verizon's towers. And so it's more than just a financial transaction. And if it is purely last dollar on the barrelhead, we usually don't win those. But if there is an industrial component where we can position ourselves as a true strategic partner, that's where we really like to play. And the last thing I'll say is as great as those firms are, they're still doing digital sort of as a sideline to their primary activities, whereas that's all we do. So those firms have a lot more people, but we have more -- we have over 100, as you mentioned, just focused on digital every day. And none of the others come close to that.

Great. Maybe shifting gears a little bit to fundraising, can you talk about the overall appetite you're seeing from investors to allocate to digital infrastructure? How has the tone changed in the last year or 2? And where are you having the most conversations today?

Good questions. So I would say there is absolutely still increasing, accelerating interest in digital infrastructure. And many institutions or investors we meet with are just sort of beginning to consider it as a distinct allocation in their portfolios. Generally, it's been part of infrastructure. Occasionally, people think of us in real estate or even private equity. But by and large, it's settling into infrastructure, and now people are looking to add a specific allocation. And that's one of the things that is attractive about us relative to some of the other firms you mentioned, where those are still generalist funds. And so if someone is looking specifically for a digital allocation, they can get some exposure that way, but they don't really know how much they're getting. Whereas with us, it's going to be 100% digital. And so that targeted approach is attractive. I think the environment has improved over the last 18 months. I'd say the so-called denominator effect has been largely resolved. There's a new phenomenon, which people may have heard of, now called the numerator effect, which relates to liquidity or the amount of distributions that investors have received. And that is a challenge for some. For those who are just starting their digital infrastructure programs, that's less of an issue. And so I'd say we're seeing interest broadly but perhaps most prominently in Asia and the Middle East. I think they seem to be in a better position, sort of liquidity- or capacity-wise. But we continue to receive commitments globally, the U.S. or North America and Europe as well.

That's a good segue into your fundraising targets. I think you've laid out goals for $7 billion of new capital formation this year. Can you talk to how this is trending right as we stand here in June? And then what are some of the biggest contributors to that $7 billion?

So the largest contributor will be our DigitalBridge Partners strategy. That we will be hopefully wrapping up by the end of the year. It's well on its way at the moment. We're also -- I got to be careful how I say this. We also are looking at other strategies, namely credit, where we see significant demand. That asset class, as people know, is growing rapidly. And all of this equity capital that's being raised, needs, obviously, debt to support the transaction volumes. And we think in our private lending business that we can grow substantially in that. The other thing that's somewhat unique about our model is we have offered a significant amount of so-called co-investment to our fund investors. And that's something that's very attractive to them relative to some of our peers. And that also allows us to raise capital on a more or less continuous basis. We're not so tied to a particular fund life cycle or strategy cycle. So we'll raise probably several billion dollars this year in co-investment. And the companies that we own and have founded continue to grow at much higher rates than the overall economy, and that allows us to continually raise capital. And that's been an important element in our overall sort of capital-raising model.

Great. Why don't I also get your views on deployment as the CIO of the firm? Where are you seeing the most interesting opportunities to put capital to work today? And how does the pipeline evolves in terms of size or diversity?

Yes. Well, we just literally had our weekly pipeline call this morning before this panel, so I can report that it is quite robust. I would say, it's definitely picked up meaningfully in the last few months. We see a lot of activity, again, in Asia, that's become a really important market for us. I'd say Europe, a little less so. We've got a couple of interesting things going in North America and also a couple in some of those new areas that I mentioned, beyond the kind of main towers, fiber and data centers. So we're excited about that. I think the environment is settling into a place where sellers are more realistic in their expectations. And with credit markets where they are, deals can get done now. So I'm pretty optimistic on our deployment outlook this year.

And maybe stepping back a bit, maybe you can also touch on your approach on the sourcing funnel breakdown. What's your approach to sourcing and originating opportunities?

Yes. That's a critical element in our business. And I think, again, we're very fortunate to have the track record and network of relationships that we do. Roughly 2/3 of our transactions end up being proprietary or not otherwise intermediated. A lot of those are strategic corporate relationships with the likes of some of the companies I mentioned. There's also an extensive network of senior advisers and operating partners that we have, which is a great source of deal flow and then the usual kind of pounding the pavement, going to conferences, meeting management teams. And so we are organized by sector. We have different folks focusing on the three main sectors and then the new emerging ones as well. And so we have this weekly call, where we sort of challenge everyone to bring at least one new idea, and we sort of bat that around. And I think we've become sort of the go-to source, and we pretty well see and hear about everything that's going on. So that's not something that we take for granted. But by and large, deal flow has not been an issue for us.

I want to make sure we touch on AI. How are the data centers -- how's the industry dealing with constraints on the energy side of things, right, as the AI demand ramps? And then broadly, what do you see as the implications or potential opportunities of this AI trend or theme for the digital infrastructure space?

Well, it's absolutely the biggest topic and the biggest challenge we have. Again, the demand side is incredibly robust. We literally can't build the data centers fast enough. We're pretty well sold out for the next 2 or 3 years and taking orders for 2029. But the constraint of power is real, and it is increasing. And ultimately, I think it's going to require innovation, productivity, efficiency from all sides, right? We're going to have to find a way to generate more power. We're going to have to find ways to transmit and distribute that. We're going to have to more efficient in the way GPUs run. We're going to need more creative cooling solutions. I mean it just goes on and on. But I believe the sort of human ingenuity has the capacity to solve that. But it requires a lot of thought and a lot of effort, which perhaps ironically, I believe, is a net benefit to us because if it were easy, a lot of people would be doing it, including some of the customers themselves, right? The big hyperscalers, by and large, are not capital constrained. They're operationally constrained or maybe not have solutions at their fingertips. So that makes us more valuable as a partner. But it requires enormous effort on our side, and we've been spending lots and lots of time around this power issue. And I think we have some creative ideas so far, but it's going to take all of us doing our very best thinking to navigate through because the projections of how much power would be required if you just extrapolate out is overwhelming. So we're going to have to find new solutions, but I ultimately believe we will.

Fair. Maybe coming back to your Investor Day a few weeks back, you've talked to doubling the business in 5 years. So what's the growth algorithm here? What's embedded in terms of capital formation? And then as you scale, how do you think about the FRE margin trajectory?

So look, we think over that cycle, we can double the FEEUM. And I think that's achievable when you think about the product suite. As we talked about, there's a few new products or opportunities that we see within that. I think implicitly, and we talked about this at the Investor Day, we need to grow our base investors. We've been very successful with the largest global allocators, but we need to expand the universe of investors. And I think, ultimately, that will include new forms of distribution, high net worth. One of the interesting areas that we've talked about recently is tapping into more of the real estate allocations, where with commercial real estate going through its challenges, maybe that's a place that we could go for digital infrastructure. So I think that's part of it. And then I talked earlier about relative to our peers, we're still subscale-ed. And so getting more leverage, operating leverage in our business certainly will help those FRE margins. I think we talked about getting to 50%, we certainly should be able to do that. I think it's interesting that the business of alternatives has become quite sophisticated and the same things that in earlier days, the so-called Blue Chip companies were doing, whether it's investing in technology or doing a distribution strategies, now alternative firms are doing that. And it's very interesting, we spend sort of all of our time analyzing other people's companies, but historically, have spent relatively little analyzing ourselves. I think that's changing now. And the level of sophistication has gone up dramatically. And I think over time, that should allow for higher margins, higher returns on capital. And I think that's what is driving a lot of interest in the sector.

I think related to that, we've seen this playbook for the other alt managers, starting with the flagship and then building out, extending into other adjacencies and acquiring new verticals. How are you thinking about that broadly? And what could that look like for DigitalBridge?

Yes. Well, I think take energy and power, for instance, that is no longer sort of optional or even an adjacency for us, right? It is fundamental to what we're doing. And just like Amazon turned their back office into a profit center with AWS, I think it would be imminently logical if we were able to gain the expertise and experience in developing energy and power solutions that, that could itself be a new line of business one day. I think that would be a great outcome. I think the other white space, we talked about filling that in, we talk about growing our distribution. I think all of that together will take us, hopefully, to a level where we can sustain a high level of growth, high level of margin and, of course, a high level of performance.

Great. I think with that, we're out of time. Please join me in thanking Ben for the discussion today.

Thank you.