TD has acquired Cowen Inc. Please bookmark TD Securities for further updates.

Conversation with GI Partners Managing Director Steve Smith

Insight by

In this episode, Steve Smith, Managing Director at GI Partners and former CEO at Equinix speaks with Colby Synesael, Communications Infrastructure & Telecom Services Analyst. They discuss his transition from the military to business, his time at Equinix, and qualities of good leaders. They also speak about the communications infrastructure sector, its changing ecosystem, and private equity.  Press play to listen to their conversation.


Speaker 1:                       Welcome to Cowen Insights, a space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.

Colby Synesael:               My name is Colby Synesael, and today we’re speaking with Steve Smith, managing director of GI Partners, and former Chief Executive Officer at Equinix as part of our leaders, legends, luminaries and visionary series. So with that, Steve, thank you so much for being here, really appreciate it.

Steve Smith:                    Sure. Thanks for having me Colby.

Colby Synesael:               I want to start actually talking about your US Army career. So you are in the US Army for eight years having graduated from West Point, had you always wanted to go to West Point and to join the army?

Steve Smith:                    No, I have no military in my background, Colby and at the time when I was a senior in high school, which was a long time ago, which was in the mid ’70s. I was fortunate enough to be recruited to play football in college at a mostly northeast school in Maryland, Syracuse, a couple in the ACC, and West Point. So I actually visited all of them. So I got recruited there to go play quarterback at West Point and when I visited, I had no idea what the Military Academy was about. As you can imagine, for those of you who have been there, it was a very impressive facility, I love the coaches, I love the idea of getting a great education. I probably underestimated the fact that you go there for four years, and then you have to serve for five. So as an 18 year old, you’re making a nine year commitment in your life. But I made the decision and I did it and it was a wonderful experience for four years. It was hard, I was actually in the last all male class.

                                         So my sophomore years when females were admitted, which I was thrilled with, just for the diversity, but it was tough for them. So it was an interesting time for me to go through, and then you do have to serve for five years, as most people know, out of all the academies, the Air Force Academy, the Navy Academy. I ended up staying in seven actually, because I became a general’s aide at some point when I was a captain, and I was in Hawaii, not a bad place to be serving. So I stayed in for a while and it was a good experience, if I look back, I’d do it again.

Colby Synesael:               So I didn’t know you were a quarterback for West Point. Did you play off for years? What was that actually like?

Steve Smith:                    I did. I did, first two years I was on the bench, I was a backup and then the last two years I decided that I wanted to play. There was a quarterback that was ahead of me that was 6’6, 230, he was all these I was never going to play.

Colby Synesael:               [inaudible].

Steve Smith:                    Yeah. So I switched and played defensive back, in my last two years I played free safety. Yes, I played all four years, and it was great experience. We played big teams, we played Notre Dame and Pittsburgh and Penn State. I played against some greats that are now retired and out of the sport, but when I look back it was a terrific experience.

Colby Synesael:               That’s awesome. I didn’t know that. I think the general perception of a military man or woman is someone who’s organized, punctual, disciplined. I guess what other adjectives Am I missing and do all these characteristics apply to you?

Steve Smith:                    Those are all good characteristics that I think my friends and colleagues would say exist in my life. I think if you visited me in my home, Colby, you’d see that my closet is extremely organized, my desk is extremely organized and our house is extremely organized. So yeah, punctual, disciplined, and organized are good descriptors. I would say during the early days of my military experience, there were some things that were different, because you’re training to go to war. When I graduated in ’79, so I was in for seven years, the early ’80s, there were no wars. So we were training all the time, and that was things like we had a common purpose.

                                         So I learned all about the importance of teams and shared consciousness and trust and building team because you were training to go take care of who is on the left and right of you. There was a concept that I also walked away from the military that I kind of referred to as service to others. There was a cause or purpose that you were kind of working towards, and in that environment you were willing to sacrifice or suffer your life to defending your country. So it kind of put a deep bond into your mindset, communal success was big, you had to do it as teams and together. So I really learned the art of that early on, and there were many other things that have transitioned into the business world when I left that I have carried with me today.

Colby Synesael:               That’s a very good point, team and trust, not what I had on that the list of things that came to my mind when I was putting all this stuff together, but those are great points and those I would think would be skills that serve you well, really throughout your career.

Steve Smith:                    Yeah, as it evolved into the business world, there were things like in the military bravado was a big thing. If you were a captain or a major general, you could boss people around and the listeners that have been in the military know that, and when you transition into the business world it’s not about bravado, it’s about bringing people along to your point of view. It took me a while, but I learned that it’s not about because you’re the CEO or the president of this division, or the vice president of this, you have to bring people along to your point of view and you just can’t push them into that. So I think people and high performance kind of transitioned with me out of the military for sure, culture became a big topic Colby, you and I talked about this for many years. My experiences and my companies that I’ve been in including and Equinix, culture became a differentiator. Culture was a big, big factor in the success of that company still is today.

                                         I learned about the idea of being humble, there are a lot of acronyms in the military as you know, there are a lot of acronyms in the tech world. There’s a couple that I’ve lived with me forever, I have the thing I call the 3Ls, listen, learn and then lead, and I think most people that are listening today that have gone into new jobs, know that you can’t come in because you came from Cisco, or HP or some big company and do it that way, you have to listen and learn the business and then you can start leading as a leader. I had a thing that I think still exists with me today and people that know me I still call the five Ps. Prior planning prevents poor performance, I definitely came out of the military.

                                         So there’s cute things like that, that I’ve kind of carried with myself, I think patience and respect for people has been part of my DNA for a very long time, and acting from understanding. I think the workforce has changed tremendously, and like I said, you have to you have to act from understanding what’s going on, not from because you’re the boss, or you’re the head of this or the head of that. All that stuff matters but probably the biggest thing that kind of lived with me for a long time is learning how to be humble. It’s not about me, it’s about we, it’s all about the team and it’s about the success of the organization.

Colby Synesael:               You think those are your hidden skills? I mean, when I’ve gotten the question in interviews, what skills have allowed you to be successful in one’s career? When I’m asked that question specifically, I always talk about my work ethic. I have a good work ethic. It’s your willingness to just listen and kind of just be more empathetic, is that your skillset?

Steve Smith:                    Yeah. Over time I certainly got more mature about that and when you’ve had success like you have in your career, and I’m sure many of the listeners have had, you get experienced and so, listening and learning and acting from understanding is very important because the bigger the organization, the more people you’re leading you have to have the voice of the people on the front lines. I used to spend a lot of time, I used to call them lunch and learns.

                                         I used to do this at all the companies I’ve been in, where I would bring a cross section of people in about two times a month, and it was a super big cross section of people and just sit and talk about what’s on their minds. If they wanted to keep it in the room and not have me go act on it, I would honor that. If it’s something that was bugging them that was going on in the company, and they want me to go fix it, I would go fix it with their permission. So yeah, I think that’s important today to be super connected to the front lines because the workforce is changing so rapidly.

Colby Synesael:               Yeah, and it’ll be really interesting to see how people are able to manage that in a COVID-19 world. But just moving on, when I look back on my career, especially early on there are a few people that were really influential in helping me to get where I am. Anybody on your list that that comes to mind that you could talk to us about?

Steve Smith:                    Yeah, I’m sure everybody could think back about that. I’ve been doing this now for 30 to 33 years, I think in the business world. When I first left the military, I got recruited by another military organization called EDS, Electronic Data Systems, which was the big outsourcing gorilla, you remember them well. They were around for a very long time then ultimately got acquired by HP. But there was the vice chairman, when I first got there, there was a vice chairman named Gary Fernandez, who was one of the original [Rosborough] lieutenants, there was like seven or eight of them. This was a great company headquartered in Dallas, kind of stormed the world with his concept of outsourcing, where we would go into a company and take over all their processing and provide a service back to them, and they were the leader in the industry and they started this in the early ’60s.

                                         He taught me two or three things that I have certainly lived with in my life. One was, know a little bit about a lot of things. Be very broad, you don’t need to be deep in any one thing unless you want to be an expert. But you should know a little bit about wine, you should know a little bit about Europe, you should know a little bit about Asia, you should know a little bit about this a little bit about that, and you can be conversational and be a storyteller. That became a powerful thing that I took from him that I enact today. He also taught me that you know, always do the right thing versus doing things right because some process or some manual said you got to do it this way. Do the right thing based on your intuition at the time.

                                         So I developed a lot of good hands habits and EDS because it was very discipline. Funny story when I first got there in ’87, ’88 you had to wear suits, those were the days was like IBM. If you left your cube or your office and went down to eat lunch or go anywhere, you had to put your jacket on. You could not walk around the EDS facility without full suit with your jacket on and tie, everything, and you actually couldn’t wear slip on shoes in those days, you had to wear tie shoes. So this sort of shocking.

Colby Synesael:               [inaudible].

Steve Smith:                    Yeah, and then it shifted, the best dress code shift and everything but it was pretty funny. I also had a great experience with and bless his heart, he passed away a year ago, Mark Hurd. So when I left EDS and went to HP, I had an interim year with Lucent, which was an interesting year, but I went to HP Carly Fiorina was the CEO and I worked for her for about six months before she left and then they brought Mark Hurd in and at the time, people were really shocked because Mark came from NCR, he was the CEO and chairman of NCR. So nobody really knew him and HP was $110 billion company, big prominent tech company. He was an interesting guy, very hard nosed guy. I learned a ton from him the couple years I was there before I left to go to Equinix. He had a lot of funny sayings. One I remember I use today to this day is, interrogate the data until it confesses.

                                         So he was a big data guy because NCR they were deep into the data world. He taught me how to think like your customer. He said, “You always have to think about what the customer wants.” So it wasn’t just about us and our stuff it was about the customer. He was super action and urgency focused, it was all about getting stuff done. Mark was very, very good with customers, and as you know, he left HP and went to Oracle and then unfortunately passed away about a year ago, come October. Super, super, probably learned more from him as a CEO than anybody I’ve worked with. Then when I got to Equinix, we worked a lot of great people. We brought some outsiders in during the decade plus that I was there. We actually worked with Jim Collins for a while, the author of Good to Great and Built to Last. I took the whole leadership team to Boulder for about a week and he unpacked us and repacked us at a very critical juncture in our history that helped us make some big decisions, which was quite interesting.

                                         He was very disciplined, remember he wrote all these books about the best companies in the world. So he taught us about being disciplined people and discipline in thought and discipline action. He taught us how to confront the brutal facts. He taught us how to get complexity out of the business and make things simple to use. He was a big factor at a key juncture in our company. Then the last couple years, the last guy we mentioned that we used was Patrick Lencioni. Another author, consultant type that’s out here in California.

                                         He was my personal coach Colby, and then he also steered us every quarter with the entire leadership team. I think if you talk to any executives at Equinix today that were with me, during the time I was there, he made us a much more cohesive team. We made decisions better, we communicated better, we got healthier as an organization at the top, he taught us how to be healthy. He was all about organizational health, trumps everything else. You can have great people and great this and great that, if you don’t have cohesion at the top of the company, you’re not going to be successful. So he was a big positive for us during a critical time through towards the end of my time at Equinix.

Colby Synesael:               I want to talk more about Equinix, and actually, at some of the analysts days that Equinix has done in the past you brought some of these people-

Steve Smith:                    Yes.

Colby Synesael:               To speak in front of investors, which is actually interesting, based on what you just said in terms of the impact that those individuals have had on that company with investors. But just going back to your own experiences, just wanted to ask a few more questions on that. Now that you’re on the other side, and obviously had success. Do you have key towels or things you look for or listen for when you’re interviewing someone that helps you determine pretty quickly if that’s a person that would be the right or wrong fit for what you’re interviewing them for?

Steve Smith:                    That’s a good question. Well, now Colby, as you know I’m in the mode with our team here of finding young companies with young executive teams that need capital to scale. We’re mid market focused at GI, things I look for with a C level executive is do they have a command of the business? Do they have the financial business market organizational customer acumen? There’s a lot of questions you can ask to probe that. I think it’s important to walk away if you have confidence in a management team, if you’re going to invest in them, that the CEO for sure has a command of the business. I like to poke at, are they thoughtful about strategy? The world is changing so much that, are they thinking about What’s new? What’s next? Are they thinking big enough about market and customer sensing?

                                         I always want to find someone that’s got hard nosed execution, and I’ve been fortunate to be around really good people. Now many of them are running Equinix today, they’re really good at just driving bookings and churn and top line, bottom line and returns and margins and those critical success factors, you have to be really tough, hard nosed about in terms of running the business that’s a critical dimension.

Colby Synesael:               What do you mean hard nosed?

Steve Smith:                    Well, just being able to unpack that stuff, being able to stress test those things on a regular basis. When I say have a command of the business, you better know what bookings are going to look like every quarter, and if you start to slide one way or another, you better be able to stress test it and make an adjustment. I find in these cable fiber data center tower businesses, the levers are the same. It’s bookings, its installs, it’s churn, you know these better than most people. It’s EBITDA, its revenue, it’s pricing, it’s returns and margins. Those levers, you have to have your hands on top of every week, every month, every quarter, and the cadence that you put around that stuff is super important. So if a company doesn’t have good, I call them operating mechanisms, that’s something that you want to really understand.

                                         Then I think the final thing that I think about is, I think there’s got to be a flavor of charisma and inspiration with leaders, and it has to be all the way down to the front lines, and that’s something that you can learn, but I think you have to bring a super amount of energy if you’re a leader, because people will react to how the top leader is behaving. The culture of a company in my view is the behavior of the leaders. So if the leaders are behaving with high energy and inspiration, guess what the culture of that company is going to be? It’s going to be super inspirational.

                                         I guess the last thing I would think about that I always look for is, can the executive that’s leading that business, or the business unit or the function, can they stand up in front of you and tell you with clarity and prioritization, the top three to five things that are driving that business? Can they prioritize those things and say, “Here’s where we got to focus, here’s where I need your investment.” That’s super important to me for people to have clarity and prioritization about strategic objectives.

Colby Synesael:               That’s really helpful. You talked about a little bit of this already, but before becoming CEO of Equinix in April of 2007, you were the SVP of the professional services segment of HP and before that the variety, professional services management and sales leadership positions at Lucent and EDS as you mentioned. Did you know when you came out of the army, you wanted to be in technology, or does it go back to that EDS interview and you figured why not?

Steve Smith:                    Well, yeah, good question. My last assignment, as I mentioned, Colby, I was stationed in Honolulu, which is, a lot of people don’t know, the commander in chief of the Pacific for all forces in the Pacific is in Honolulu. So there’s a ton of military there, with Pearl Harbor and Hickam Air Force base and the big army deployment. Actually tech found me, I was a captain getting ready to be promoted to major, I made the decision I wanted to get out and go into the business world and EDS was recruiting former academy grads all over the world. So because I was an academy grad, I got contacted, I didn’t know anything about EDS. I had heard of Ross Perot in those days, and one thing led to another and went there to join, which today would never have, an annual, a full year sales development program.

                                         So when I went to EDS, I moved to Dallas, they put me into a sales development program and taught me how to sell for an entire year. So the investment was enormous. We went to an Outward Bound and climbed mountains in Colorado, we just did incredible things, and at the end of that year, they the kind of hand you a bag and say, “Here you go, here’s your quota.” They moved me to New Jersey to go join the national accounting with AT&T, which was right after divestiture. So I was calling on executives at AT&T every day, and so I learned how to sell every day and that’s how I started my career at EDS.

Colby Synesael:               It’s really interesting about, you talk about the importance of training, I was talking to a friend yesterday, who’s a doctor, we’re having this conversation about how to be a doctor, you obviously have to go to undergrad, and then medical school, and then you actually have to go on for many years and practice alongside somebody who actually has done that before. We were actually getting ready to being a police officer, and how they only give you six months of training, and then they expect you to go out there and know exactly what to do. That obviously, as you can appreciate turned in this really interesting debate happening in today’s world to have a full year of training to be the best salesperson you can be. I mean, that’s unheard of today.

Steve Smith:                    Well, companies don’t do that today. You just can’t afford it, yeah. I was lucky in those days because I could take a naval grad or an Air Force, all the people that I went to the first program with us, 13 of us, I think 10 of us were Academy grads. Pretty hard charging, former captains that were, “Go, take the hill.” So Perot’s whole mentality was, these are hard charging discipline executives, let’s go teach them how to sell. The art of selling it was wonderful, and then I was fortunate, as many people have been in their careers. I sold and I sales managed, and then they asked me, did I want to move to Singapore to go run a business? So after being a successful sales leader, I moved to Singapore with my family and managed a P&L, and managed all of Southeast Asia for EDS.

                                         Then a year 18 months into that they asked me if I wanted to move to New Zealand, and we did and I ran a bigger business in New Zealand, I was the only American there, there was 1000 Kiwis and me and I brought a few other EDSs over. I went from running $150 million business to a $400 million business, and then I managed all of Asia, and I went to Hong Kong. So I spent seven years in Asia for EDS with my family, and became super familiar with Asia. So I was fortunate enough to have the opportunity. Now, not a lot of people would leave their family or their friends and move from Dallas to Singapore and from Singapore to New Zealand. New Zealand was wonderful as the listeners would know. Hong Kong was a fantastic experience. But I took those opportunities which definitely helped me and afforded me the opportunity to become broader and deeper as a leader.

Colby Synesael:               How did you get brought into the process for the CEO spot at Equinix and how much did you really know about the company at that time?

Steve Smith:                    I didn’t know anything about it, to be honest with you, because I was running the outsourcing business and the technology services business and all the consulting business for HP at the time. So I was working for Mark Hurd, as I mentioned to you. I mean, it was a $16 billion P&L Global, it was 50,000 people. It was an enormous organization. It came to me via a search firm, and I met the search firm and then I met Peter Van Camp. As you probably remember, and as some of the listeners remember, Peter was the chairman and CEO at the time, and he was brought in to take it public, was going through a tough personal situation with his wife at the time, she was unhealthy and eventually, I think most of the market knows she passed away.But at the time, he needed to step away from the day to day, so they were searching for a CEO. He was going to remain on the board and as a critical member.

Colby Synesael:               He kept an office.

Steve Smith:                    What’s that?

Colby Synesael:               He kept an office.

Steve Smith:                    A tremendous guy, as this industry knows. It’s an interesting story. So I met the executive team, I studied the business model. Actually, at the time, I was running a big business for Mark, but I had such a good relationship with Mark, I actually presented the opportunity to him and he helped me look at it. So he was so supportive at the time to say, I think you’re going to have the opportunity to be a CEO someday, and he studied the model with me and said, this is an incredible business model. I knew it was a good team and I knew that they were market differentiated. I knew the culture was great, and they were just looking for someone to come in who had big scale who had lived around the world, that could take Equinix to the next level. Peter and I hit it off and I don’t know how many people they talked to, Colby, but I was fortunate enough to be selected. I took the job as you know, and probably the best decision I ever made in my life.

Colby Synesael:               When you joined Equinix its market cap was just under under billion. Whereas today, it’s just under 70 billion. Did you ever think it would become such a big company?

Steve Smith:                    No, at the time, I don’t think anybody did. No one knew how to think that big and 2007 I think is when I joined. I joined it was 400 million in revenue and I guess the market cap was in the 3B range, it was mostly North America. But we made some very big decisions, we had some big pivotal moments along the way that were key hires, were geographic expansion, go to market decisions, products, et cetera, that helped us scale the company. I knew the assignment there was to go scale the company and bring in new executives, combining with the current executives that are some are still there, and there’s probably six, seven, eight, Colby, when I look back that were underpinning, going from three billion market cap to what it is today, 70.

                                         From the beginning, it was kind of it was kind of pounded into me from the board and from Peter and the team was, we never wandered very far from the founding idea that they built the brand promise on which was interconnection and ecosystems. You know that as well as anybody. Scale and reach, it mattered. So we had an executive that you remember named, Jarrett Appleby that I brought in at a certain point who was the head of marketing, and he left and went on to do other things. But he educated me on the idea of a platform, he said, “We need to turn this thing into platform Equinix.” I give him credit for pushing that agenda because it underpins what happened over a decade, which was about 21 acquisitions, and we probably spent 25 billion US dollars and organic and inorganic growth over the time that I was there, and put us on the map.

                                         We moved this thing from a North American business to five continents, I think was like 28 countries and maybe 52 metropolitan areas and a couple 100 data centers by the time I left, I know it’s bigger now, and that mattered. Scale and reach mattered in this business. Market leadership decisions mattered, we decided to be number one or number two, in every market that we served. That was a major decision, and so that drove acquisition strategy. If we were number three or number four, we just said, “We can’t play in that market.” So that drove major differentiation. We were just really focused on differentiation, which I think most great companies do, and the differentiation there was around ecosystems, global recent scale, and service excellence with the product of the data center.

                                         The Equinix data center looked different than every data center did on the planet as you know. There were more bells and whistles there, and that’s all evolved now as you know, lots of companies don’t need all that. We got very clear and very prioritize on our strategic initiatives. We knew what we needed to do this year to press our advantage. We knew and we had a group of people that were studying the market to see what the next wave was, we knew when cloud was going to come. We know what when the edge was starting to unfold. So we had a group of people, that’s all they did, they weren’t sellers, they weren’t operators, they were market sensing and customer sensing people, and they went out and talked to the most prolific companies in the world and said, “Where’s this going?” We used to triangulate that and make decisions, and that was critical.

                                         Probably though, there’s two or three other things, I think were probably one of the best capital allocators during that tenure, I think they still are now. We never went dark in the market. So we had a mantra inside that said, if there’s demand in the market, we never want to go dark in that market. So the capital planning with the capacity planning was super aligned. I say at the end of the day it was a very high powered sales growth culture. Culture mattered here, and as you know, I was a big proponent of the sales and growth engine at the company, and so all those things matter. Now, Charles and that team are taking that thing to the next level way beyond where anybody I think, would have envisioned certainly, what we didn’t during the decade I was there.

Colby Synesael:               Yeah, when I think about it because I have been covering it since 2004 or 2005, 2005 maybe. There’s two things that kind of stick out to me. One was the company had what I refer to as the first mover advantage, and if it didn’t have a first mover advantage, it made really strategic acquisitions before other people were even thinking of them. When you think of IX Euro, for example, in Europe, or you think about what you guys did in Asia, now even what they’re doing in other markets, to just continue to press that advantage and each acquisition kind of gets the benefit of the acquisitions before it. But the other thing I think that isn’t as fully appreciated is actually the technological know how. A lot of the people that are in Equinix now and have been in Equinix, are actually out of the telecom industry.

Steve Smith:                    Yeah, that’s right.

Colby Synesael:               You really understood the interconnect component of that, and the sophistication of that platform and product set, and I think that that still resides as part of the culture now inside the company.

Steve Smith:                    Good question.

Colby Synesael:               If you think about that, versus a lot of other data centers, particularly today, they’re much more of this real estate mindset, which for a lot of businesses, I’m sure will be enough. But to really have Equinix be as successful as it was over the years that it’s been successful, I think that that technological know how, they always seem to first and you’d see some of the other data center companies kind of come behind them six months or two years later, with similar products, almost after follow what Equinix has done.

Steve Smith:                    I would guess their future Colby, and you’re more connected than I am these days after being out of there a couple of years now because you talked the executive team is. Their future growth, they’ll do M&A in new markets, I’m sure they’ll put them like they just did in India, they’ll continue to do that like the other big players will. But I think you’ll see them doing more product type expansions around what’s the next wave of interconnection, and the evolving edge and what the next ecosystem is going to look like. So they’re very tied in with the digital agenda. The whole world is digitizing and they’re very, very connected into understanding where that’s going, and the emerging services coming out of there.

                                         So it won’t surprise me if they do more technology, product oriented acquisitions going forward to just completely have a full suite of services. I think you’ll see digital doing similar things too. The two big global players, the amount of acquisitions and scale and reach they’ve built is super tough to go try to copy today. It’s just that there’s a multi year advantage, billions of dollars gone into it, and systems and processes underneath it to make it all work globally.

Colby Synesael:               Yeah. I guess that brings me to my next question which is, when I looked at some of the things that Equinix is doing, such as the HSP JVs, and I look at the acquisitions that digital has done such as more recently interaction, both companies are positioning themselves to be what I refer to as conglomerates of sorts within the data center world so they can support any type of demand, whether it’s a cabinet or it’s a full leased facility. Do you think that there’s room for a third or a fourth global player and anybody you’d highlight who you think has the makings to be that?

Steve Smith:                    That’s a big question, Colby. As I just alluded to, I do think unfortunately for others, it’s going to be pretty tough to ever go build the level of skill that Digital and Equinix have built. They have such a big head start, with the capital and the acquisitions in the systems and processes. I do think there’s room for regional players and combinations to get bigger, particularly in Asia. As you probably know, I’m on the next DC board down in Australia and that’s a very solid company that can can easily extend its reach out beyond Australia as AirTrunk is doing now. So I think there’s more opportunity in Asia, there’s been enough consolidation in Europe, and certainly North America is pretty consolidated. But I do think it would be tough to put together a combination today to ever catch what’s done with those two players.

                                         Now, the world doesn’t need global service providers everywhere, regional providers do a great job and then small players are doing a great job around the edges. And even if you look at the big cloud providers and the big enterprises today, they use multiple data center providers, they use multiple fiber. So they’re very diversified, so I think there’s room for lots of companies to do well. The advantage they have are the cross border deals. So when you’re looking at a local company, like in Australia or in China or in Hong Kong, they don’t get inbound deals coming in. When you’re a global platform like Digital and Equinix, American Salesforce can find a customer that wants to buy capacity in Europe, but your European Salesforce can find a demand that wants to go to Asia.

                                         So the amount of cross border deal flow that happens for those two big companies, just gives them an enormous advantage to service these global demands, and it’s why they grow faster. They just have more, now, not everybody needs global footprint but when I left Equinix, I think 60% of their customers were in all three regions with them. Think about that, 60% of the customer base. I think that customers around, I don’t know, 8,000, 9,000. 70% of the customers were with them in multiple regions, and I think it was this high two years ago, it was 85% of those customers were in multiple metros. So they were focused on requirements that needed consistency around the world and I think digital has done a great job doing that too. But it’s hard to replicate that.

Colby Synesael:               It is very hard to replicate that. I mean, even CyrusOne is an example, who’s now in Europe will tell you that where they’re being successful is just taking companies from the US and transplanting them into their European facilities. But when you ask them about their ability to actually start to build a relationship with the European enterprises, very hard-

Steve Smith:                    That’s tough.

Colby Synesael:               Very hard to be able to do that.

Steve Smith:                    Well, we’ve seen Vantage and EdgeConneX made the move to Europe and do quite well. So there’s definitely opportunities to do this, but it’s a tough road. It’s a tough road to hoe. There’s no question about it.

Colby Synesael:               When you left Equinix did you know your next move is going to be in private equity?

Steve Smith:                    No, but I educated myself after I left and I talked to a bunch of businesses. I knew I was going to do some board work, Colby and then when I got educated about the amount of capital inside of these big infrastructure players, which I knew they were there because our last two acquisitions at Equinix down in Australia and the InfoMart, the competition were these enormous infrastructure funds that I had never really heard of, and that I’ve become very familiar with now, because I’m in that space. So I did talk to a bunch of them and I was just absolutely flabbergasted at the amount of capital that private capital that was being aimed at these infrastructure segments, which included data centers and data transport and wireless.

                                         I was that whole part of the world having been public my whole life that I just had no deep understanding of and I was blown away at the amount of capital. So I knew I could go help one of them, might talk to probably a dozen of them and decided to go with GI partners because they had such a deep history. I knew the founder, I knew a handful of the managing directors, and it’s been a great run with them. They’re a pretty, well as you know very sophisticated in North America. Not in Asia, they’ve been in Europe a little bit, but very deep sector focus North American history and that was important to me to go to somebody who had domain knowledge.

Colby Synesael:               Yeah, it just launched it’s made an infrastructure fund that you and Mark [Pributak] are co-leading. Considering GI has been in the data center space for many years, having helped create Digital Realty. How does this fun differ from GI funds in the past?

Steve Smith:                    Yeah, good question. So GI Partners has been around for two decades as you mentioned, Colby and they’ve been in the private equity business since 2001. They’ve probably invested over $2 billion in nine or 10 infrastructure related companies over those two decades. You mentioned one of them. A lot of the listeners probably do not remember that that GI founded Digital Realty, they stood up Digital Realty and everybody knows that success story. They also own Telex, along the way they owned a company called The Planet, which merged with a company called SoftLayer. We all remember SoftLayer, GI I sold it to IBM became the fourth largest platform at that time. They were in the broadband business, they own Flexential today as you know. We’ve extended that now and are buying more broadband businesses.

                                         So they’ve invested a couple of billion into the infrastructure over those two decades. They also had a real estate arm, Colby, which some of the listeners may not know since 2012, and so GI has invested over a billion dollars into facilities not just infrastructure facilities, but all kinds of facilities and they actually own One Wilshire. So they own one of the most interconnected facilities in North America, and we probably own 25, 26 data centers where we own the building but it’s not an operating company. So the private equity has evolved now into software and services and healthcare, and the reason that Mark and I were asked to come in and help them was they wanted to extend the heritage and the history of being in hard asset infrastructure. As you know that whole industry re-rated and we needed a new source of capital.

                                         So we were asked to build this new strategy, go out and raise the capital, which we did, and go invest and extend the two decades of history of, they probably have eight billion of total enterprise value of investments that they’ve made over the two decades, and extend that history and keep doing it. So we’re focused on-

Colby Synesael:               It’s really that the infrastructure fund is less a pivot in strategy or mindset, or what GI has been founded upon. The moral reflection of just the evolution of the industry around you and the valuations and what’s required then to be competitive in bake offs and so forth, and needing your more longer dated capital and so forth.

Steve Smith:                    Right. Right. As you know, the reason these infrastructure funds all got stood up and the private equity investors kind of stepped away from these infrastructure companies is because there was so much capital, new sources of capital that were very targeted in these infrastructure sector. So we’re North America focused, very sector focused and we have a long history here.

Colby Synesael:               Why North America? I mean, when I think of the better growth opportunities, it feels like they’re actually outside of North America, and if I think about those who’ve been paying attention to this space the longest, they probably have a pretty good understanding of all the players are at this point in North America. The new frontier, if you will, is kind of going into these other areas. But why play in the area is probably, most understood at this point and to some degree, maybe most mature?

Steve Smith:                    Yeah, it’s a very good question. A little bit of as the heritage of the firm has been in North America predominantly for two decades, as I said. There’s also a huge span that still going into the US over the next five years across data centers, data transport, wireless IoT, et cetera. It’s somewhere in the $400 to $500 billion over the next five years. So there’s enough investment going into North America, Colby. We’re very sector focused, so we’re not generalist focus. So we have an advantage almost every deal we look at. We either have a relationship or we have an angle, we have some advantage, but there’s plenty of deal activity. Yes, it is. It’s more mature than Asia, Europe. A little bit of his first fun dynamics too, 20% of this first fun is non North America carved out. So we can do deals and we can partner for deals outside of North America.

                                         I think fun to you’ll see us broaden out beyond North America, a little bit of its fun one nature, a little bit of it’s the heritage of GI. But trust me, there’s plenty of opportunity in North America. Remember, we’re mid market focus. So we’re looking at these regional players, broadband players and COVID done nothing but accelerate that opportunity.

Colby Synesael:               I guess to that point, does the current macro backdrop? It’s not just COVID-19, it’s the recession, it’s the election, it’s China US relations. Do some of those things give you concern about where or when to be deploying capital?

Steve Smith:                    Not really, probably the opposite. I think for the last decade and I think for the next decade, people that are investing in this industry realize that we’re playing at the intersection of some of the greatest technology trends in our lifetime, and I don’t see it changing anytime soon. So as computing power continues to digitize nearly everything around us, and we continue to live in a mobile cloud enabled world that will go to the next wave, 5G is going to continue to transform the communications space, artificial intelligence, the races on. Everything’s being served up as a service today, right? I think Amazon taught the world the easy button, and I think you’re going to see infrastructure companies trying to continue to copy that formula, and everything’s moving to software.

                                         So I think the opportunities with the evolving edge and this Internet of Things concept, I think it’s early, but I think you’re going to see 5G push use cases out that are going to fall into these infrastructure essential services categories, and I think you’re going to see this concept of more compute storage, networking getting pushed further out, and as is use cases.

Colby Synesael:               Is that where you’re most excited then? Is it wireless and in the edge? I mean, when you think about towers and data centers and fiber, and you think about fiber to the home, and then you think about long haul fiber, and then you think about edge computing. What is of those varieties? I mean, where are you most excited to find most interesting right now?

Steve Smith:                    A lot of those are disruptive technologies, Colby, as you well know, and they’re becoming very investable opportunities rather than a threat to the existing assets. So we’re paying attention to all of them. We’re looking at these regional players that have the capability, the customer base, the knowledge of how to go build a regional small platform in these tier two, tier three, tier four markets. So the same thing that’s happened in the tier one markets around the world, the thesis says that it’s going to spread further out to the tier two, three, four markets, and the same requests and requirements for a local hospital or local enterprise, or a local school is going to be in those smaller markets.

                                         So yes, we’re very interested in that. Broadband, I can tell you in rural America, is important to people in those communities as food, shelter and water. So you could talk to a young leader at a company today, and they try to prioritize those things. I’m not sure they put food, shelter and water, but broadband. So the world is changing at a rapid pace and there’s so much investment going into these communities to enable them. Wireless infrastructure is growing at an incredible rate, small cell deployment, CBRS and spectrum is unfolding today. So we keep an eye on the leading edge stuff, Colby, and then we have to invest in very… They have to be cash flowing businesses, they need capital for the next wave of growth, and we have a whole bunch of qualification things we need to do to go make sure it’s the right asset. I mean, there’s going to be winners and losers like there has been in every decade.

                                         So for us, we’re going to do in our first fund, which is 1.8 billion, we’re going to do probably seven to 10 deals, and there’ll be equity checks in the size of 100 to 400 or 500, and at the upper end, our LPs will co invest with us. So 1.8 billion, we’ll deploy somewhere north of three billion in total capital deployed to go find these mid market companies across all these sectors that are going to be winners in the next generation.

Colby Synesael:               We’ve now entered the lightning round, and what I mean by that is I’m going to ask you three or four questions, asking you to keep your responses to less than 30 seconds, but we’ll keep the answers to less than 30 seconds for each one and I will not ask any follow up questions. Let’s move right on to the next one. So the first one is, will it make sense for a large data center and a large tower company to ever merge?

Steve Smith:                    Wow, that’s a big question. I guess if there’s industrial logic, anything can happen. The customer basis today, to my knowledge are very different, Colby, and so I think that’s probably a tough part today. But if those two business models transition from the big hub to the edge, as we’ve just been talking about, and these edge pop data centers might live, we might see micro data centers at cell towers, maybe. Maybe that makes sense to have a combination there.

Colby Synesael:               What’s the best infrastructure business model?

Steve Smith:                    If you’re talking between the big sectors like data centers, towers, fiber, or if you’re just talking about how we look at it as an investor now, it would be-

Colby Synesael:               You can answer however you want.

Steve Smith:                    Value added space I would tell you was what’s most exciting to us. It’s businesses that have a great mix of customers, have a good diversity of advantage because of location. They’re providing essential services, they’re scaling like crazy, they have a good management team, they have predictable cash flow. We like that investment to go put money to work to help them edge out and scale the business. If you can underwrite something to return that meet your investors threshold, but there’s five or six levers you can pull that can exceed that return, then it’s a very attractive value add opportunity and that’s what we’re mostly focused on.

Colby Synesael:               Will Equinix ever buy an edge data center company?

Steve Smith:                    I’m probably the wrong person to ask that to now, but my opinion on that will be of interconnection continues to enable edge workloads, you might see them pushing to extending out of those big tier one markets into markets that are further out. But today even in North America, when I left, they can service up to 80% of the requirements in North America down to 10 milliseconds. So they have so much capacity in so many different places, whether it’s latency and high availability and data sovereignty and security requirements start to evolve and it pushes them to go further out to the edge, it’s possible.

Colby Synesael:               Well, my last one. Will fixed wireless ever equate for more than 10% of market share of US in home broadband?

Steve Smith:                    Wow, now you’re really stretching my knowledge.

Colby Synesael:               You’re a private equity guy, you know everything these days, so it’s not data centers



Steve Smith:                    I think fixed wireless is a low cost alternative mostly for low volume users today. So I think it would be tough to replace fixed line users to take it over 10%. But it’s unlikely, I would think, Colby, but it’s possible. But to replace fixed line, high speed broadband that already exists in these markets is a tough part to overcome. So it’s possible to go over 10%, but I think today fixed wireless is truly a low cost alternative to the low volume users, and I don’t know if it’s going to make that shift. It’s possible, but that’s a big jump to go over 10% I would think.

Colby Synesael:               Fair enough. Steve, with that we are out of time. Thank you so much for being our inaugural leaders, legends, luminaries and visionaries guest speaker. The next one just so everybody knows is Tom Leighton, the CEO and co-founder of Akamai, which we’ll be doing just after the third quarter earnings. But Steve, thank you so much, really appreciate your time.

Steve Smith:                    Colby, appreciate the dialogue.

Speaker 1:                       Thanks for joining us, stay tuned for the next episode of Cowen Insights.

Get the Full Report

If you’re already a member of our Research portal, log in.

Log In