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Private Equity & Data Centers: A Conversation with ABRY Partners Co-CEO CJ Brucato

Insight by

CJ Brucato, Managing Partner & Co-CEO of ABRY Partners speaks with Colby Synesael, Communications Infrastructure and Telecom Services Analyst. According to Colby, ABRY Partners was one of the first private equity firms to identify the data center sector as an opportunity in the 2000s and early 2010s.

They speak about CJ’s background, the skills and traits that have made him successful in private equity and the importance of entrepreneurs who understand what their customers want and need. They also discuss acquisitions in managed services and colocation and edge computing.  Press play to listen to the podcast.

Transcript

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:               Hello and welcome. My name is Colby Synesael and I’m the senior research equity analyst at Cowen, covering communications infrastructure and telecoms services. Today we’re speaking with CJ Brucato, who is the co-CEO and managing partner at ABRY Partners as part of our Leaders, Legends, Luminaries and Visionaries podcast. CJ, thanks so much for being here.

CJ Brucato:                      Thank you so much for having me. I really appreciate it.

Colby Synesael:               Before we begin, and for those who might not be aware, CJ and his team at ABRY were one of the first PEs to really identify, at least in my opinion, the data center sector as an opportunity in the 2000s, and then in the early 2010s. And it’s great to have you join us today and to share some of your thoughts on the sector and how it’s evolved. But before we get into that, I’d love to hear a little bit about your background. Coming out of undergrad, that was in 1995, you started out in investment banking working at Prudential. And then after just a year, moved to ABRY, where you’ve been the past almost 25 years now. That’s a long time. I thought I was doing well, being at Cowen for 11. Was your plan always to be in PE? Was that the plan from the beginning?

CJ Brucato:                      I wish I could say that it was, but I would say graduating from undergrad, 1995, I didn’t know what PE was. Maybe if I were lucky I saw it barbarians at the gate and had some idea of that. Maybe I saw Wall Street early on and had some quasi-idea of private equity, but it’s not true. I graduated, I was 22 years old, I was young. I had no idea what Wall Street is. I had no idea what finance was. I sort of fell into it. I think a friend of my mother, legendary investment banker on the CMBS side, named [Vinnie Tika] worked with … Vinnie’s sister worked with my mom, and so knew that I needed a job. And she spoke to her friend, and Vinnie gave me a job at Prudential Securities pretty much on the spot. I had no idea what I was heading into.

                                         Fortunately, I’d always had an affinity for math and the sciences. I was an engineer in undergrad, so I knew how to run Excel and Lotus at the time, knew statistics quite well, and calculus. And so I was able to adapt to the math side and the finance pretty quickly, and it suited me. And it had always been part of what I liked. I sort of fancied myself as an engineer and a tinkerer and a bit of a techie. Programed my own Commodore 64 back in the day, whatever language that was. So, always was a little bit of a techie, always had an affinity for math and sciences. And so for me, coincidentally, finance scratched that itch. I had an opportunity to work for two very talented investment bankers and media communications group, which I also happened in to. It was, I think a lottery. One of whom was a fellow named [Charlie Yiao], who you probably remember, Colby, as the somewhat legendary wireless communications banker.

Colby Synesael:               Sure.

CJ Brucato:                      Ultimately ended up, I think, at Bear Stearns. And so he was one of my two bosses.

Colby Synesael:               Oh wow, I didn’t know that.

CJ Brucato:                      I was investment banking all of the then-wireless companies. We’re talking Arch Wireless and Motorola, and-

Colby Synesael:               That’s when the space was hot.

CJ Brucato:                      Yeah. Half of my job was that, and then the other half was on the media side. We were a very small group, and I ended up working for my now-current CEO, Jay Grossman. So, Jay had a great roster of clients that included Sillerman and his broadcasting empire, Evergreen, some legendary radio names and TV names. And so I ended up splitting my time between the two of them. Sort of fell in love with media communications, and got trial by fire by two very productive bankers. And I would go from IPO to secondary to bond issuance, to M&A. I got to be very … In my limited, one-year period of time, got to be very productive. So, I learned finance really quickly. I learned media communications really quickly. And a year into it, Charlie left to go back to Bear Stearns, and then Jay left a couple of months after him. So, I was sort of left leaderless in a group that really had no future.

                                         Fortunately, two months after Jay came to now-ABRY, he called me, told me that he needed me to come, move back to Boston. Fortunately, I’d been from Boston. He and Royce and Andrew and Peggy played into that, and they convinced me to come back to Boston. Which, I’m from a small town outside. It wasn’t like I was coming back home. I was coming back to a foreign land. I knew New York a lot better than I knew Boston at that point. And so came back and, as they say, the rest is history. 25 years later, I’m still here and Jay is now my co-CEO. Royce and Andrew have retired from the business, Peggy is now our chairman, and so Jay and I are the only ones left, albeit with a group of about 100 people that we’ve hired over the past two and a half decades. So, that’s the story.

Colby Synesael:               A few things there. Number one is I’m glad you said that you’re from Boston. I have a question at the very end that I’m actually now extra excited to ask. The second thing is it’s really interesting how you talk about your background. And so many people that I speak to, including myself, it’s really just circumstances, it’s somewhat luck, to some degree, where we end up. I’ll tell you even for myself, my uncle knew somebody at Thomas Weisel Partners, and that’s how I got introduced to working at Thomas Weisel Partners. But before that, I’d worked at Allegiance Telecom for four months as a salesperson. And because I’d worked at Allegiance, they said, “Well, you should go work for the telecom team because you have telecom experience.” And here I am now, 20 years later into my career, and I’m still covering telecom. So, it’s interesting.

                                         You know, you also got your BSE from Princeton. You mentioned you BSE but it was from Princeton, so certainly no slacking there. But I’ve been under this illusion that most people in PE have their master’s, or maybe it’s their CFA. From what I gathered when I did some research in preparation for this, you have just a BSE. How did you make that happen?

CJ Brucato:                      Yeah. I would say that that was, again, great salesmanship from Royce, Andrew and Peggy and Jay. I mean, I got two to three years into my experience here at ABRY, and it was early. And I joined in fund two, which was really our first institutional fund, fund one, the first of our core families of bonds. And relatively early, you could see things were heading in the right direction. It was still a very small firm. We actually had a small office above the Ann Taylor on [Newbury] Street, so we had a great co-tenant there. Ann Taylor, and a rickety, old elevator that was broken every other day. And so it was sort of hard to know that we were going to be a leading private equity all the way back then. But we were growing, and I had sort of an inkling that things were heading in the right direction. And the thing that always had attracted me to ABRY and always kept me at ABRY was just really the quality of the people. So, Andrew and Royce, Peggy and Jay, tremendous investors, tremendous minds, really great people. And so that was always the hook.

                                         But just going back to the story, a couple of years in, like every other investment banker, private equity, I thought, “Hey, I’m going to need a bachelor’s at some point. I need to go across the river to Harvard, or maybe MIT, and get my MBA.” So, I had a pretty frank conversation, “I think it’s time,” with Royce. And he asked me some really difficult, probing questions, like, “Are you happy here? Do you want to stay here? Why do you think you need an MBA to be successful at ABRY? You don’t.” Meanwhile, everyone here had their MBA except for me. So, it was a really good sales job.

                                         I mean at the end of the day, we were very small. They couldn’t afford to lose me. And so they put on the hard sell and I was probably 25 years old at the time and pretty susceptible. I hadn’t really learned my negotiation skills at that point, and so they put the hard sell on and I came to my own decision. I never even took the exam. I never finished the course. I paid for the course, which was no small fee at that point, but I never took the exam. They talked me out of it. And fortunately, they were true to their word. Obviously, they worked really hard to make this a successful firm early on. But they also gave me every opportunity to advance and to grow.

                                         And I’m sure I missed something by not taking a couple of years to go off and get my MBA, but it’s not apparent to me now. So ultimately, they helped me make the right decision for me.

Colby Synesael:               After 25 years at this, I mean what do you think are some of the skills or traits that you think have helped enable your success in PE?

CJ Brucato:                      Well, I think you hit one thing on the head at the outset. That is the element of luck, and certainly the element of luck plays a big role in the success of individual investments, the success of individual VCs. Timing is everything. You and I have talked a lot about the timing of our entry, say, into the data center and infrastructure space. And many, many smart people came before us by five or even 10 years and were just five to 10 years too early. And their investments resulted in catastrophe, and there were global markets in turmoil, a function of some of these earlier plays. So, we have the benefit of luck of coming a little bit later.

                                         So, luck clearly played a role, I would say. The other thing, having great mentors in Andrew, Royce, Peggy and Jay, obviously plays a role. And then it’s just I think maybe this is part luck, maybe this is something else, but again as I mentioned I never knew what the work was going to be getting into it. I didn’t have any experience. My dad is a small town attorney. My mom is a nurse and a real estate broker. So, I didn’t have any experience with high finance, but I found it really suited me. I had passion for it. So, the fact that I had a passion for it just made everything a little bit easier. It made the late nights and long weekends just a lot easier. It was just easier for me to really immerse myself in it, find a passion for it, and tinker and experiment and explore and do all the things that ultimately you need to do to have success. And so I think that’s again, luck, and just hard work, but fortunately just having a passion for it is probably the thing that’s helped me the most in my career.

Colby Synesael:               Yeah. Really great answers. I mean, to your point it is luck. It’s mentors, which is a great point you bring up. It is passion. Certainly, the hours that are involved in your industry, and it is just this work ethic. Your first investment in the data center industry I believe was CyrusOne, I believe back in 2007, before you guys actually were the ones who sold it to Cincinnati Bell in 2010. And then, it was Cincinnati Bell that ultimately took it public. Can you recall what the view of the colocation market was back then?

CJ Brucato:                      Sure.

Colby Synesael:               And what it was about CyrusOne that attracted you guys?

CJ Brucato:                      Sure. Sure. CyrusOne was the first one that made, but as you might imagine, we kissed a lot of frogs, some of whom turned out to be princes, along the way. And so it wasn’t the first one that we really pursued aggressively. And actually, our history dates back to the days of our investment in Pinnacle Towers, which was one of the early tower aggregators. And I think we started that platform … Actually, that platform pre-dated me. At least, it’s early days, in the early ’90s, and I joined in the midst of investing ABRY two and got involved in that, as we built that business out and IPO-d, and just great investment for us. But towards the end, believe it or not at the time, in the late ’90s, we had full penetration of the then-wireless carriers, the paging companies primarily. And it’s hard to see around the corner to see the next leg of growth for that business.

                                         One area where we’ve seen some demand from some of our customers, in particular the carriers, was around data center space. They were looking to colocate their gear at our tower sites, and so that caused us to then look at it. Pretty quickly, we determined that power sites were not suitable for colocation of equipment, but we then started to look at what were then called telecom carrier hotels, which is probably a term we don’t hear very often any more. And so we looked at that in the context of Pinnacle as being an important part of the next stage of our growth.

                                         I think ultimately, we, ABRY at board level, determined it was a little bit far afield for a tower business like Pinnacle. And fortunately, the next wave of the telecom wireless build-out happened and there was plenty for us to do, and so there was plenty for us to grow. But at the time, I really became a student of the model. Amongst the group, I’m a lot younger and so I had an affinity for computing, and I brought us Internet and I brought us email and all these other things. Business had been done via fax up until I joined in ’96.

                                         So, I took a liking to the data center industry then and began to follow it. And I saw the emergence of these companies who were raising tons of money, like Exodus and PSINet, and it looked, for the moment … I remember looking at it and thinking, “Gee, this could be my thing. This could be what I do at ABRY in terms of my investment activity as a principal.” And I feel like I sort of missed the bus. It went away. It went away, it went through VC to PE, and all of a sudden there were huge, public debt issuances, and equity issuances to support some of these businesses with the hopes of the dotcom customer base coming about.

                                         And so, I feel like I missed it. And I was sad for a moment there, and then of course in the early 2000s, that all came crashing down. And lo and behold, those opportunities became the great opportunities for us to invest in. I mean effectively what we were doing by investing in … And I guess I’ll start with the first one that got away from us was actually Telx. When GI made their original investment in Telx, I think would have been 2006, we were the cover bid. And so that one was the first one that got away.

                                         Telx at the time was … 111 8th hadn’t come about yet. It was 60 Hudson, and Marietta, and that was basically two buildings at the time, two carrier hotels. And so again, we were the cover bid. We lost by 10 million bucks to GI. It worked out to be a great investment put off. Coincidentally, in 2011 we bought it from GI. And they had done an amazing job building out the platform, and it was 12 markets, 12 facilities, they had struck the digital realty deal. They brought about 111 8th. So, it was a very different company when we saw it then.

                                         The next one that got away after Telx was Switch and Data, believe it or not. 2006, 2007, met with [Keith] and [George] and the team, and we were friendly with the [Seaport] guys. They were really the first ones that, GI and Seaport were a few years ahead of us, and so we went down to Tampa and tried to make a deal with Keith. And ultimately, that IPO market got hot in 2007, and Switch was able to get public.

Colby Synesael:               My first IPO was with Switch, so you’re missing that one.

CJ Brucato:                      Yeah, there you go. You probably have a [inaudible] behind you. I’ve got a few here as well, but switching to one of them. But again, that worked out fabulously for Seaport, the guys over there. So, that was the second one that got away. Really, CyrusOne, and nothing against my good friend Dave Ferdman at CyrusOne, but that was the third one. That was the third try. And fortunately, Dave, he founded the company, owned the majority of the company, and we just sort of hit it off. And at the time, we were very keen on colos. I think from our standpoint, we saw a landscape for adoption that was going to start with wholesale and colos. It was going to start with the simple stuff first. You’re going to outsource the box with some of the upfitting first before you ever got comfortable outsourcing the actual compute.

                                         And so we saw this evolution of wholesale, colo, managed, and then what would ultimately become cloud. And so for us, we felt like … Again, we were mindful about being early, and so we were confident at the time that we made the CyrusOne investment that colo adoption was there. And we could see that. We could look at Dave’s business, and he had a massive penetration of the energy 300 out of Houston. And so very discerning customer base, very competitive. And so that stamp of approval for colo was really important to us, and obviously was really important to our investment in CyrusOne. We were really quite keen on colo early on, and then we sort of evolved. We just followed customer adoption. We saw that big enterprises were adopting colo initially as they dipped their foot, and then saw that they began to adopt managed services, and I guess then private cloud as the next step in their technological evolution.

                                         And what we also observed is that the enterprise really thought about their infrastructure from an application and geography standpoint, and so there was the right service for the right application in the right geography. And sometimes, geography was about what the connectivity landscape looked like. Sometimes, it was about other topographic factors. But ultimately, they were buying their data center services on an application and geographic basis. And once we understood that, we appreciated there would be opportunities for colo and managed. It wasn’t like managed would replace colo, and it wasn’t like private cloud would replace managed. It wasn’t like ultimately, cloud would …

                                         What we found is, although we were concerned and we treaded lightly and slowly, we were concerned that there was replacement cannibalization between, but we ultimately observed that it wasn’t that hot. There was just this additive process. And I think part of it was obviously the proliferation of compute, and the overall demand for services far outweighed the supply, inclusive of colocation and managed and cloud. And so we saw it as like the whole pie grew, and then that was really exciting for us in the sense that we were able to play in a number of different areas across the-

Colby Synesael:               Then, you’re off to the races.

CJ Brucato:                      Yeah, we were off to the races.

Colby Synesael:               And I guess you mentioned in your commentary, you hit it off with David Ferdman. And for anybody who doesn’t know, a great guy and someone I actually still get to interact with from time to time. How important is it to have that relationship with the CEOs and founders of the companies you’re investing in? I mean, what are the skills or what is it they have to say in the meeting that the light bulb goes off and says, “I think that this could work.”

CJ Brucato:                      Yeah. I mean, I think that I mentioned David, but my career has been the beneficiary of partnerships with tremendous entrepreneurs across a variety of sub-sectors, but in particular around data center space. If I look back, it was … Again, I mentioned in the pre-GI days, Telx was [Hunter] and his team, and then [Steve] and [Jordan] are Switch and Data. And then it was Dave Ferdman at CyrusOne, and then it was Rich Lee at Hosted Solutions, and then it was Paul Sharpe and Osama Arafat at Q9. So, I look across and then it was the late, great Eric Shepcaro at Telx, round two for us. And ultimately, [Chris Downey], who we gave his first CEO job to, and he’s gone on to great things, a CEO in the industry. And Rupprecht Rittweger over at e-shelter in Germany and throughout Europe. And so it’s really been a long litany of about a dozen CEOs, and I know I’m forgetting names.

                                         And then there are just great relationships. And I should mention, although it was after the SoftLayer days, but I’ve known Lance Crosby for a couple and a half decades, and we missed SoftLayer round one and two. I should have put them on the list of ones that got away as well. And fortunately, we caught Lance when he was looking at his third act with StackPath. And we’re pursuing a different strategy that wasn’t right down the fairway data center infrastructure, but again, it’s Lance, obviously, fits into that category.

                                         And then there are relationships at the board level where … [Mike Toven] served on a couple of our boards. And so it’s really been a collection of tremendous entrepreneurs and pioneers in the data center and infrastructure space that have really contributed to our success. And you ask to answer a short question in a very long answer. You ask about, well, what is it and what’s that common characteristic across that group? And it’s just this deep entrepreneurial spirit with a deep understanding what customer wants and needs. Like, what I described earlier in terms of this customer adoption in terms of colo, wholesale, to managed … I mean, this was all anticipated, and then this is how they created so much value in the companies that they built. This was all anticipated and understood by the CEOs who I mentioned a second ago. Like, Dave had a direct line to the CIOs and CTOs of the Energy 300. He had great relationships with them, and he had a burning entrepreneurial spirit to serve them.

                                         And so, I learned from him. And Rupprecht Rittweger had that same understanding of global enterprises who are looking to build out data center space in central Europe. And so it was really, those are probably the two key attributes, that entrepreneurialism and that ability to understand what the customer wanted and what they were going to want, and then anticipating that. That’s, I think, what really created so much value for those companies.

                                         And I think the technical knowhow, the technology understanding is the table stakes there. And so, they all had that. They were all brilliant technically, and built unbelievable facilities and created great services. That was the table stakes going in, but it was really what created all the value was in the ability to anticipate and basically give the customers what they wanted. Maybe what they didn’t even know they wanted yet.

Colby Synesael:               So, you mentioned that you’ve done colo and managed services. You guys didn’t really shy away from managed services like maybe some of the other players may have. But when you think about CyrusOne, you sold it to Cincinnati Bell. Hosted Solutions, you ended up selling that, I believe to Windstream.

CJ Brucato:                      That’s correct.

Colby Synesael:               Both in 2010. And we’ve seen telcos by other colo and hosting providers. I mean, I can think of Verizon Terremark, CenturyLink Savvis, you could even think of Q9 and BCE. But as you know, none of those proved to be long-lasting marriages. Upon reflection, what is it that you think prevented those acquisitions from working the way that they’re probably intended?

CJ Brucato:                      That’s a really great question. I think ultimately … And then again, if you look at for example AT&T investing in, acquiring Terremark, I think ultimately you’re looking at a very, very large company that has many diverse interests and has a number of core businesses that dwarf the data center piece. So, I think ultimately with these big telcos, they were just picking up something that was non-core to them. I think logically, at a high level on the face of it you could see that yeah, core telecom services, core telecom managed services on top of the infrastructure, that makes a ton of sense. It’s like a vertical integration play. Very, very logical, and I can see why a telco would ultimately make that decision. But telcos are also, for the most part, in low-growth, maintenance-type businesses, and so they’re searching for growth and they look over and they see data centers just growing at a very rapid clip.

                                         Ultimately, those businesses were just too small to move the needle for your big telcos. And they faced other competitive issues and CapEx requirements, and having to go out and buy your spectrum. And so these tiny, little businesses … Big for me, the Terremarks of the world, the CyrusOnes of the world, the Savvis of the world … But for the telco acquirers, they’re quite small, non-core. And so it just never gelled, and that’s I guess the way I think they’re very good businesses. You’ve seen some of those businesses pop back out as private companies and then thrive, and with a very different margin profile. And so I think it’s just focus and attention, and the big telcos just don’t or didn’t have the time and attention to focus on these little data center businesses. But the logic was there. I got it every time.

Colby Synesael:               I feel like the focus, which is a really soft skill, hard to define, is something that we see permeating in terms of those who are successful and not across the broader communications services sector. I mean, you think about AT&T and what they’re going through right now, trying to be everything to everyone with media and content and satellite, but then also the traditional wireless and broadband business, versus someone like a Verizon. You think about somebody who tried to do both managed services and colocation, think about cable, and maybe what Comcast is going through right now versus somebody like a Charter. I remember talking to Dave Schaeffer at Cogent, and you would think for a company their size they wouldn’t be able to compete with the incumbents the way that they do, but they do. And the answer that he gives is it’s focus. This is all that they do. So, I think there really is something there.

                                         So, you guys go and do a ton of acquisitions in the data center and managed services space really up until 2010, 2011, and then you kind of pull back. But you do kind of come back again and do the Root Data Center deal up in Canada in 2016. And that was really it. So, what happened? Why did you guys walk away from this space the way that you have? And if I look on your list of all your investments today, you’ve really moved into different directions. Was it just where we were in the cycle? I’m just trying to get a sense, what happened?

CJ Brucato:                      Yeah. I think we continued to be active and continued to pursue a lot of opportunities, say, between 2011 and 2000 and … I guess whenever we did Root. We did make a couple of investments, so we did Datapipe in, I think it was 2014, we ultimately merged that into Rackspace. We also invested in Rackspace alongside Apollo and their private transactions. I think we’re the number two investor to Apollo in that one, and I should probably call out Kevin Jones. Although, it’s a new-ish relationship. I mean, Kevin came on after we made the investment. The big private was done. I mean, he is a rockstar. I mean, he is a great operator, and certainly belongs on that list that I mentioned earlier, though it’s a non-controlled investment for us.

                                         And so in between when we did Datapipe, that was 2014, and then Root, we definitely pursued a number of other opportunities. And I think what it came down to, our lack of success if you will in terms of putting capital to work, was just valuation. Valuation and growth, and so we saw the reutilization of the data center space, the rotation of the investor base from tech investors, to real estate investors, and from growth investors to income-type investors. And the maturation effectively of a large cross-section of the data center business. And so for us, we’re a private equity firm. We’re targeting private equity-type returns. And when we ran the math in the mid to early 2000s and late 2000s on the growth that we’re seeing in some of these businesses in the Telx and Cyrus and Q9s, we’re seeing 30, 40% annualized growth. And recognizing that came with a fair CapEx burden. It wasn’t pre-growth. The ROI was so very high that even investing more in CapEx to generate that growth would drive very high equity returns.

                                         And so, we were able to see that earlier on in the industry, and earlier on in maturation of colocation and wholesales. And as those businesses achieve maturity, and there was sort of a window in time where the enterprise, wholesale and colocation was coming to maturity, but the megascalers had yet to really emerge in a meaningful way. There was a sort of air pocket. And it doesn’t show up on the charts, but I can tell you in the companies we’re invested in and targeting, there was a flatness where before the megascalers came about and provided that tremendous last leg of growth that we’ve seen. So from our standpoint, we’re looking at mature businesses with modest growth. And as we ran our math, even at relatively high leverage levels, we couldn’t make our equity returns work.

                                         And so we pursued a number of things, but ultimately we lost out. We were a net seller over that period of time, and that’s when we had a number of our great exits to a different investor base, to a digital realtor, digital realty investor base, and to an AT&T with e-shelter. And, to your point, BCE with Q9. So, there was a period of time where the growth just didn’t support the investment level. Root was a little bit of a different animal. I mean, Root had the growth, it had extraordinary growth embedded in its business. To us, it looked a lot like Sentrum, before we made that investment. And so we’re able to justify our cost to capital. We’re able to rationalize the valuation we’re able to ascribe that have worked out tremendously, tremendously well. But again, more of a one-off process.

Colby Synesael:               It’s not fundamentals. You’re still fans of the space, if I’m putting the correct words in your mouth.

CJ Brucato:                      Absolutely.

Colby Synesael:               It’s really just a function of valuation. And you’re still kind of hanging out around the rim. You’re looking for opportunities for recognizing there’s … They’re probably far and few between, like they used to be.

CJ Brucato:                      Yeah. Yeah, I know. And again, I think it’s just a function of growth. I think if the growth isn’t there, we can’t get our target returns. Real estate investors can, infrastructure investors can, folks that have a different target return are able to make the math work. And so yeah, I’m a huge fan of the investment for the right pocket of capital.

Colby Synesael:               So, there’s other areas that are tangential, right? There’s the network as a service space, companies like RSTOR, Aviatrix, Epsilon, Kira. And the packet-type acquisitions, these bare metal providers, companies like DigitalOcean and Hivelocity. There’s megaports and consults. Are those attractive to you? Could those make sense? Are you looking at them? How do you think about some of these peripherals, these tangential areas?

CJ Brucato:                      Yeah. I think that we are a fan, if it’s a question of valuation. I think if you were to look across this list of names, for the most part, maybe one or two exceptions, you’re looking at very high valuations, very high growth. If you look at our history, we had a very successful investment in Masergy. C Mac, [Chris MacFarlane], he belongs in that list of names. He’s part of the family, even though he is in a slightly different business. But that, we were at the very beginning of SPN and network as a service, and unified communications as a service with that investment. And he used to deliver great results for the first-year folks there. We had One Source as well, which was a smaller play, and then [inaudible] as a service. So, we’ve definitely had our opportunities to play in that area, and we need to pursue that.

                                         We’ve got an investment in a spin-out of Mitel called Clearspan, currently. We’re not a majority shareholder there, Searchlight guys are. But that’s another one that sort of fits into this profile. So, it’s definitely an area where we’ve been active on a much smaller scale. We haven’t done any of the deception of a Masergy, maybe. We haven’t done any large-scale buyouts, but we’ve definitely been playing to our structured equity fund in that space pretty successfully, albeit without a lot of notoriety. We’d love to do more. We’d love to own some of these businesses, but again it’ll come down to a question of valuation versus growth. And when you start to see businesses trading at 20, 30 times EBITDA and they’re generating 10 to 15% growth, it’s sort of hard to make our math work at any leverage level.

Colby Synesael:               Got it. Yeah. You’re talking about the world that I now live in.

CJ Brucato:                      Yes.

Colby Synesael:               Once more set of questions and then we’re going to go to what I’m referring to as our lightning round. But I believe you mentioned that ABRY is, I think, still an investor in StackPath, and Lance I think has left the CEO role. There’s a new gentleman there. And that business has morphed a bit over the years. It seems to really honed in on edge computing. Maybe it’s just the market coming to them, but how do you think about edge computing? I mean, what is the opportunity, maybe from a PE perspective, that you see today in that area?

CJ Brucato:                      Yeah. I think that as we looked out over the horizon, sat down with Lance when he was thinking about what to do next, we saw this evolution where compute moved into the nether regions where space and power were achieved, at least for a subset of applications. And what we learned around that was that that was a great use case for a subset of applications, but then for your real-time data and high connectivity-driven applications, it was totally inappropriate. You were introducing latency and high connectivity costs, and so we saw that … And to Lance’s credit, he saw over the horizon. This is one where we were probably earlier than in any other. Most of the other investments we’ve made we saw proven first. This is one where we were willing to take some risks and look out over the horizon because we were so excited about the opportunity, and so we saw that for a subset of applications, makes content sort of an easy one. We saw that ultimately, compute was going to move closer to the eyeballs, was going to move closer to the edge.

                                         And so we then crafted a strategy with Lance that ultimately, we would try to build an edge computing platform. And we did so by acquiring a small CDN, and then-

Colby Synesael:               Highwinds.

CJ Brucato:                      A slightly … We bought a smaller one first. And the name actually escapes me, but we bought a smaller one first. It was a really well engineered, albeit underused, CDN with some really interesting customers and technology. And then we bought Highwinds, to your point. We bought Highwinds’ CDN business, which was very well engineered, purpose built for deeming and content, and really had some attractive attributes as compared to, say, an [inaudible] or a Limelight at the time. And so we saw that as our platform to build this as compute. Ultimately, what is edge computing? It’s sort of like a content delivery network on steroids. You just needed to add a little bit of weight to the end of the barbell at the different hubs. And what we saw was a great platform to be able to do that. All the spokes were in places. We just needed to add the hub.

                                         And so we then invested significantly in compute at the edge. And then we realized that we had to build and rebuild and engineer a network in technology and software to be able to effectively deliver edge computing. It hadn’t really been done at scale yet, and so we embarked on a massive development program. It’s hundreds of developers in Dallas, and so we’ve built our own technology that powers our edge computing, and now we’re in the process of bringing something to market that’s very differentiated. But it’s taken years. I mean, I think I originally sat down with Lance probably five or six years ago to conceive this idea, and it’s taken a lot of time and a lot of money to get to this number of acquisitions that we’ve had to plug together to get to this point.

                                         I think there’s a lot on the horizon for StackPath, that we’re really just bringing to market. And maybe adoption is just now here as well. The part adoption, part having the right product to be able to do that.

Colby Synesael:               It’s interesting that you talk about this being an earlier investment than you typically would make. I mean, GI … Not GI, Berkshire Partners has done effectively the same thing, I think, with Vapor IO, which is you both have had history in this space. You’ve attached on to some people who have been successful in the past, and you’re now willing to put some more, I’d almost refer to them as VC-like investments out there. Not a lot, not like [Jacor] do, but some of those because you see where this space is going based on your history. It’ll be really interesting over the next few years to see the edge evolve.

                                         We’re now at the lightning round. What I mean by that is I’m going to ask you a handful of questions. I’d love for you to keep your answers tight, and I promise not to ask any follow-up questions to them. The first one is, who’s the best CEO you’ve ever worked with?

CJ Brucato:                      I mean, I can’t answer that question. That’s like picking my favorite child. So, if she’s listening, it’s Grace. But I can’t possibly answer that question.

Colby Synesael:               All right.

CJ Brucato:                      There’s too many great ones. There are too many great ones, and they all contributed in different ways. And I’m so appreciate of all of them, and to continue to have great friendships and working relationships with all of them now. And so that one, I’ll pass. Phone a friend.

Colby Synesael:               Fair enough. What’s the biggest investment regret, either selling too early … I feel like there’s a lot of those. Or, not buying when you had the chance?

CJ Brucato:                      I mean, probably I can’t say that we sold too early because we sold for good reasons in every instance. And ultimately, it wasn’t us dictating the sell, it’s the CEO. And we really tend to listen to that. And the CEO looks around the corner and says, “Okay, this is what I can do from a growth standpoint over the next few years. This is where valuations are.” You sort of make a very mathematical bet, sell now, sell later. And we tend to listen to the CEO when they say it’s time to exit. So, can’t really say that we had any regrets there. I haven’t gone back to see what value did we miss out on, on creating or what have you.

                                         It’s probably more on the investment side. Like I mentioned, I missed Telx round one. GI guys made about $500 million that we could have made during that process. I missed out on Switch and Data. Again, that one we changed into an IPO. One that was much less publicized is I had a deal with [Manny] on Terremark in 2008, and his balance sheet was getting constrained. And the [inaudible] bond market opened up for a moment in time, and he was able to clean up the balance sheet. A year, year and a half later, AT&T came and paid, I think, $2 billion for the business.

Colby Synesael:               Verizon.

CJ Brucato:                      Sorry, yeah. Verizon. And we were valuing the business at maybe 100 million. So, there are a number that got away on the buy side, and we certainly would have loved to have been more productive on the investment side. That’s probably more the ones that got away than any other.

Colby Synesael:               When’s the next time you think I’m going to see you, in person, at a data center industry conference?

CJ Brucato:                      I mean, I feel like I should go to the next one that is in person just for posterity’s sake. But I haven’t been in a few years. I’m spending more of my time managing the business at ABRY than chasing new investments. It’s unfortunate, all of my good friends and CEOs are ostensibly still there. We always have a presence. You know Brian St. Jean and Tomer Yosef-Or, and Nicolas Massard, and my guess is one or all of them would be there and continuing to nurture our interests in this space. But I hadn’t been going for a couple of years. My last one was probably last time I saw you, 2017 or something.

Colby Synesael:               Got it. And then my last question, and I mentioned I’m going to revel in the fact you said you were brought up in Boston. And I know you played football at Princeton as well. As a Buffalo Bills fan, I have to ask, how do you think the football season went this year?

CJ Brucato:                      I mean, I’m a huge football fan, college, professional. I don’t have a lot of other hobbies, so I don’t really have a lot to entertain myself other than, say, football, in life. So, just to have football back, period, was great. I mean, I guess there was a sort of a long, cold, dark winter and spring with limited sports throughout the initial onset of COVID. And so I was just happy to watch anything.

Colby Synesael:               You’re not answering. You’re not answering the question, are you?

CJ Brucato:                      Oh, so specifically about the Patriots? I mean, listen. I think Tom Brady made a big statement this year as the Brady versus Belichick. I think some things happened in the past with eight key players opting out that-

Colby Synesael:               Okay, all right. All right. I got it.

CJ Brucato:                      But I’m a big fan. I had Josh Allen on my fantasy page. He was great. I’m a big fan. Stefon Diggs is amazing.

Colby Synesael:               Fine. All right. Cool. Well, CJ, thank you so much for your time. Really appreciate. Again, I hope to see you again some time at a conference, but who knows.

CJ Brucato:                      Yeah, I look forward to that. I look forward to that. Thank you so much. Take care.

Colby Synesael:               Bye.

CJ Brucato:                      Be safe.

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


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