Chadd Garcia finds price dislocation in global digital infrastructure firm, DigitalBridge $DBRG (Episode #155)
Chadd Garcia, Portfolio Manager and Senior Research Analyst at Schwartz Investment Counsel Inc. - Ave Maria Mutual Funds, joins the Yet Another Value Podcast for the first time to discuss DigitalBridge Group, Inc. (NYSE: DBRG; YAVP sponsor Daloopa has a thorough DBRG model available on demand), and why he finds there could be price dislocation in the global digital infrastructure firm.
This podcast is sponsored by the Roundhill IO Digital Infrastructure ETF – BYTE.
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Transcript begins below
Andrew Walker: All right. Hello and welcome to the Yet Another Value podcast. I'm your host, Andrew Walker. If you like this podcast, it will mean a lot if you could follow, rate, subscribe, and review it wherever you're watching or listening to it. With me today, I'm happy to have Chadd Garcia. Chadd is a portfolio manager at the Ave Maria Focused Fund. Chadd, how's it going?
Chadd Garcia: It's going great. How are you doing?
Andrew: I'm doing great. We had some technical difficulties getting this up, but that's behind us now and I'm excited to get the podcast going. Let's start [crosstalk] Go ahead.
Chadd: At least we are talking about bank stocks.
Andrew: Oh, my God, yeah. Silicon Valley Bank. I can't even talk about it right now. Let me start this podcast the way I do every podcast with the quick- You know what, I came to notice them first. A quick disclaimer, first, the disclaimer is just to remind everyone. Look, nothing on this podcast is investing advice. We're not financial advisors. Everyone should consult a financial advisor. Please, do your own work. We're talking about a stock that Chadd has done a lot of work on obviously, due to deep diligence, but I believe he's got a holding in it. And I don't have a position in it just to give that disclaimer. But everybody should keep that in mind.
I'll just go back to the banks you were talking about. I have a tweet out there from a few weeks ago where somebody's talking about negative equity banks and I was like, "There's only a couple out there and the one that comes to mind is Silicon Valley Bank" and I kind of looked at it, I was like, "Oh, it's trading at 1.5 times book" and just didn't really do anything. And now, the stock is, we're talking on Friday, what is it? March 10th. And it looks like they are in serious, serious trouble. I'm just like, "How do you miss that? How do you miss that?"
But anyway, neither here nor there, the stock we're going to talk about today is DigitalBridge. The ticker is DBRG. This is a stock with a long history, and very complicated financials that I think they're going to simplify in 2023. That could be an interesting thing, but I've rambled about both DBRG and other stuff. I'll just turn it over to you. And what's so interesting about DigitalBridge?
Chadd: Well, as you said, it's a stock that has a long history and there's a history of the company going back prior to its public entity, which is now DigitalBridge. But formerly, Colony Capital. If you go back in its history, Marc Ganzi, he's the CEO. He founded a tower business. At one point, he got backed by Blackstone as a financial sponsor, they grew it, and they sold it for several billions of dollars to American Tower. The partner that backed Marc at Blackstone has been Jenkins, who was a senior managing director there. I believe he runs Telecom[?] as well as the Hong Kong office at one point. He ended up leaving Blackstone.
He and Marc formed an entity where they were doing deals in the digital, infrastructure space things. So, I think towers and data centers and small cells, and dark fiber. And they were doing it with their own checkbook. You know, doing funnel sponsor, a lot of their own capital, putting into it as well. And they had some initial successes and if you're successful in this business, you're going to attract competitors. Other infrastructure investors and large P firms wanted in on it. And I mean, even to this day, if you listen to KKR, Blackstone, Brookfield or [inaudible], they talk about a heavy focus on digital infrastructure.
And so, this is as of now, the place to be as far as allocating private capital to but when the other firms entered, Marc and Ben[?] knew that the days of doing it as a funnel sponsor are over and that you needed to be able to underwrite and write a check quickly. And at that point, they looked for ways to set up proper funds. And I believe, Marc's father knew the CEO at Colony Capital. That organization was going through some problems. But they had a couple of things, they had a public shell, they had a balance sheet, and they had relationships with allocators.
And so, Colony Capital, but Marc and Ben's entity, which was called DigitalBridge, they renamed Colony Capital to DigitalBridge. Marc was set up as the CEO in [inaudible] and Barrack at Colony, introduced Marc to several allocators, particularly in the Middle East. Going forward, Barrack left Colony Capital, and Marc and his team sold off all the legacy assets or at this point, most of the legacy assets of Colony Capital. They did so without hiring bankers, which, I think gives some indication of their ability and their culture as far as watching expenses, etc.
And now, they're at a point where they are almost a pure-play investment management firm or alternative investment management firm. There are a handful of investments, two major ones that are left on the balance sheet that makes their financials a little bit complicated, but that should be cleaned up this year and it's going to be much easier for investors to look at the business and analyze what's going on once the financials are simplified. When you look at alternative asset management and I've been involved as an investor in Brookfield for several years and then KKR, right? When they switched from an LP to a C-Corp, I was involved in that for several years.
Andrew: You're speaking my language with both of those. Yep.
Chadd: And you know what's interesting about DigitalBridge and even Brookfield is that their funds are very long life. So, let's say you have an average life of five-plus years for a PE fund. Well, the infrastructure funds are going to be, you know, the average life is probably 11 years. And so, you can see what the fee revenue is going to be for a long time. And after that, it's raising additional funds. Each new fund they raised, brings in incremental fee revenue with not that much more incremental expenses.
And so, from a predictability and a durability of their cash flow streams, it gets pretty easy to analyze. We're not there yet because they have some of the legacy assets that they're getting rid of. So, DigitalBridge has got compounder potential but it's trading at an egregious valuation because of the complications with respect to the current financials, which should be done. It should be over with soon and if you want to, it's tough to get a great business, it's going to compound its earnings for a long time and pay a cheap price. And so, if you want to pick one up, you want to do it when there's some dislocation or some confusion as to the financials. And I think this is a good case study.
Andrew: It's perfect. It's a great overview and I want to dive into a lot of these points. I want to talk valuation. I want to talk about some of the stuff. But I do think like, I know, several people who are invested in DigitalBridge. I know people who really kind of smash it out of the park with, as you mentioned, like, a lot of people historically got burnt by Colony in one way, shape, or form or another. And I know a lot of people who made a lot buying DigitalBridge, once kind of the old CEO was gone and Marc took over. This was going to be a new DigitalBridge, go for it and they made a lot of money saying, "A lot of people just won't even look at this".
And I do still think just as you said, because of all the complications, I think, there's still that hair on it, which will go away. But a lot of the people here, they're here because of the cheapness, they're here because of the sum of the parts, they're here because of compounder story. But I think a lot of it does come back to Marc Ganzi, like, a big piece of this is a bet on the jockey-type style. I've really liked how he talks about the business, just having read, probably read the past three conference calls and some, they go to a lot of conferences, as well. So, read a lot of those. Do you want to talk about Marc Ganzi a little bit more and how you kind of view him as a bet-the-jockey type set-up?
Chadd: I think this is... for bet-the-jockey but more, it's bet the horse, as opposed to bet the jockey. Ganzi is impressive. Some people say that he's an excellent salesman and sells ice cubes to Eskimos.
Andrew: I can see. Have you read the transcript? I can absolutely see this. This man, every deal, you're like, "I want to back this guy. This sounds awesome."
Chadd: But let me just challenge that. Because when I think of salespeople, I think of people that have killed your emotions. And I don't think he's a salesman as he is a general manager that knows a lot about his business and is a good marketer. He knows his business inside and out which is evident on the calls and which, in part what gets me excited about it, but he just tells you, "Here's what we're going to do, and here's how it's going to work. And you know, here's where our finances are at. And here are our negatives with respect to the complications of the financials. And here's how we're going to clean it up. And here's the timeline and you know, if you want anyone in, and if you don't, you don't".
So, I don't think he's sales, he's with respect to appealing to somebody's emotions to try to get somebody in as opposed to just laying out the facts of the business as he sees it, and either you agree with them, or you don't. But finance people are pretty hard working and I know some other shareholders that know him personally and they say that he's the hardest-working person that they know. He misses a lot of- as we do go to a lot of events but there were several investor events this week that he was supposed to show up to and he ended up sending the CFO to them because he's over in the Middle East.
Last year at the Formula 1 race in Miami, they sponsored a booth and had their clients there. I know some people that were in their booth with them, and he left the race early to get on a plane, which is a zone plane to fly over the Middle East to raise capital. One would think if it's your own plane and you can control your schedule a little bit, you might wait till the end of the race, but he didn't. So, I liked that.
Andrew: I liked that too. The man's fundraising. Look, if you're running a digital infrastructure fund or any type of alternative asset, Middle East is the place to go. Okay, so what [crosstalk]-
Chadd: But if you- that's it really quick on if you look at the people that he's attracted into the business, it's impressive. And from an internal investment team standpoint as well as the CEOs of their portfolio companies. A lot of the CEOs of the portfolio companies, like, one of them was a CEO of Equinox. This guy doesn't need to work and he's their reign sale form. So, there is something special that attracts top players to this organization. But there's a lot of talent within it. So, I mean, if something happened to Ganzi, it would be unfortunate, but I think from the investment team standpoint, it would be fine. There's more talent there.
Andrew: Perfect. So, why don't we start by just look- you and I are talking about the stock is trading a hair under $12 per share, it's March 10th. Why don't we just start by, because as you said, the valuation argument is the overarching thing. We could go talk about all of the different pieces but at $12 per share just under, how do you see the sum of the parts for DigitalBridge?
Chadd: Yeah. Well, there's no real standard I think in analyzing alternative asset managers, but the approach that Blackstone and KKR take is using distributable earnings. And so, what that is, distributable earnings are your fee-related earnings, so that's your management fees that you're getting from raising capital, and then occasionally, carry comes in and realized returns from investments come in. So, that gets added to the defibrillated earnings to get you down to digital or distributable earnings. And then, taxes if there's any, and any interest or capital structure issues kind of coming out of that too.
So, it's almost like BPS. Now, where it differs is that an EPS number would include if you had any invested capital and you increase that in the quarter, any increases in vessel capital would flow through to recognized earnings. It doesn't on distributable earnings. It's kind of more like a free cash flow proxy. So, if you look at KKR and Blackstone, they're kind of pushing towards using that metric. But then, if you look at Brookfield and Brookfield has a significant amount more of corporate invested capital on their balance sheet than other asset managers. They value the invested capital separate, and they subtract out any corporate-level debt to get to the net invested capital. And then, they will put a multiple on their fee-related earnings and their carried interest. At 25 [inaudible] use on fee-related earnings and a 10x on carried interest.
Andrew: I think that's not right. Yep.
Chadd: So, that's how those two work. DigitalBridge right now, is going to stuck in a world where they have two investments that are on their balance sheet. They own 11% of one data center business called DataBank. They own 13% of another business called Vantage SDC. And because they have board seats in control of these businesses, they are forced to consolidate them on their balance sheets. So, if you look at the sell-side analysts, they'll put multiples on these two businesses and then out the 90% or 82%, or 88% that they don't own and try to come up with some value. But you can also just look at the balance sheet. They've had transactions in these businesses fairly recently and just look at the net. So, that would be the value of those.
They also have several other invested capital assets. They've got nearly a half a million probably or just over half a million dollars of firm's capital that's invested in the GP and their GTB contributions to the funds. And so, that up and just gets ignored. But if you take the Brookfield approach, you should include that. And so, if you go on and thoroughly look at all the invested capital and their business and then subtract out the debt, I get that to around 11:47 share. And that doesn't take out the value of their 800 million plus in preferred stock, but the company announced distributable earnings projections in their last earnings. So, they haven't given those projections. And in those projections, they are assuming the current capital structure which includes the preferred payments to those preferred. And so, you can just deal with it that way.
This company's fee-related earnings, if they hit their multiple, should go at a 40% plus cater over the next couple of years where Blackstone's not doing nearly that and Blackstone's trades at 21 times distributable earnings. Oh, by the way, Blackstone's [inaudible] earnings. No, because it's a much older firm that is going to include some realizations in it and carried interest, whereas the DigitalBridge distributable earnings estimate isn't factoring in any returns of capital nor carried interest.
Andrew: So, let me just pause you right there to do a summary. So, right now we've talked about, and I fully agree with you. I was invested in KKR for a long time. I was invested in BAM for a long time. The way to value these things is to split up. You've got the balance sheet value which consists of your investments in your operating assets, your funds, and all that type of stuff. You put that on one side and then, you put some type of multiple on the income stream. I personally agree with you. The original way they did it with. You put them also on the fee- related earnings and then, you put a multiple on the incentive because those two deserve different multiples.
I think that's the way to go but everybody likes to UGE now because it's simpler. So, whatever. But we've only talked about the first thing so far. And what you said is, "Hey, I think about $11 per share in asset value on the balance sheet exists". Now, as you said, that is before the preferreds, right?
Chadd: Yes.
Andrew: Because the preferreds [crosstalk] window- Go ahead.
Chadd: That's also its net asset value. So, I exclude all the debt.
Andrew: Yep. You exclude all the debt. Net asset value is about $11 per share. That's before the preferreds , which the preferreds are a little over $5 per share if I'm remembering the math in my head correctly. And you're doing that for a good reason, the company gives UGE targets that deduct the expense from the preferreds. So, if you use their targets for DE and then the invested capital less the preferred, you'd actually be double hitting them for the preferred. So, $11 per share. So, what you're telling me is you think that basically the company's balance sheet value right now, covers almost all of the company's share price?
Chadd: And then, Charlie Munger always says it invert, you know, always invert. And so, where am I going to get hurt in this? If you want to look at this another way, you'll get hurt, you'll never raise another dime of capital, or you could get hurt if you never raise another dime of capital. Let's just say, for some reason, allocators don't like what they've done in the past and just completely shut off. Well, these funds as we discussed, are 11-year funds.
And so, I ran out what the fees would be for called eight years and did a DCF on that and argued, "Are you really my expenses that I'm purging that free cash flow stream?" Would probably be high because we wouldn't need all the staff. But yeah, be conservative. If you add that to the asset value and then, take out the preferreds, that's a little over $10 in value and they're trading at $12 today.
Andrew: Perfect.
Chadd: So, you're almost getting this business today at runoff value.
Andrew: I just want a pause because when I was praying for the podcast, I was emailing you and I sent you. I try not to look at much sell-side, but I was interested because I hadn't heard the asset story pitched on the sell-side. So, I sent you a sell-side model that kind of had the value of their balance sheet about flattish. Obviously, we've talked about the preferred stuff which does make a difference, but they were still well under you on the balance sheet side.
So, I just want to ask, what do you think, like sales, this is a complicated story, right? We talked about how they're consolidating to businesses but what do you think the sell-side is kind of missing when they look at the asset value side of this business?
Chadd: Well, I think there are two issues with the sell-side, and I haven't read all the reports, but I would say on the asset value, they're probably not giving credit for the invested capital that's in the proper funds. So, DigitalBridge Partners one and two, they're probably giving value to some of the legacy balance sheet assets but kind of excluding that Because I think they think they're picking it up in their value, in their multiple on a business. On the multiple on the investment management business.
So, they're so they're excluding doing a true, what is that? the net invested capital on this business as Brookfield kind of lays that out, right? And then, the other error that I think that they may be making is that if you look at the history of the coverage of the firm, it got picked up by a lot of Telecom analysts.
Andrew: Yep.
Chadd: And I think that. And so, there was a big miss a couple of weeks ago, when they reported a miss on the sell-side's estimates for distributable earnings and what the company laid out. Now, if you dig into it, the company did not assume any carried interest. So maybe, the company should have been a little bit more forthcoming about that, but they always say that they don't include carry interest in things. So, if you followed it for a while, you would know that.
And I think that the kind of a telecom analyst me, I've got tripped up a bit with respect to realized gains. They may have been trading the growth of the GP contribution to the funds as DE when that only occurs when there's a realized gain or sale. And so, I think that that was another miss on their part.
Andrew: Just on what you're saying there, I was just laughing because the only sell-side report I've looked at, this again, I try not to read sell-side, is George Bank did an initiation on them in mid-February, that's the sum of the parts I sent you. And the Deutsche Bank thing is exactly what you say. Like, the second page is the company you've covered says, "Hey, we're Telecom analyst. We'd like to thank our asset manager analyst for their help with the insights and thinking throughout the value". That which, you know, it's fine. They're DigitalBridge, obviously, the underlying drivers. A lot of it is going to be how Telecom and digital assets perform.
But it's just funny when you're covering an asset manager and you're thanking your asset management side for helping you think out to do that. So, I do agree with you that there's the potential for some miss there.
Chadd: Stuff will get worked out over time. Like that little other adjuster numbers down or digital gradually will footnote very in bold, with bold letters, you know, excludes such and such. And that's what gets worked out.
Andrew: And look, in undervaluation caused by the "sell-side", like, that will get worked out over time. The company will talk about share buybacks in a second. And the second thing is, it's not like analysts aren't smart, like if they cover this company for two years and they're getting inbounds from investors on how to think about this and the company. Something like eventually, they're going to pick up how to look at this and how to think about this.
Chadd: Yeah. I don't want to blame the sell side on the undervaluation exclusively. I mean, if you look, the big drop in the price happened last summer, and if you've covered KKR and there was a nice positive move from when they went from the LP ownership structure to the C-Corp because it attracted new shareholders. That's going to happen. That should happen here, too. As people that want to be focused that want to be allocated to investment management businesses, come in. But in May, they announced that they were dereading because Colony Capital was a read for tax reasons.
Andrew: Yep.
Chadd: And because DigitalBridge is moving away from investing off their own balance sheet, they don't need those. That structure was not appropriate for structure for an investment management business. And so, they created for sellers at a time of peak market pessimism, which was the summer of 2022.
Andrew: I was absolutely, I have all my things to talk about the transition from RE to C Corp. So, we'll maybe talk about that in a second. But yeah. So, I think we've covered the asset side well, right? So, about $11 per share covered, not including the preferreds. The preferreds will deduct out when we talk about D, but let's just go to the income side. Let's talk about how you're thinking through the income side of the statement, the ongoing cash flow, and the value there.
Chadd: Well, they got about 26 billions of they call, FEUM. Fee Equity Under Management. [inaudible] calls it fee [inaudible] capital. Their goal is to grow that to 8 to 10 billion this year. They've got three funds that will be in the market this year. They have a core fund, a credit fund and they launched their third flagship fund. And so, they've already done some deployments out of the corp and credit funds. And some of them were raised from co-invest, some, warrants. And they recently announced a $100 million deal for their credit funds. So, I mean, what kind of size of fund does that imply? I mean, I would probably say two billion on a [crosstalk]
Andrew: Yep. Off the top of my head, I'd say around that.
Chadd: Yeah. So, on proper funds, they earn 90 [inaudible] of revenue, about 65% of that, gets you do net income or distributable earnings before the carry and realizations. And then, if they do co-invest, which they do often, then the fees come down a bit. And allocators like that because it allows them to kind of buy down their fees on their allocations. But you know, DigitalBridge likes it too, because it allows them to kind of punch above their weight class and take out some very large deals.
Andrew: Yep.
Chadd: Some deals, like, you saw on GD Towers, they partnered with Brookfield. They're not going to be raising, they're not going to be charging money on Brookfield's Capital. So, there are some instances where co-investments come in. They don't make any fees on it but what it allows them to do is, form capital around that and raise co-investment capital from other investors and earn fees on that. So, I mean, I think that they're in the hottest sector with respect to secular tailwinds, which is data and digital infrastructure.
Allocators are under-allocated to both infrastructure and especially digital infrastructure. So, I think that their ability to raise capital and hit their goals is real and if that occurs, then their distributable earnings over the next few years are going to grow at a 40% plus cater.
Andrew: So, I'm just looking this is their Q4 earnings slide. It's slide 20 for anybody who's going in diligence seeing this company or anything. The kind of midpoint of their distributable earnings per share is in the low 40s per share. I think I'm doing my math correctly.
Chadd: Yeah. It's like 40 and 60, right? was the range for the '23?
Andrew: So, if I'm looking correctly, this is the updated guidance without M&A, the low end is 0.26 per share and the high end is 0.6. And that's for 2023. And then, for 2025, this is on DE again. The low end is 0.75 and the high end is just over a buck per share. So, when I throw those numbers out to you and obviously, that's not including, they've got a lot of firepower for buying stuff, buying back shares. We'll talk share buybacks and stuff in a little bit. But when I just throw those numbers out to you, how do you think about valuing that side of the company?
Chadd: Well, I think it's fine as long as you value the net invested capital in the business, as well. Because if you don't do that, what you're missing is that, that DE number doesn't include the appreciation of their $500 million plus of invested capital that they have in the NF funds [crosstalk].
Andrew: That's the asset side that we already talked about. Yeah.
Chadd: And then, they have over $800 million of preferreds that pay between 7 and seven and a half percent that is burning that DE. And so, I think that DE is wildly understated, and it will prove to be. If they hit their fundraising targets, then, come 25, those numbers are going to be high but setting the [inaudible], those numbers are going to be low. But setting that aside, I mean, what kind of multiple should it trade at? I mean, Blackstone's at 21 times. Blackstone has a longer history. But in the end, your multiple should be driven by the organic growth rate of the earning stream. And I think that DigitalBridge is just going to have a much higher growth rate than you're going to see at Blackstone.
Andrew: Their higher end. I guess, the other thing I learned is, I think there's a little more leverage for DigitalBridge versus Blackstone both on the financial side because we talked about that big slug of preferred that we're taking out of the DE side not the invested capital side. And then, on the second thing, they're smaller, the funds are a startup. You know, Brookfield. So, you know how they talk about, "Hey", Brookfield and KKR, both talk about, "Hey, your first and second funds, you actually don't really make any money off of. It's your third fund where you start."
These guys are smaller. A lot of their funds are just starting, they've talked about in 2022, they were kind of doing the famous invest through the income statement thing where they were hiring people to go accelerate their fundraise and launched new funds. So, I do think for both financial and operational reasons, you get a little bit more leverage to the growth there. Obviously, you've got the digital tailwinds and everything we've talked about too, which, you know, we can talk about if they deserve sole credit for picking them up, but I'll just pause there and let you talk about anything financial operational leverage side that you wanted to chat about.
Chadd: Well, I mean, I can see your point. Let's say that they hit their 25 PM fundraising goals, which is about double of face PM. Is the investment team going to be double in size? No. So, that will certainly drop. Is the back office going to be double in size? No. So, the margins are definitely going to get much nicer over time.
Andrew: So, let me just a little pushback on mentioned about 20 times multiple on DE which I don't have massive issues with, but I do just want to push back on what you think. So, there were two kinds of deals on the asset management side for DigitalBridge in 2022. The first is, Wafra owned a decent slug of the investment management side. They bought out the Wafra. They bought out the Wafra shares. I think that valued defibrillated earning stream at approaching 20 times earnings which obviously, the fee-related earning stream's a little bit higher up in the income stream than the distributable earning stream. And then, the second deal they did was they bought AMP for a pretty low multiple autorun [inaudible].
It says, "AMP has now become InfraBridge" and I look at those two and I say, "Hey, are we turning around and slapping, call it a 20x DE multiple on DigitalBridge's earning stream when we've got two precedent transactions that maybe suggests the multiple should be a little bit lower?"
Chadd: Well, on the Wafra transaction. Now, they were innovative and securitized some of their fees during Covid to make sure that they had capital. Not needing that capital but when the world looks like it's going to end, that was a smart way to do it and it was cheaper than issuing equity. And then, on the purchase of Wafra, I mean, you should want them to pay as little as-
Andrew: No. I 100% agree. But it is, two sophisticated parties coming out a multiple, and it does strike me, you know, it's the old, "Hey, KKR agreed to sell a company to you for $2 billion. Like, why do you think you're getting the good side of that deal?"
Chadd: AMP had issues at the parent company, and I hear that their LPs were not too pleased with the parent company. And so, they sold off more businesses than the now, InfraBridge [inaudible] Project, which is a mid-market infrastructure asset manager. The alternative to selling into DigitalBridge was selling to another mega PE fund, who only wanted to buy the portfolio and the team would have to have been laid off and dealt with and come say to go away, etc.
Ganzi recognized that he could use a new offering in the middle market space. He could utilize the team, so, he pays secretly bought AMP at run-off mode, but what it gets them is their margins were a little bit low which DigitalBridge can get up and so, he gets some free juice there and then, he gets access to AMP's legacy LPs. So, he gets to meet some new LPs there and those LPs, he can introduce to his other funds and vice versa. His DigitalBridge's legacy LPs can now access a new product and so, he paid run-off mode for it. It was a distress sale. The alternative was the sell to a large PE fund that deals with distress sales and wanted only the fund and not the employees. He solved their problem. Got a good deal. And if there's any revenue synergies from it, this is going to get really interesting for DigitalBridge.
Andrew: Yup. That's perfect. And I think they've, as you were alluding to, they have said, "Hey, we're having good success. They had AMP at a bunch of logos. They sold too on their side. We have a bunch of logos that we sell too on our side. We're having good success kind of co-mingling and cross-mingling." So, I think we've covered balance sheet value. You've got it at about $11 per share. Distributable earnings take their 2025 number of about a dollar per share about 20 times multiple that would get you to $20 per share.
So basically, both sides of that equation are about covering or more than covering the share price. People can do the math and get to a fair- pretty easy. That's addition fair value there. But I do just want to ask one other thing. So obviously, everything in investing is opportunity cost, right? And we can compare investing in DigitalBridge to investing in a micro-cap in Asia, Apple, the largest company in the world, or whatever. But I think the most direct opportunity cost here is going to be, "Hey, why choose DigitalBridge over another of the [inaudible], right?
And you mentioned Blackstone which DigitalBridge certainly [inaudible] in backs then. But the three that popped to mind are one that I know you own, Brookfield, which has been doing a lot of spins to try to realize some value, much larger, a lot of balance you value there. PX, which is a popular kind of multi-strap fund, doesn't really have the balance sheet, but they've got a lot of growth and a lot of M&A potential that trades at, if I remember correctly, I've been up to M&A model in a couple of months, about 11 times. So, that trades very cheap and then, KKR, which has a big balance sheet and I think that trades at like about 10 times 2025 distributable earnings if I kind of look at what they've been doing and what they're projecting. So, when I just toss that out and say, opportunity cost versus alternative asset managers. Why is DigitalBridge to play?
Chadd: Well, because they have the secular tailwinds with the industry that they're exposed to. They have the tailwinds with allocators being under-allocated to this sector. Their fee-related earning should be growing at a much faster rate than the competitors that you laid out and if the market doesn't appreciate it, one would expect it's the KKR, the Brookfield, or the Blackstone's over world to come knocking on the door and using this as an add-on to their offering.
Andrew: That's perfect. Let me switch. So, I think when I said, "Hey, we're coming on to do the DigitalBridge thing". Some pushbacks here. So, I do just want to address some of the pushback. A lot of the pushback would address specific deals. I think a direct quote on Twitter was, "Hey, if Zeo goes bankrupt, does that take a lot of the sheen off of DigitalBridge?" And the couple others were, I mean, you've heard they closed switch at peak multiples or a lot of the deals, multiples kind of looked high in retrospect versus the current interest rate and everything environment.
And I think Marc has talked about that, but I just want to toss that over to you to either we can talk about specific companies or just overall, when people look at these multiples, why they might be missing something?
Chadd: I think that's fair. And I was with the company in early January and my message to them was, like, "Listen, you have a narrative that Zeo's in trouble and that you paid peak multiples for GD Towers and switched. And so, you guys should change the narrative." And I think that they have done that with respect to the switch at Marc's presentation at the Pacific Telecommunication Council keynote address, which was a few weeks ago. The shorts are out there saying that Zeo was closed at 36 times.
And the way they get there is they're using an LTM multiple at the time that the deal was announced as opposed to using a forward multiple, which is what's done in valuations at the time of close, as well as you know, that LTM [inaudible] or had some kind of, like one time legal, non-cash charges that made it artificially low, but, you know, they kind of cleaned that up and if you can get to a 30 multiple, a 34 multiple, then, if you look at what they have signed, contracts that they had signed and you throw that in there and take out the public company costs, you're getting down to low to mid-20s on Zeo.
So, that starts to not look as egregious as kind of like the headline 36 times [inaudible] but what was interesting about Zeo is that if you're going to grow a data center business, you need four things. You need demand, you need land, you need power, and you need permits. And that's what Zeo had in spades. And if you read the merger agreement with Zeo, which is all public because Zeo was a public company. You can see that they raised a billion dollars of equity in excess of what they needed to close the deal and they raises a billion dollars in equity of debt in excess of what they needed to close the deal. And that billion dollars can be pulled down 18 months from close.
So, what are they telling you they're going to do? Effectively, they're going to double the size of that business within a short order and at the Pacific Telecommunication Council keynote address. And again, Zeo goes through the economics of that, that it's about $70 million for a data hall at Zeo and they'll get an 18%- ish unlevered return invested capital from that. And so, if they're doubling the size of Zeo's business within a year or 18 months at an 18% unloaded return, I don't think anybody's going to be looking at those kinds of headline multiples anymore.
Andrew: That makes total sense. I think that's right. I do worry just I was going back through, and it seemed like at the investor day in 2021. They were saying, "We've really transformed Zeo. We've really transformed the culture. We're really going to simplify the business and ultimately create value" and then, you go through 2022 and just on the queue for call, they're talking about, "Hey, we think we've got Zeo turned around now. We feel good. Anyone who's in the bonds, we have a strong convention. You can sleep safely at night." Which, it all sounds positive. But, you know, to go from saying, "Hey, we've already transformed it in 2021" to "Hey, they turnaround in 2022, took place and the signs are good", it sounds a little strange, right? It sounds like a [crosstalk].
Chadd: Yeah. They said to me that the turnaround took a year longer than they thought it would. And you know, it's hitting now, it's very [inaudible] positive, it's not free cash flow positive, which means they're probably still investing into the business a bit. I think it'll be all right. Perhaps, because it's Zeo. I mean, their reputation will be hurt a little bit with the LPs that they co-invested with, and it wasn't just them. There was another, the EQT was our partner on the deal.
And then, it's probably 5% or 6% of DigitalBridge Partners one. So, private equity funds have some bad deals all the time, and the size is not. You know, it won't feel good but it's not going to kill them.
Andrew: Yep. Let me ask about just I guess, the environment right now. So, we've started talking, I guess we'll stick to kind of the multiples and acquisition environment. But I do want to talk about the fundraising environment because that's important as well. So just, DigitalBridge, its digital infrastructure interest rates have gone up. A lot of the multiples have calmed down a little bit. How does that affect, excluding Zeo, just how does that affect their overall portfolio companies, and tech companies' layoff? And that's the defensive side and evaluation side, but on the offensive side, how does that affect kind of the outlook for them going and buying companies? Lower valuations companies that might be more willing to sell, all of that.
Chadd: Well, let's just go piece by piece. I mean, interest rates go up, and multiples come down. But multiple's not the only way to create value, you know, earnings growth is equally important, probably, more important because it also drives the multiple something it gets. These funds that they have are long life. They don't have to sell today at current multiples. They have time to grow their earnings and to get yield from that throughout the lives of the investments. Higher trades are certainly going to affect the companies that need financing, but they're 75% fixed and their portfolio companies are under leverage. So, I don't think there's going to be any problems with having to deploy capital and to shore up the balance sheets of their fund investments.
I think that their [inaudible] rates are probably going to go up for the investments that they're going after. I mean, a cork on making 9,10,11% rates were probably much more appealing a year ago than it is today. And so, I think that the return thresholds are going to go up. But the higher interest rates are going to probably will create sufficient dislocation where it's going to be very interesting if you have tried [inaudible].
Andrew: So, that's on the multiples side for the business. I just want to talk fundraising, right? Go ahead.
Chadd: Well, the fundraising side. I think that investors are so under-allocated to it, but there's you know what, they're calling the denominator effect. So, you've got the allocators have less capital to deploy. And so, I think that's probably pulling back check sizes about 20 to 30%. So, they're going to be out with DigitalBridge Partners three. I expect that probably come out at around 6 billion. The last one was just over eight. Is it going to be a disaster that it was not as big as the last one given the interest rate environment and denominator fact? I think that'll be fine.
Andrew: Perfect. I believe they talked about both at conferences and on the Q4 call. They said, "Hey, look. Q4 even after not being disastrous for them, was disastrous for the markets. Q4, they had really good results in fundraising. I think they talked about their having really good results early in 2023 fundraising as well. Obviously, that's important, if they're going to grow that distributable earning stream that we talked about earlier from call it 40 to 50 cents per share this year to the dollar per share that we're talking about in 2025. Look, [crosstalk].
Chadd: A couple of big catalysts this year, right? One of the big ones is simplifying the business by getting [inaudible] databank and vantage. Vantage SDC. There are multiple advantages in their portfolios. And then, having some substantial first closes on core credit and DB3 articulating what the fund size are, that's going to be a key for them, and articulate credible fund sizes. Hence, like the sizable first closes, and if that happens, this is going to get real interesting really quick.
Andrew: Their 2025 targets assume about $50 billion in fee-earning assets, whatever their number is. I think they think in terms of scale, they could get to over a hundred billion dollars in assets. If you look at kind of a Blackstone or a KKR, hundred billion is a lot bigger than I'm running, but 100 billion isn't the largest in history in terms of the peers they are, but their peers they're up against. But they're only digital infrastructure. So maybe there's some, how do you think about kind of the ultimate scale potential here?
Chadd: Well, I figure which call it was, but one of the early calls Ganzi walks through how much Capex is deployed annually in digital infrastructure and if it's quite a trillion, but it was maybe close to it. And so, having decade-plus funds and 100 billion of that, that doesn't seem like an egregious amount. If you're deploying, those are trillion dollars in Capex annually.
Andrew: Do you think they'll eventually branch out outside? I mean, they are DigitalBridge, but do you think they'll eventually branch outside of the digital?
Chadd: I can see them doing investing in some ancillary industries and probably through a PE fund which would probably their next one. I think they'd had conversations with some teams that they like and would love to tack on. I mean, it kind of alluded to it on the last call on enhanced kind of M&A in the projections. Wow. I think ultimately, it would be great to have a PE fund in here too, kind of like what Brookfield did with Brookfield business partners and invest in some ancillary businesses to digital infrastructure via that and maybe ultimately at some point, some software companies. I think that the low current stock price is a very high growth rate. So, in the short run, I had kind of a privilege doing some share repurchases over tacking on a PE.
Andrew: That's a great transition because I think the last thing, there were a couple of other things we could talk about, but I also want to be conscious of time. But the last thing I did want to talk about is look, a lot of times when people talk about the alternative asset managers, they will say, "Hey, these are supposed to be the sharpest guys in the room". They're supposed to be great with financial allocation. And you think the stock's undervalued, but the sharpest guys in the room over there are not repurchasing their stock. So, what does that tell you about where they see value? I think there's actually a lot of as with everything, there's a lot of gray areas and [inaudible] that, but DigitalBridge did get decently aggressive with the buyback in Q4. So, I just wanted to let you talk about the buyback and how you see that side of the capital allocation chart flowing over time?
Chadd: I would see their appetite to do that with is probably going to grow in the next few months. So, if you think about, there may have been a situation where they got really aggressive today or the last couple of months on share repurchases, there may have been a situation where they had to pull down a revolver in order to affect some of the other commitments that they have. And so, for example, they've got some converts that expire in April that's going to take a slug of cash. They had $90 million dollars of Wafra earn-out payment that's due on the 31st of March. They'll have some fund commitments, some GP commitments to their new funds.
And so, they have the closing of the AMP transaction occurred in Q1. So, they had some pretty significant outflows. Inflows, they've got coming in the continued monetizations of Data Bank and Vantage, but the timing of that is questionable. So, I think, from them being conservative and not wanting to pull down debt in order to affect the buyback, they were kind of on hold until that got shook out of it with respect to all the outflows going out and then, taking in some of the monetizations that they've had in their funds as well as Data Bank and Vantage.
So, the pressure items are coming up on them. Now that they're going to have some more monetizations, like, what are you going to do with that? So, I'm not really too sure that they didn't buy more shares back in Q4 but come Q2, Q3, if they haven't, then [crosstalk]
Andrew: Look, I don't disagree with you, but I thought even Q4 given the constraints you listed, I think it was all, if you looked in the 10K, I'm doing this from memory, but I think all the buybacks really happened in October. But it was a decent bit of buybacks for a company with the constraints you're doing. So, I actually talked a little bit of a different question. Last question, then, I'll give you final thoughts and then, we can wrap this up. We've talked Ganzi, a lot of people here, I do think our Ganzi, when he took over in 2019, he famously, infamously, probably neither of the above but a lot of investors do look at it.
He got a contract that said, "Hey, you have to adjust for the stock reverse split, but adjust for that, if the stock price holds $40 per share for 90 days by July 2024, he'll get a $100 million pay-out". And I know a lot of people look at that, look at Ganzi and say, "This man is going to be incentivized to get to $40 per share." I think if you think about the sum of the parts we laid out, it doesn't take much to think another year value creation. Maybe a little bit of multiple expansion source, we talked about some financial engineering. Again, another year value creation may be a really successful deal.
I know a lot of people who look at that and say, "This man is going to be really incentivized to drive the share price higher". I don't know, I kind of think once you get to call it a little over a year out in the stocks 75% below, 60% below, whatever it is the target. I kind of think that goes out the window and they'll just, the board will just [inaudible] on another thing. But I do just want to talk about it because I know a lot of [inaudible] talk about this pay-out level.
Chadd: Yeah. It doesn't take too hard to kind of sketch out evaluation where that's possible.
Andrew: Yeah. A 100%.
Chadd: I mean, realistically, I think you're going to see like it's a crisis at work with cleaning up to the balance sheet. They're going to have and once the balance sheet in the financials is kind of cleaned up with Data Bank and Vantage, you'll have another analyst day and that might get some momentum going forward. But if it's not $40 by September, you're going to start seeing sale reverse. Starts to come out, I imagine. I mean, whether they're true or not, it's just how the markets work because everybody knows that they have to hit the 90 days is 90 consecutive trading days. So, if you back that out, that's mid to late February '24, he's got $40.
Andrew: So, you do think that, I mean, look, if I had $100 million online, it certainly incentivizes me, but you do think that pay-out, especially as you kind of clean up in Q1, Q2, as you get towards in your, you think the company is going to have very high on their mind? "Hey, how do we realize that? Whether it's really aggressive on the repurchases or really trying to drive this home or potentially exploring a ship sail." You do think that could be a catalyst?
Chadd: I don't think that the sale's out of the other picture. I would hope that it doesn't happen because I want to own this for 20 years. I think it's exciting to find a compounder when the story is complicated, you get it cheap, and you can own it for 20 years. And so, that's what I would like to see happen. But I think, just the market being the market and people knowing about this, and all the bulls talking about that. Yeah. Maybe you'll hear some rumors in September about whether or not that. Whether or not that it drives him to do something extraordinary like a sail. I don't know.
If the board does make a change to this, I would hope that two things happen. That if he gets extended that the strike price goes up. So, it's not 40 anymore. And I think, the boards extend it to another two years, and they made it 60 or something higher than, I think that's fair to shareholders. I think that it would be looked at negatively by some shareholders if the $40 strike price stay the same and he pushed it that out a couple of years.
Andrew: Yeah, that's the classic. I mean, it's tough because you've got incentivized, [inaudible] who's running literally billions of dollars to say but that's a classic heads, I win. Tails, I don't lose where, "Hey, we put a 5 year, $40 target, you didn't hit it. So, we just give you another 5 year, $40 target." Shareholders language, you still have a shot to make a $100 million.
Chadd: But he's got massive incentive with respect to the carried interest that he's such a realized that if they raise capital and make good investments and harvest good returns and so, he's practically incentivized. It would be nice to see to your point that these are the sharp guys and the best investors in their sector given how cheaply the common stock is trading. It seems like it's one of the best opportunities in the whole complex. It would be nice to see him and Ben Jenkins, the CIO, make some significant share repurchases particularly since they realized some significant amounts of carry last year with the Data Bank recapitalization and are probably set to realize some more as they de-consolidate Data Bank and Vantage SDC.
Andrew: And if I remember correctly, they did buy some shares on the open market last year, but obviously, you'd love to see, "Hey, we just got 30 million of carry. We set aside 10% axes, and we throw 10 of it into the stock at these levels because we're really convicted." The last thing, we've covered a lot. I actually had more I wanted to cover but I've got to be conscious of time here. So, I just want to ask, like, this is a story. I think we've done a nice job of simplifying it down, laying out the value, and addressing some of the parts. But is there anything we didn't hit that you think investors should be thinking about or anything we kind of glanced over that you wanted to hit a little harder?
Chadd: No. I think we covered it pretty well. I mean, if they hit their fundraising goals, the earnings are going to increase at a massive kegger, and there's going to be a lot of value there. In the meantime, you're buying it very close to run-off mode. So, you have limited downside, and the upside can be pretty material. And the complications with respect to the financials are getting simpler. I mean, it's having the share.
Andrew: Perfect. Perfect. That's a great place to wrap it up, Chadd. And again, Ave Maria Focused Fund. We can go look it up. There are some other interesting names in there. So, Chadd looking forward to having you and talk about one of the other 16 Holdings in your portfolio in the near future.
Chadd: Yeah. We can do eDreams next or something.
Andrew: I've done a lot of work over in the European travel sector. Yeah, but we'll save that for next time. But Chadd Garcia, thanks so much for coming on and we will chat soon.
Chadd: Great.
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