Yet Another Value Podcast - Chadd Garcia finds price dislocation in global digital infrastructure firm, DigitalBridge $DBRG

Episode Date: March 14, 2023

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), and why he finds there could be price dislocation in the global digital infrastructure firm. Chapters: 0:00 - Introduction + Episode sponsor: $BYTE 2:23 - Overview of DigitalBridge Group, Inc. (NYSE: DBRG) 8:10 - Chadd's thoughts betting on CEO, Marc Ganzi, + background 12:38 - First part of the valuation argument, Chadd's describes the sum of the parts 18:17 - DigitalBridge investment summary so far + second part of the valuation argument (asset pitch), and what the sell-side is missing when they look at the asset value side of the business 26:30 - Thinking through the income statement and cash flow 29:38 - Updated guidance for 2023 and 2025: how does Chadd think about valuation with respect to this information 32:14 - Operating leverage 33:44 - Two acquisitions on the asset management business and their affect on D/E multiple 37:47 - Opportunity cost: Why choose DigitalBridge over alternatives? 40:02 - Addressing pushback on DigitalBridge 45:45 - Outlook on fundraising & acquisition environments 48:47 - Value catalysts for 2023 49:49 - Thinking the the DBRG's scaling potential 50:59 - Does Chadd Garcia think DBRG eventually branches outside digital infrastructure? 52:36 - DBRG's capital allocation strategy 55:45 - Marc Ganzi's payout incentive and how that affects investor sentiment/thesis on DBRG 1:01:04 - Closing thoughts on DBRG  For more information about Chadd Garcia and Schwartz Investment Counsel Inc. - Ave Maria Mutual Funds, please visit: https://www.schwartzinvest.com/investing-with-us/ave-maria-mutual-funds/ Today's episode is sponsored by: Roundhill IO Digital Infrastructure ETF – BYTE Investing in the real assets that underpin our digital world has never been easier. We are pleased to bring you this podcast in partnership with Roundhill Investments, the advisor to the Roundhill IO Digital Infrastructure ETF – BYTE - which trades on the New York Stock Exchange under the ticker symbol - “B” “Y” “T” “E”. The fund tracks the BYTE Index, which measures the performance of 40 leading global digital infrastructure businesses, such as towers and mobile communications, fiber and fixed line connectivity, and data centers. For a prospectus and more information, please visit roundhillinvestments.com/etf/byte - read carefully. Investing involves risk, including possible loss of principal. Investors should consider the investment objectives, risks, charges, and expenses carefully before investing in BYTE. Distributor Foreside Fund Services, LLC: https://www.roundhillinvestments.com/etf/byte/

Investing in the real assets that underpin our digital world has never been easier. We are pleased to bring you this podcast in partnership with Roundhill investments, the advisor to the Roundhill I-O Digital Infrastructure E-TF, Bite, which trades on the New York Stock Exchange under the ticker symbol B-Y-T-E. The fund tracks the Bight Index, which measures the performance of 40 leading global digital infrastructure businesses, such as towers and mobile communications, fiber and fixed line connectivity, and data centers. For prospectus and more information, please visit roundhillinvestments.com slash ETF slash bite.

Please read carefully. Investing involves risk, including possible loss of principle. Investors should consider the investment objectives, risks, charges, and expenses carefully before investing in bite. Distributor of Foreside Fund Services LLC. All right, hello, and welcome to yet another value podcast. I'm your host, Andrew Walker. If you like this podcast, it would mean a lot.

If you could follow, rate, subscribe, review it wherever you're watching or listening to it. With me today, I'm happy to have Chad Garcia. Chad is a portfolio manager at the Ave Maria Focus Fund. Chad, how's it going? It's going great. How are you doing? 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 this. Go ahead. At least we're not talking about bank stocks. Oh, my God, that Silicon Valley Bank. I can't even talk about it right now. Let me start this podcast the way I do every podcast with a quick. You know what?

I can. No, just them first. A quick disclaimer. First, the disclaimants remind everyone, look, nothing on this podcast is investing in advice. We're not financial advisors. Everyone should consult a financial advisor. Please do your own work. We're talking about a stock that Chad has done a lot of work on, obviously, deep diligence.

But I believe he's got a holding in it. 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 was 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 that. And I was like, oh, it's trading it 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. And 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 digital.

bridge. The ticker is DBRG. This is a stock with a long history, 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 Digital Bridge? Well, as you said, the stock is a long history. And there's a history of the company going back, you know, prior to its public entity, which is, you know, now digital bridge, but formerly calling capital. And if you go back in its history, Mark Gansy is the CEO. He founded a Tower of Business.

At one point, he got backed by Blackstone as a financial sponsor. They drew it and they sold it for several billions of dollars to American Tower. The partner that backed Mark at Blackstone was Ben Jenkins. He was a senior managing and director there. I believe he ran telecom and as well as the Hong Kong office at one point. He ended up leaving Blackstone. Him and Mark formed an entity where they were doing deals in the digital infrastructure space. So 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.E firms wanted in on it. And even to this day, if you listen to KKR, or Blackstones, or Brookfields, or any sculls, they talk about a heavy focus in 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, Mark and Ben knew that the days of doing it as a funnel of sponsor or over, 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 Mark's father knew the CEO at colony capital you know that organization was going through some problems you know they had but they had a couple things they had a public shell and they had a balance sheet and they had relationships with allocators and so colony capital bought mark and ben's entity which was called digital bridge they renamed colony capital digital bridge mark was set up as the CEO in way team and Barrick at Colony introduced Mark to several of the allocators, particularly in the Middle East. Go forward, Barrett left Colony Capital. Mark 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 the culture as far as, you know, watching expenses, et cetera. 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 would be, it's going to be much easier for investors to look at the business and analyze what's going on, like, once the financials are simplified.

And when you look at alternative asset management, and I've been involved as an investor in Brookfield and for several years. And then KKR, right when they switched from an LP to a C corp who was involved in that for several years. You're speaking my language with both of those. Yep. And, you know, what's interesting about Dillard Bridge and even Brookfield is that their funds are a very long life. So let's say you have an average life five plus years for a P.E. fund. Well, the infrastructure funds are going to be, you know, average life probably 11 years.

And so you can see what the fees, the fee revenue is going to be for a long time. And, you know, after that, it's raising additional funds. you know, each new fund they raise, you know, brings in incremental fee revenue with not that much more incremental expenses. And so from a, from a predictability and a durability of their cash flow streams, it gets pretty easy to analyze. You know, we're not there yet because they have some of the legacy assets that they're getting rid of. So, you know, Deucro Bridge has got compound or potential, but it's trading at an egregious valuation because, of the complications with respect to the current financials, which should be done,

you know, should be over with soon. And, you know, if you want to, it's tough to get a great business that'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, you know, when there's some dislocation or some confusion as to the financials. And this is, I think this is a good case study in that. That's perfect. That's a great overview. And I want to dive into a lot of those 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 Digital Bridge. I know people who really kind of smashed 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 Digital Bridge once kind of of the old CEO was gone and Mark took over. This was going to be new Digital Bridge, go forward. 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 the compounder story. But I think a lot of it does come back to Mark Gansy. 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 I wrote a lot of those. been, do you want to talk about Mark Gansy a little bit more and how you kind of view him as a bet the jockey types set up? I think this is part bet the jockey, but more it's bet the horse as opposed to bet the jockey. Gansy is impressive. Some people say that he's an excellent salesman and sell ice cube to Eskimos. I can see having read the transcript I can absolutely see this this man every deal you're like I want to back this guy this sounds awesome but let me but well let me just challenge that because when I think of salespeople I think of people that appeal to 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 a good marketer he knows his business inside and out which is evident on the on the calls and which in part of what gets me excited about it.

But he just tells you, like, here's what we're going to do, and here's how it's going to work, and here's where our financials are at, and here's 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, if you don't, you don't. So, you know, I don't think he sales these 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, you know, finance people are pretty hard working,

and I know some other shareholders that know him personally, and, you know, they say that he's the hardest working person that they know. I would, I would, he misses a lot of, as if you do go to a lot of events, but there was, there were several investor events this week that he was supposed to, to show up to you. And, you know, he ended up sending the CFO to him because he's on, he's over in the Middle East. You know, last year at the at the Formula One race in Miami, they sponsored a booth and have 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, on a plane, which is his own plane, to fly over the

Middle East race capital. Now, you know, what would think if it's your own plane and you can control your schedule a little bit. You might wait until the end of the race, but, you know, you didn't. So I like that. I like 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. But back to it real quick, if you look at the people that he's attracted into the business, it's impressive. I mean, 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 the CEO of Equinix. This guy doesn't need a work, and he's their running sale for him.

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 Gansy, it'd be unfortunate, but I think, from the investment team standpoint, it would be fine. There's more talent there. Perfect. So why don't we start by just, look, you and I are talking, 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. And we could go talk about all the different pieces. But at $12 per share or just under, how do you see the sum of the parts for digital bridge? 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, the distributable earnings are your fee-related earnings, so that's your management fees that you're getting from raising capital. And then occasionally, Kerry comes in and realized return. from investments come in. So that gets added to the fee-related 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 EPS.

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 best of capital would flow through to recognize 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.

and other asset managers, they value the invested capital separate and then they subtract out any corporate level debt to get to a net invest the capital. And then they will put a multiple on their free related earnings and their carried interest. Like a 25 multiple, I think they use on fee related earnings and a 10x on carried interest. I think that's not right. Yep. So that's how those two work. And so, you know, Digital Bridge is right now. Now it's kind of 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 and control these businesses, they are forced to consolidate them on their balance sheets. So if you look at the sell site analysts, they'll put multiples on these two businesses and net 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. And so that would be the value of those. But they also have several other invested capital assets.

They've got nearly a half a million or just over a half a million dollars. of firm's capital that's invested in the GP and their GT contributions to the funds. And so, you know, that often just gets ignored. But if you take the workfield approach, you know, you should include that. And so if you go on and look at all the invested capital in their business and then subtract out the debt, I get that to around 1147 a share. Now, that doesn't take out the, the value of their, you know, 800 million plus and preferred stock, but the company announced

digital or, excuse me, distributable earnings projections in their last earnings call. 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. And, you know, I, this company's fee-related earnings, if they hit their multiple, should go out of, you know, 40% plus Kager over the next couple of years where, you know, Blackstone's not, not doing, you know, nearly that. And Blackstone trades at 21 times distributable earnings, you know. Oh, by the way, Blackstone's distributed earnings, you know, because it's a much older firm, is going to include some realizations in it. carried interest where the digital bridge distributive earnings estimate isn't factoring in any returns of capital nor carried interest.

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Distributor of four-side fund services LLC. 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, you know, 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 your your investments in your uh operating assets your funds 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 a multiple 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 do de now because it's simpler so whatever we can 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? That's also net asset value. So I exclude all the debt. Yep, yep.

You exclude all the debt. Net asset value about $11 per share. That's before the preferreds with 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 you DE 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? Right. And then, you know, Charlie Munger always says it invert, you know, always invert. And so, you know, where am I going to get hurt in this? If you want to look at this another way, you know, you'll get hurt if they never raise another dime of capital. Or you could get hurt if they never raise another dime of capital. Let's just say, you know, for some reason allocators, you know, don't like what they've done in the past and, you know, just completely shut off.

Well, you know, these funds, as we discussed, are 11-year funds. And so, you know, I ran out what their fees would be for, you know, call it eight years and, you know, did a DCF on that. And, you know, arguably my expenses that I'm burdening that free cash flow stream would be probably be high because they wouldn't need all the staff. But, you know, be conservative. If you add that to the asset value and then take out the preference, you know, that's a little. a little over $10 in value, and they're trading that, you know, 12 today. So you're almost getting this business today at runoff value. I just want to pause because when you and I were, when I was pregnant for the podcast,

I was emailing you and, you know, 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 flatish. 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 two businesses. But what do you think the sell side is kind of missing when they look at the asset value side of this business? Well, I think there's 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 lumping, they're probably not giving credit for the invested capital that's in the proper funds. So digital bridge partners, one and two. They're probably giving value to some of the legacy balance sheet assets. kind of excluding that because I think they think they're picking it up in their value,

and their multiple on the business, the multiple on the investment management business. So they're excluding, you know, doing a true, like what is the net invested capital in this business as 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. Yep. And I think that,

and so there was a big miss a couple 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 carry 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 may have got tripped up a bit with respect to realize gains. They may have been treating 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 a, you know, another miss on their part. 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 cell side is

Deutsche Bank did an initiation on them in mid-February. That's the some of the parts I sent you. And the Deutsche Bank thing is exactly what you say. Like the second page is the company who covered says, hey, we're a telecom analysts. We'd like to thank our asset manager analysts for their help with the insights and thinking through how to value that, which, you know, it's fine. They're digital bridge. 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, I do agree with you that there's the potential for some missed there. Stuff will get work at over time. Like they'll, you know, they'll, you know, they'll adjuster numbers down or, or digital bridge will, we'll footnote very, you know, in bold, with, with bold letters, you know, excludes such and such and that's like it's right. And look, that's, a, an undervaluation caused by the sell side, quote unquote, 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, you know, in bounds from investors on how to think about this and the company's something, like eventually they're going to pick up how to look at this and how to think about this. I don't know I would blame the sell side on the undervaluation exclusively. I mean, if you look, the big drop in the price happened last summer. And, you know, as, like, you've covered KKR and there was a nice positive move from when they went from the LP ownership structure to the Seacorp because it attracted new shareholders. Yep.

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 de-reading because Colony Capital was a REIT for, for, you know, tax reasons. And because Digital Bridge is moving away from investing off their own balance sheet, you know, they don't need those, that structure. It's not appropriate for a structure for investment management business. And so they created four sellers at a time of peak market. Pessismism, which was the summer of 2022. I was absolutely, I have all my thing to talk about the transition from REIT to C-Corp.

So we maybe talk about that in a second. But yeah, so I think we did cover, we've covered the asset side well, right? So about $11 per share covered, not including the preferreds. The prefers will deduct out when we talk about D.E. 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, the value there. Well, they got about 26 billion of, they call it fee equity under, fee and equity under management.

Perthville calls it fee bearing capital. Yep. Their goals to grow that to $8 to $10 billion this year. They've got three funds that will be in market this year. they have a core fund, a credit fund, and they'll launch their third flagship fund. And so, you know, they've already done some deployments out of the core and credit funds. You know, some of them were raised from co-invest, some warrants. You know, 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 $2 billion. Yeah, off the top of my head, I'd say around that. So they earn on proper funds, they earn 90 bips of revenue. About 65% of that gets you to net income or, you know, Distribal earnings before carry and realizations. And then if they do co-invest, which they do often, then the funds come, 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, Digital Bridge likes it too because it allows them to kind of, you know, punch above their weight class and take down some very large, large. deals. Yep. Some deals, like you saw on GD Towers, they partnered with Brookfield, you know, 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 anchor co-invest 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 kill-investment capital from other investors and earn fees. on that. So, I mean, I think that they're, they're in the hottest sector with respect to secular tailwinds, which is data and the digital infrastructure. Allocators are underallocated to both infrastructure and especially digital infrastructure. So I think that their ability to to raise capital and hit their goals is real. And if that occurs, and then their distributed earnings over the next few years are going to grow out

40, 40% plus K here. So I'm just looking, this is their Q4 earning slide. It's slide 20 for anybody who's going in diligence in 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. It's like 40 and 60, right, was the range for the 23? So if I'm looking correctly, this is the guidance without, 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 a 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? Well, I think it's fine if as long as you is, 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 plus million of invested capital that they have. Yep. Capital that they have in the, that's the asset side that we already talked about. And then they have over $800 million of prefers that's that pay between 7 and 7.5% that is burdening

that DE and so I think that that DE is wildly understated and it will prove it will prove to be let's just if they hit their

if they're fundraising targets then that then come 25 those numbers are going to be high but setting that those numbers are going to be low so but setting that aside I mean what kind of multiple should it trade at, you know, I mean, Blackstone's at 21 times. You know, Blackstone has a

longer history, but in the end, your multiple bulls should be driven by the organic growth rate of the earning stream. And I think that Digital Bridge is just going to have a much higher growth rate than you're going to see it at Blackstone. They're higher end. I guess the other thing I layer in is I think there's a little more leverage for digital bridge versus a blackstone both on the operational side because we talked about that big slug of preferred, sorry, 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 startup. You know, 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 launch new funds so i do think for both the 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. Well, I mean, to your point, let's say that they hit their 25 FEM fundraising goals, which is about double of FEM. Is the investment team going to be double in size? No.

So, you know, that will certainly drop. Is the back office going to be double in size? No. So the margins are definitely going to get much. master every time. So let me just a little pushback on mentioned about a 20 times a multiple on DE, which I don't have massive issues with, but I do just want to push back on two things. So there were two kind of deals on the asset management side for Digital Bridge in 2022. The first is Wafra owned a decent slug of the investment management side. They bought out the Wafra.

they bought out the Woffer shares. I think that valued the fee-related earning stream at approaching 20-times earnings, which obviously the fee-related earnings streams a little bit higher than the distribute, it'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 on a run rate bit. 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 20 times DE multiple on digital bridges earning stream when we've got two precedent transactions that maybe suggest the multiple should be a little bit lower. Well, on the WAPRA transaction, now they were innovative and securitized some of their fees during COVID to make sure that they had capital. Now, they ended up 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 issue and equity. Yep.

And then on the purchase of Wafra, I mean, you should want them to pay as little as. No, I 100% agree, but it is, you know, two sophisticated parties coming out of multiple. And it does strike me, you know, it's the old,

hey, if 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? AMP was a was AMP had issues at the parent company and I hear that their LPs were were not too pleased with the parent company and so they they sold off more businesses than the now Infrabridge was what digital grade brought which is a mid-market infrastructure asset manager the alternative to selling to Digital Bridge was selling to another mega PE fund who only wanted to buy the

portfolio and, you know, the team would have to have been laid off and dealt with and compensated to go away, etc. He recognized that he needed a, you know, he could use a new offering in the middle market space. He could utilize the team. So he basically bought A&P at runoff mode. But what it gets them is, you know, their fee, their margins were a little bit low, which, which Digital Bridge can get up. And so, you know, 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. his other funds and vice versa. His Digital Bridges legacy LPs can now access a new product. And so he paid runoff mode for it. It was a distress sale. The alternative was to sell to a large fee fund that deals with the stress sales and wanted only the fund and not the employees. He solved a problem, got a good deal.

And if there's any revenue synergies from it, this is going to get real interesting for Digital Bridge. That's perfect. And I think they, as you were alluding to, they said, hey, we're having good success. They had a, A&P had a bunch of logos they sold to on their side. We have a bunch of logos that we sell to on our side. We're having good success kind of commingling and cross mingling. So I think we've covered, you know, balance sheet value.

You've got it at about $11 per share. Distributable earnings. Take their 2025 number of about $1 per share, about $1,000. 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 things. So obviously everything in investing is opportunity costs, right? And we can compare investing in digital bridge to investing in a microcap in Asia, Apple, the largest company in the world, whatever.

But I think the most direct opportunity cost here is going to be, hey, why choose Digital Bridge over another of the alts, right? And you mentioned Blackstone, which Digital Bridge certainly looks cheaper than best. 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 sheet. PX, which is a popular kind of multistrat 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 haven't updated my model in a couple 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 costs versus alternative asset managers, why is digital bridge to play? 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 earnings should be growing at a much faster rate than the competitors that you laid out. And if this doesn't, if the market doesn't appreciate it, you know, one would expect the KKRs, the Berkfields, the Blackstones overworld to come knocking down their door and using this as, you know, as an add-on.

to their offering. That's perfect. Let me switch. Let me switch. So I think when I said, hey, we're coming on to do the digital bridge thing, got some pushback here. So I do just want to address some of the pushback. You know, a lot of the pushback would address specific deals.

You know, I think ZAO was one. A direct quote on Twitter was, hey, if Zayo goes bankrupt, does that take a lot of the sheen off of digital bridge and a couple others were, I mean, you've heard they close switch at peak multiples or, you know, a lot of the deals, multiples kind of look high in retrospect versus the current interest rate and everything environment. And I think Marks 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. I think that's fair. And, you know, I was with the company in early January and I, and

And my message to then was like, listen, you have a narrative that, you know, Zayo is in trouble and that you've peaked and you paid peak multiples for GD Towers and Switch. And so, you know, you guys should change the narrative. And I think that they have done that with respect to Switch at Mark's presentation at the Pacific TILA Communication Council keynote address, which was, you know, a few weeks ago. You know, the shorts are out there saying that ZAO was closed it 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, you know, using a forward multiple, which is what's done in valuations at the time of close, as well as, you know, that, that LTM Bid also had some kind of like one-time legal. non-cash charges that you know made it artificially low but you know if you kind of clean that up and you can get to a 30 multiple um a 30 forward multiple then if you look at what they have signed contracts that they had signed um and you you throw that in there and take out the public

company costs you're getting down um to you know load them at 20s on sale so that doesn't you know That starts to not look as egregious as kind of like the headline 36 times. But what was interesting about ZAO 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 ZAO had in spades.

And if you read the merger agreement with ZAO, which is all public because ZO was a public company, you can see that they raised a billion dollars of equity in excess of, what they needed for to close the deal and they raised a billion dollars equity of debt in excess of what they needed to close a deal and that billion dollars could 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 within a short order and at the Pacific Telecommunication Council keynote address you know Gansy goes through the economics of that that it's about $70 million for a data hall at ZAO, and they'll get an 18-percent-ish unlevered return

investment from that. And so, you know, if they're doubling the size of ZAO's business within a year or 18 months at an 18% unlevered return, you know, that, I don't think anybody's going to be looking at those kind of headline multiples anymore. That makes total sense. You know, I do, I think that's right. I do worry just, I was going back through and it seemed like, like at the Investor Day in 2021, they were saying, we've really transformed ZAO, we've really transformed the culture.

We're really going to simplify the business and ultimately create value. And then, you know, you go through 2022 and just on the Q4 call, they're talking about, hey we think we've got Zayo turned around now we feel good uh anyone who's in the bonds we have strong convention you can sleep 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 the turnaround in 2022 took place and the the signs are good it just it sounds a little strange right it sounds like a little too polyanish yeah they said they said to me that the that the turn took a year longer than they thought it would yeah and you know it's it's hitting now it's it's

it's very even out positive it's not free cash flow positive which means they're probably investing um still investing into the business a bit um i think they'll be all right what happens if it goes a zero i mean it's it's um their reputation will be heard a little bit with the lps that they co-invested with. And, you know, it wasn't just them. There was a, there was another, I think EQT was their partner on the deal. Yep. And then it's probably five percent, six percent of, of digital bridge partners won. So, you know, private equity funds have some, have some bad deals all the time. It's not, the size is not, you know, it won't feel good, but it's not, it's not going to kill them. Yep. Yep. Yep. Let me ask.

about just, I guess, the environment right now. So we could, 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, you know, digital bridge, it's digital infrastructure, interest rates have gone up. A lot of the multiples have calmed down a little bit. How does that affect the excluding ZEA, just how does that affect their overall portfolio companies, tech companies laying off? And that's the defensive side and the valuation 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? Well, you know, let's just

go piece by piece. I mean, interest rates go up, multiples come down, but multiple is not the only way to create value. You know, earnings growth is equally important or probably more important because it also drives the multiple something gets. These funds that they have are, long life. They don't have to sell today at, you know, current multiples. They can, they have time to grow their earnings and to get yield from that, you know, throughout the lives of the, of the investments. Higher interest rates are certainly going to affect the, you know, companies that need financing, but, you know, they're 75% fixed and their portfolio companies are under leverage. I don't think there's going to be any problems with having to deploy capital

and to, you know, to show up the balance sheets of their fund investments. I think that the hurdle rates are probably going to go up, you know, for the investments that they're going after. I mean, if you, a quote on making 10, 11%, 9, 10, 11% rates was 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 you know the higher interest rates are going to you know probably will create dislocation sufficient dislocation where it's going to be very interesting if you have dry powder or boy so that's on the multiples side for the business i just want to talk funders right go ahead well the fundraise inside i think that investors are so

under allocated to it but there's you know what but um they're calling the denominator of facts 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 I, you know, they're going to be out with Digital Bridge Partners 3. I expect that probably to come out around $6 billion. The last one was just over 8. You know, was it going to be a disaster that it was not as big as the last one. Given the interest rate environment and denominator effect, I don't, I think that.

that'll be fine. Perfect. So, and I believe they've talked about both at conferences and on the Q4 call. They said, hey, look, Q4, even after not disasters for them, disasters for the markets, Q4, they had really good results fundraising. I think they talked about they're 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. Yeah, I see that we've probably had a couple big catalysts this year, right? One of the big ones is simplifying the business, getting deep consolidating data bank and Vantage, SDC, there's multiple advantages in their portfolios, and then having some substantial first closes on core credit and DB3 and articulating what the fund size are. That's going to be key for them. and articulate credible fund sizes, hence like the sizable first closes. And if that happens, then this is going to get, you know, real interesting real quick.

Their 2025 targets assumes about $50 billion in fee earning assets, whatever their number is. I think they think in terms of scale, they could get to over $100 billion in assets. If you look at kind of a Blackson or a KKR, 100 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? Well, I think of which call it was, but one of the early calls, Gansley walks through how

much CAP-X is deployed annually in digital infrastructure. And I mean, I don't know if it's quite a trillion, but it was maybe close to it. And so, you know, having multi, having, having decade-plus funds and, you know, 100 billion of that, that doesn't seem like an egregious amount if you're deploying, you know, close to a trillion dollars in CAP-X annually. think they eventually branch out outside? I mean, they are digital bridge, but do you think they eventually branch outside of the digital? I can see what, I can see them doing some ancillary, um, investing in some ancillary industries and probably through a Pee fund, which would probably be their next, their next one. I think they've had conversations with some teams that

they like and would love to tack on. I mean, they kind of alluded to it on the last call and hence kind of the M&A, uh, in the projections. You know, my, while 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 price of the, the low current stock price is a very high rate. So in the short run, I'd kind of, I'd privilege doing some sherry purchases over tacking on a P. And now, a quick word from our sponsor. Comprized of 40 of the world's leading digital infrastructure businesses, the byte ETF, ticker BYTE, trades on the NYSE and tracks the byte index.

Byte looks globally for companies such as mobile tower, fiber, and data center operators. For a prospectus and more information, please visit roundhill investments.com slash ETF slash bite. Read carefully. Investing involves risk, including possible loss of principle. Investors should consider the investment objectives, risk, charges, and expenses carefully before investing in bite. Distributor of four-side fund services LLC. That's a great transition because I think the last thing, there were a couple other things we could talk about, but I also want to be constants 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 complexities of that. But digital bridge 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. I would see their appetite to do that is probably going to grow in the next few months. So if you think about there may have been a situation where they got real,

if they got real aggressive today or the last couple months on sherry purchases, 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. You know, that's going to take a slug of cash. They've got, they had $90 million of Wafra earnout payment that's due on the 31st of March. They've, they'll have some fun commitments, some GP commitments to their, new funds. And so they had, they had, they have the closing of the EMP transaction, you know, occurred in Q1. So they had some pretty significant outflows. Inflows, they've got coming in the continued monos, the monetizations of data bank and advantage, but the timing of that's questionable. So I think from, from, from them being conservative and not,

wanting to pull down debt in order to affect a buyback, they're, you know, they're 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 advantage. So, you know, the pressure on those is on, is on, is coming up on them, you know, now that they're going to have some more monetizations. Like, what are you going do with that. So, you know, I don't, I'm not really, I'm not really too sore that they haven't bought, they didn't buy more shares back in Q4, but come, come Q2 and Q3 if they haven't. 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 talk a little bit of a different question. Last question, then I'll give you final thoughts, and then we can wrap this up. You know, we've talked Gansy. A lot of people here, I do think are, Gansy, 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, adjust for the, 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 $100 million in payout. And I know a lot of people look at that, look at Gansy 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 of value creation, maybe a little bit of multiple expansions versus 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 the board will just re-up them another thing. But I do just want to talk about because I know a lot of Bulls talk about this payout level. Yeah, well, it doesn't take too hard to sketch out evaluation where that's possible. Yeah, 100%. And so I think, I mean, realistically, I think you're going to see like, if the stock price starts to work with cleaning up the balance sheet they're going to have and once the balance sheet and the financials are kind of cleaned up with data bank and advantage you'll have another analyst day and that might get some momentum going forward um

but if it's not if it's not at forty dollars by september you're going to start seeing sale rumors start 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, and he needs to hit that $40 by. So you do think that, I mean, look, if I had $100 million in line, it certainly incentivized me. But you do think that $100, that pay out, especially as you kind of clean up in Q1, Q2, as you get towards the end of year, 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 repurchase, is really trying to drive this home or potentially exploring a sale?

You do think that could be a catalyst. I don't think that the sales out of the 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 stories is complicated and 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 know, about this, you know, and all the bulls talking about that, you know, maybe you'll hear

some rumors in September whether or not that'll be if, whether or not that it drives him to do something extraordinary like a sale. I don't know. If the board does make a change to this, I would hope that, you know, two things happen, that if it gets extended, that the, that the strike price goes up. So it's not 40 anymore. And I think it's, If the board extended it in the other tiers and they made it 60 or something, something higher, then, you know, I think that's fair to shareholders. You know, I think that it would be, I think it would be very, I think it would be looked at negatively by some shareholders if the $40 strike price stayed the same. And he pushed it pushed it out a couple of years. Yeah, that's the classic.

I mean, it's tough because you want to get, you've got to incentivize your top talent who's running literally billions of dollars to say. That's the classic heads I win, tails I don't lose, where, hey, we put a five-year, $40 target, you didn't hit it. So we just give you another five-year, $40 target. Shareholders languish, you still have a shot to make $100 million. But he's got massive incentive with respect to the carried interest that he set to realize if they raise capital and make good investments and harvest good returns. And so he's probably incentivized.

It would be nice to see, you know, to your point that these other are, are, you know, 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 do to realize some more, you know, as they deconsolidate data bank and advantage SCC. 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 for taxes and we throw 10 of it into the stock at these levels because we're really convicted. 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, look, this is a story. I think we've done a nice job of simplifying it down, laying out the value 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? No, I think we covered it pretty well. I mean, it's a, if they hit their fundraising goals, the earnings are going to increase at a massive Kager. And, you know, there's going to be a lot of value there. In the meantime,

time, you're buying it very close to runoff 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 happening to share. Perfect. Perfect. That's a great place to wrap it up, Chad. And again, Avin Maria Focus Fund. We can go look it up. There's some other interesting names in there. So, Chad, looking forward to having you on to talk about one of the other 16 holdings in your portfolio in the near future. Yeah, yeah, we can do a we can do eDreams next or something or something. I've done a lot of work over in the European travel sector. Yeah, well, we'll save that for next time. But Chad Garcia, thanks so much for coming on and we will chat

soon. Great.