KKR sets aside $1bn to muscle in on European data centre market

US investment firm KKR has outlined vague plans to fuel growth in the European data centre market with $1 billion for a build-to-suit and roll-up acquisition data centre platform.

While it is difficult to translate the overly enthusiastic PR and marketing language which dominates the press release, it does appear to be an effort to build more data centres in the European region.

“The data centre market in Europe presents a unique opportunity to invest behind the secular trend of increased cloud services adoption and demand for data,” said Waldemar Szlezak, MD of KKR.

The new company, which will be known as Global Technical Realty (GTR), will operate in two ways. First, a build-to-suit programme for the major cloud players. This segment will presumably have an anchor tenant dictating the location, before selling services on to additional cloud players.

Secondly, the team plan to execute a ‘roll-up’ acquisition strategy, a particularly effective business model when economies are facing tough trading conditions. This is a simple, albeit slightly predatory strategy, effectively identifying distressed assets for acquisition, before merging together in a single operation to benefit from scale.

“We are thrilled to have found an investor like KKR that shares our vision for the future of the data centre market,” said GTR CEO and founder Franek Sodzawiczny.

“KKR’s breadth of resources and tremendous expertise will allow GTR to fully participate in this growing market and provide a solid foundation for GTR’s future growth and success.”

Ultimately, KKR and GTR are attempting to capitalise on momentum towards the cloud. The major cloud players have their own data centre footprint of course, which is rapidly expanding, but there is only so much which can be done alone. The built-to-suit programme releases some of the risk associated with data centre investment, while the roll-up acquisition strategy is a quick win for a cash-rich company looking to muscle in on cloud momentum and create an immediate presence.

Today, trends are only heading in one direction. With more companies digitising business processes and workloads, the cloud computing segment is certainly benefiting from societal lockdowns and enforced digital transformation programmes. The big question is how many of these programmes will be returned as the world returns to some semblance of normality.

When we asked Telecoms.com readers how many thought their employers would retain remote working practices 50% said they would have to check into the office once or twice a week and 34% believed they would given the option to work as they please.

It does appear the enforced remote working dynamic has some sustainability in the long run, perhaps kick-starting a wider transformation programme. Nicholas McQuire, SVP and Head of Enterprise Research at CCS Insight told us there has been resistance to the cloud from traditional companies in the past, though once started it should provide a catalyst for greater things.

Aside from these very immediate and unusual drivers for cloud, trends have of course been gradually heading towards a more digitised and distributed world. Netflix, as an example, is very interested in caching as much content in edge data centres, to improve experience for customers, while cloud gaming could also provide greater demand for data centres.

Not only is the world become more digitised, super data centres will have to be supplemented by additional infrastructure to create a distributed cloud. This is an important element to reduce latency and remove choke points when attempting to improve customer experience.

The world is only heading in one direction though the pace of change is unknown for the moment. COVID-19 might have acted as an accelerator for digital transformation, and while this might only be temporary, this is an excellent time for KKR to be throwing money at data centre infrastructure.

VC money continues to flow into European fixed networks

KKR is the latest investment firm to pump cash into European telecoms infrastructure, and with traditional investments on wobbly ground, the trend is set to continue.

While it not 100% finalised just yet, Telecom Italia (TIM) has entered into a non-binding agreement to be a partner is the rollout of a fibre-based network in Italy. While Italy has proven to be a stifled market for broadband in recent months, the Italian Government is attempted to force TIM and Open Fiber into partnership to reduce network overbuild, this deal is another example of the telco industry coming back into vogue for the investment community.

For years, the telecommunications industry was largely ignored by the financial heavyweights. According to Ronan Kelly, CTO of Adtran, this distaste for telco was largely driven by returns. Telco investments were offering investors 4-5% returns annually, but when there are options to get 7% or more through government bonds or other means, why would anyone consider pumping cash into a telco.

That said, the tables are certainly turning. Government bonds are barely offering anything in return, and in some cases are turning negative interest rates back onto investors, while the aggressive political climate is making it very difficult to figure out which companies are a good bet. All of a sudden, the 4-5% return many were turning their noses up at are starting to look attractive.

There are of course another couple of factors to consider here. Firstly, the telcos are under financial pressure thanks to decreasing profitability and demands to invest significantly in both 5G and fibre networks. The equation isn’t balanced, and it has the telcos scrambling to source cash. This presents a financially attractive opportunity for the crafty investor.

Secondly, Kelly highlighted the way in which these deals are now being structured makes investment a more compelling case. Some telcos are going through the process of structurally separating the retail business from the infrastructure assets, meaning investments can be attracted to the infrastructure without having to worry about the performance of the retail business.

Considering how cut-throat and price sensitive the retail markets are becoming, the structural separation protects investments in the network if the retail business fails. Investors, who are after long-term returns not a quick buck which a retail environment can offer, will like this strategy.

With fixed infrastructure investments coming back into fashion, money is starting to flow into the pockets of the telcos. Goldman Sachs spent $750 million to purchase CityFibre in the UK, though this followed $2.5 billion which had already been invested in the infrastructure firm by Goldman. Alt-net HyperOptic always seems to be able to attract additional investment, while Brookfield Infrastructure seems to have an almost endless back account to fire funds into various telco and infrastructure companies.

Interestingly enough, an interesting consequence of this trend is the dilution of influence the telcos have on their own industry.

Investment companies are buying controlling stakes in fixed networks, while tower companies are purchasing the passive assets from MNOs who are desperate for cash. Elsewhere, companies like Vodafone and Telefonica are structurally separating towers assets into another business unit in preparation to a potential IPO. In each of these examples, the telcos are handing away influence and control of the industry in the pursuit of investment.

While fragmentation of influence in the telco industry would be considered a significant negative to the telcos and lobby organisations such as the GSMA, there is seemingly little choice in the matter. This is an industry which needs money, and it might have to carve out more than a pound of flesh to fund the big connectivity dreams.