Description

We first wrote up DigitalBridge in November 2020, back when it was Colony Capital (CLNY).  While now dated, the writeup contains a detailed overview of the company, history, and its transformation process under CEO Marc Ganzi.  DigitalBridge held an investor day in June 2021 which is worth reviewing, as well as the latest Corporate Overview IR presentation (October 2022).  Please note that since then, there has been a 4:1 reverse stock split and the company has dropped its REIT status as it moved to become a pure play alternative asset manager focused exclusively on the digital infrastructure space (cell towers, datacenters, small cells, fiber).

DigitalBridge officially changed its name in June 2021 and has largely completed its transformation into a digital infrastructure investment firm.  Nearly all legacy assets have been sold off (save for a few OED assets and their remaining equity stake in CLNC).  Tom Barrack (Colony Founder) and nearly all legacy board directors are gone. 

The stock roughly doubled from the time of our first writeup, but has given it all back since reaching a 52-week high of $34 the end of last year.  Rising rates have impacted the broader fundraising environment as well as multiples in the alternative asset manager and digital infrastructure spaces.  And since DBRG is still in transition, it is expecting a significant step up in earnings in 2023 following the launch of several new funds, including its third flagship fund (DBP III).  In our view, the market is now pricing in zero success in fundraising and zero credit towards carried interest.  The stock has reached an incredibly dislocated level, which we believe can rapidly correct upon the announcement of successful new fund launches.  The company cannot discuss its fundraising efforts publicly until it chooses to announce a first or final close.  As such, public shareholders are essentially left in a holding pattern simply waiting to hear of a big announcement.  And once this happens, we believe DBRG shares can roughly triple from current levels.

For a number of reasons, we believe DBRG will be successful in raising its new funds and meeting/exceeding its fundraising targets implied in their 2023 guidance:

• The CEO and other insiders started buying stock recently – the first insider trading we’ve seen since he took the helm
• The company is on track to exceed its fundraising goals for 2022 and plan to finalize the launch of their new Core and Credit funds in Q4’22
• DBP II is fully deployed – they need to raise DBP III ASAP and that process likely kicked off earlier this year once DBP II reached ~70-80% deployed (it is now 90% deployed – and this means DigitalBridge won’t be able to acquire more platform assets for its portfolio without the next fund or co-investment capital)
• DigitalBridge has the unique opportunity to not only buy, but build – instead of needing to find scaled companies to purchase, they can simply deploy more capital into existing portfolio companies that can build more towers, datacenters, etc. from the ground up – this activity in 2022 is nearly $8 billion of capital investment into projects on five continents

As such, the opportunity to deploy capital into digital infrastructure is both enormous and secular – we do not believe DBRG’s fundraising efforts will be weighed down with the rest of the private equity industry.  DBRG is the fastest growing alternative asset manager out there, and we do not expect that to change anytime soon.  And across the industry, infrastructure has been a key growth engine for alternative asset managers – simply listen to KKR, Blackstone, etc., they are all raising significant capital for infrastructure investments.

Here is the high-level math on why we believe DBRG has been oversold and can roughly triple from here (page numbers reference DBRG’s latest corporate overview presentation):

• There are two segments: Digital Investment Management (IM) and Digital Operating (DO)
• Digital IM is the main focus – this is an alt. asset manager that has raised PE, credit, etc. funds to invest in digital infrastructure
  • Typical mgmt. fee / performance fee business model
• DO is essentially 2 datacenter companies they own directly on their balance sheet
  • DBRG is selling off their stake in one of the companies, Databank, to LPs that are moving their ownership into a DBRG managed vehicle that will generate fee income for the company
  • Based on the CEO’s recent commentary, once that process is fully done, they will likely do something similar for the other datacenter company, Vantage SDC
  • Once this process is complete, DO will cease to exist and they’ll become a pure play IM company which should simplify the story
• For now, the right framework is SOTP of the two segments plus leftover items on the balance sheet – see pg 25 of company presentation
• Digital IM value
  • Digital IM 2023E FRE guidance is $175-195mm
  • This is conservative as fee-earning equity under management (FEEUM) is guided to $38bn midpoint next year, up from ~$25bn this year
  • The main FEEUM jump will be the four new funds they’re about to launch: DBP III (third flagship PE fund) which should be $10-14bn, and new Credit, Core and Ventures funds (appear to have already launched per mgmt. commentary, yet to be publicly announced)
  • Assuming blended mgmt. fee of 90bps (they’re at 1% across the platform now), this would imply ~$222mm FRE on $38bn FEEUM and assuming 65% FRE margin, well above their guidance
  • Incremental FRE margin is ~70% and the segment is already close to 65%
  • Using EV / FRE of 22x = $4.9bn value
  • If they maintain 1% blended mgmt. fee and not witness dilution to 90bps, then FRE should be $240mm+
• DO value
  • See pg 21 - $1.1bn is a decent proxy
• Digital IM – carried interest value
  • Our own estimate values this at $1bn+, but questionable whether the public markets will ever give them (or any alt. asset manager) credit for carried interest
• Rest of balance sheet / net debt
  • See pg 26 – this basically nets out to zero
• FDS ~190mm shares
• Digital IM of $4.9bn + DO of $1.1bn = $6bn value / 190mm = ~$32 stock price (excluding carried interest value) vs. $13 today
  • Carried interest on top is another ~$5/share
• Doing the same math a couple years out on 2025E figures will get you to the $45-50+ range

Most importantly, CEO Marc Ganzi will receive a $100mm payout if the stock reached $40 by mid-2024.  The man is motivated, and the big earnings driver will be the launch of DBP III sometime in 2023. 

However, if the stock is nowhere near $40 by the end of next year, we believe DigitalBridge should consider selling itself to a large alternative asset management platform – Blackstone (BX), KKR, Brookfield Asset Management (BAM), EQT, and Macquarie (MQG) are all large enough buyers and should be interested in this unique industry specialist.  There are significant revenue (capital raising) and cost synergies (G&A) in asset management M&A.  Plus, one of these acquirers should finally give DBRG credit for its carried interest in case the public markets does not.

Catalyst

• Raise DBPIII new flagship fund (expected $10B to $14B fund) 2023
• Continued buybacks with excess cashflow
• Continue to pure-play Digital IM platform - will simplify story
• Sell to a larger alternative asset management platform – Blackstone (BX), KKR, Brookfield Asset Management (BAM), EQT, and Macquarie (MQG) are all large enough buyers and should be interested in this unique industry specialist