DCK Investor Edge: Blackstone and QTS – Why Intellectual Property Matters

The Blackstone Group (BX) is the largest alternative asset manager in the world with $881 billion of assets under management. Blackstone funds paid about $10 billion, including debt, to acquire data center giant QTS Realty (QTS) at the end of 2021.

In addition to a solid portfolio of data center assets, powered shells, and land, Blackstone picked up a strong management team, and significant intellectual property as part of the QTS Service Delivery Platform, or SDP. This deal was announced the first week of June 2021 and closed at the end of August, much faster than most $10 billion M&A deals.

QTS was taken private for a premium of 20 percent over its June 2021 publicly traded valuation. That contributed to the rapid approval of QTS shareholders, and speedy conclusion of the deal. However, the sheer scale of Blackstone's real estate operations, and a business model that always has "dry powder" available for acquisitions, is the not-so-secret sauce.

Blackstone Q4'21 earnings presentation

When Blackstone reported last year’s results on Jan 27, 2022, the company had a total of $135.8 billion of dry powder, with $37.2 billion earmarked for real estate deals.

To find out more about the SDP, and the role the business played in the transaction, Data Center Knowledge sat down with Brent Bensten, chief technology officer at QTS, and John Fitzpatrick, senior managing director and CTO of alternative asset management technology at Blackstone. Fitzpatrick handles all aspects of technology across Blackstone’s real estate and private equity businesses, and assists portfolio companies with managing their technology programs and strategy. He is also involved in the firm’s balance sheet investments.

Related:Blackstone’s $10B Deal to Buy Data Center Giant QTS: The Context

SDP platform value proposition

Here is a quick overview of the SDP platform. The QTS Realty SDP Engine does three things, in real-time or on-demand:

Bensten told us that the premise for SDP is “about how do we get customers closer to their data? How do we make it smarter for them? How do we make the data more operationally efficient? Large enterprises demand data transparency which is at the core of SDP’s value proposition and reflected in SDP’s 100% customer adoption."

The unique SDP architecture allows the QTS design team to add features in a matter of weeks, not months or years.

Related:DCK Investor Edge: Understanding the Changing Landscape for Data Center Investors

Fitzpatrick added, "Blackstone has monitored the development and advancement of SDP for several years. Over time, it became clear that customers were becoming very motivated by the ability to make data-driven decisions. SDP makes data 'actionable' by applying advanced technologies, such as artificial intelligence and machine learning, to enable intelligent, data-driven decisions that we believe is a massive differentiator in the industry."

Blackstone’s long view on QTS

We asked Fitzpatrick about the importance of SDP in the QTS acquisition. He told us: "QTS has a strategic real estate portfolio, world-class management team, industry-leading customer service, and technology leadership exemplified in SDP, and we were excited to acquire the company through our long-term perpetual capital vehicles.

“Now, as part of the Blackstone ecosystem, we expect QTS to grow even faster with increased access to capital, technology investment, cross-selling to portfolio companies, procurement support and talent recruitment, backed by our long-term commitment."

The clarification that the QTS data center platform is part of the long-term perpetual capital side of the ledger is an important distinction. Blackstone also has shorter-term "draw down funds," which are sometimes referred to as "buy it, fix it, sell it" funds.

Investor Edge

Data center developers and operators, both privately held and publicly traded, will be dealing with QTS "on steroids," as Blackstone has virtually unlimited access to capital for expansions, acquisitions, and "bolt-on" deals when they make sense after close examination and underwriting. And Blackstone's A+ credit rating and sheer size makes QTS Realty a more attractive counterparty when competing for hyperscale deals across the globe.

There are two important takeaways for investors:

All things being equal, the QTS Service Delivery intellectual property (IP) did make a difference, and I expect that trend to continue – and likely it will accelerate over time.