And Then There Was One: How Vantage Outpaced NGD

Silicon Valley and Europe got to see which was best at nurturing high-tech startups after two sets of entrepreneurs launched similar data center companies with similar business models at a similar time. They got similar lucky breaks and a chance to make it in an industry that was just about to go bigtime.

Ten years later, the Silicon Valley firm, now a massive international business, has bought the European firm. The latter had grown a little, but barely enough to fulfil the claim it made when it launched about 10 years ago, that it was the biggest data center in Europe.

On paper, chance looked to have favored in equal measure both firms: Vantage Data Centers, which started in Silicon Valley, and Next Generation Data (NGD), an offshoot of the London tech industry that set up at the other end of the M4 motorway connecting it to South Wales.

Data centers being big industrial facilities that cost big money, both firms got a head start by buying ready-made buildings. They had the same strategy as well, to sell wholesale portions of data center space to global internet service firms just as the cloud computing business was turning into the data-driven phenomenon it is today. Both planned to raise the millions of dollars in growth capital they would need to house the immense computing facilities the cloud giants needed – amounts typically unimaginable to firms that had come out of nowhere.

Both did come out of nowhere. But 10 years later, Vantage has raised $2 billion to fund an international expansion that has already seen it build or buy some 12 data center buildings in 10 or so countries on four continents, with its continuously sprouting construction projects numbering about 20 at last count.

NGD meanwhile amassed a mere £180 million ($145m) in debt to equip the vast building it acquired in Newport, a city in South Wales that aspires to be like Silicon Valley. By the last reliable measure, NGD took 10 years to fill about a third of the capacity it acquired, according to its financial records and public statements.

Related:Colony to Buy Digital Bridge, Owner of DataBank, Vantage, for $325M

The Silicon Valley Advantage

Both firms started out with the same advantages. But each advantage was magnified in Silicon Valley.

Silicon Valley had a stronger tech market than London and its offshoots in Southern England and Wales. It had more innovative and enterprising financial services than London – and a lot more money too. It also had more people with experience building massive data center firms who seemed determined the make their business global.

Vantage's head start was more substantial as well. It bought an operating data center in 2010 from Intel, the very computer chip firm Silicon Valley owes its name to. The facility was in Santa Clara, the region's heart, and home to much of its data center capacity.

NGD's building was also ready-made for heavy tech industry, but it wasn't operational when the firm acquired it in 2008. It was not ready-made to be a data center. It had been a computer-screen manufacturing plant in the past but sat empty for 10 years since the Asian economic crash dented the ambitions of its builder, the Korean electronics giant LG. The Welsh government repossessed it to reclaim some of the £130 million it put into developing the site in the mid-90s. NGD leased the shell and the following year sublet its first portion of data center space to the former state telecoms firm BT. It started operating in 2010, just as Vantage took over Intel's operating site.

NGD got an ambitious £200 million ($380 million) credit line to finance such deals, from RBS Lombard, an old British industrial asset financier. But things changed in 2010.

The price for data center space in London was at a high of €225 per kilowatt per month (worth then about $300). But it plummeted, and kept falling, until it hit €145 (then about $160), where it has been ever since, according to market research by the commercial real estate agent JLL. Data center firms meanwhile built vigorously, while London's demand for their space lagged, according to market research by CBRE, a commercial real estate giant who’s also a major data center operator.

NGD set up in Newport to steal business from London with cheap rates and its canny, cut-price industrial conversion. London land and builds were costly, space was tight, and optimism was high. But a lot of London data center space sat empty in the years that followed. Brexit hit business as well, according to some international operators. Data centers had more vacant space in London in 2018 than they had for a decade. In 2019, a third of the space sat unused. CBRE said cloud computing companies, whose custom brought astounding growth to the data center industry in the last five years, had bought all the space they needed.

NGD Nets a Hyperscaler

NGD let space to prominent IT servicers IBM and Wipro in its first five years and to the telecommunications firm Alcatel. Then, in 2015, it landed a contract with Microsoft, one of those coveted cloud giants, and its business boomed. From NGD's public accounts, Microsoft seems to have driven most of the Newport firm's subsequent growth. NGD spent so heavily that it amassed nearly £200 million in debt to equip its data center space and to get its leasehold – assets that amounted to only £136 million by the end of 2018, the last year for which it has published financial statements

It was geared for growth then. Its customers were operating enough computing to draw 32 megawatts  of power, putting it in the world league of big data centers. Still, it was operating only 17 percent of the 180MW capacity upon which it based its claim of being Europe's biggest.

NGD says now it has 72MW equipped for use and ready for sale – 40 percent of capacity. But it won’t say how much of that is operating. Its debt grew more than 30 times since its first big customers started operating in 2013, as it equipped the site for their use. Its data center assets grew only tenfold. Its sales grew barely fourfold.

Capital Velocity

Then the coronavirus pandemic happened. And on 7 April, before the threat of unprecedented economic recession had become widely apparent, and after the value of the British pound, and British assets, had fallen to their lowest point in 35 years, NGD said it had been bought by Vantage.

Vantage had set off in 2010 with an Intel data center that was already operating at 6MW, with backing from Silver Lake, then a $14 billion fund behind famous big-tech brands, and with deep industry roots.

Silicon Valley was a boom town for data centers. Prices there were higher than anywhere in the US, and they held for the next decade. Demand was so high that data center space was bought as fast as operators could build it. They had about 5 percent of free space for most of the decade, and most new builds were preleased before construction finished, according to CBRE.

Within two years Vantage had built 21MW and raised $210 million from a consortium of five banks. As NGD took loans of £4 million to serve its first big customer contracts in 2013, Vantage refinanced to $275 million with eight banks. In 2016 NGD was acquired for £70 million by InfraVia, a €4.4 billion European investment fund with shares in transport, energy infrastructure, and nursing homes. InfraVia loaned NGD £60 million for it big expansion. Vantage meanwhile refinanced to $570 million with 12 banks. The following year a consortium of investment funds worth nearly $1 trillion acquired Vantage. The US operator declared it would now invest $1 billion to expand its data center footprint.

Driving Vantage's extraordinary growth was a team of Silicon Valley executives with long experience in data centers. Founder Jim Trout had been senior VP at Digital Realty Trust, the world’s second-largest data center operator by revenue. Its chairman, Hank Northhaft, was a renowned tech exec who built America’s first fiber backbone network, invented the app store, and was non-executive chair of SPTS Technologies, a silicon wafer firm in Newport's aspiring Silicon cluster, near NGD. Then there were Sureel Choksi, with 15 years in data centers and origins in investment banking; Greg Vernon, with 13 years in data centers; David Renner, with 13 years as a chief tech finance officer; Steve Lim, a former marketing director at data center giant Equinix; Joe Goldsmith, with 9 years at Digital Realty; the list goes on. NGD's core team of three enterprising directors by comparison had previously run a trading hub that helped Europe's telecoms market operate when it was liberalized in the 1990s.

Securitizing Data Center Leases

Vantage took a radical turn after building its management team in 2018. As the public accounts of NGD show, it costs big money to equip a data center, let alone build another one. Vantage had a maverick way to go about it, while NGD's accounts show how the business usually works.

NGD mortgaged its customer contracts to raise money it needed to prepare its site to house their computer systems. It would then skim a profit off the income after making its mortgage payments and investing what it could in other facilities. It had got a reasonable lump of growth capital from InfraVia, but it came with 10 percent interest. It had got its bank loans at rates between about 4 and 6 percent.

Vantage had grown similarly: mortgages, customer leases, banks loans, and backers. The sums were bigger, but its leases could only be mortgaged for so much, and its balance sheet could carry only so many loans. So, it bundled them up and sold them as shares on the capital markets. It raised $1.125 billion this way in 2018, paying off its loans and turning contracted customer payments for the next 20 years into a single lump sum it could use to build new data centers today. A year later, after two more securitizations, it had raised $1.8 billion. It used the proceeds to buy the Canadian data center firm 4Degrees and Etix, another InfraVia-held European operator. In January it said it had retaken loans worth $2 billion to build in European cities.

InfraVia did not respond to requests for comment. The big question is why InfraVia has resigned from the data center business so soon after getting into it. And why it has not used its investment expertise to help securitize NGD's debt and assets to fund its own expansion, perhaps into other European markets not as weakened as London.

But securitization has been a dirty word in Europe since the 2008 financial crash from which both Vantage and NGD emerged. It was the means by which the crash came about: "sub-prime" mortgage debt resold as good assets to bamboozled investors.

Europe had produced €400 billion of securitizations before the crash in 2007, according to the Association for Financial Markets in Europe, and only €25bn in 2009. Its issues have hovered around $100 billion ever since. EU regulators have been enacting standards to remove the stigma and revive the market. US issues rebounded quickly to pre-crash levels.

InfraVia had meanwhile made notable investments in NGD and other data centers in Europe and had written manifesto statements about the importance of digital infrastructure and its potential to make money for long-term investors – only then to back out almost entirely after four years. Brexit, currency fluctuations, and coronavirus intervened. But Vantage did too.