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August 25, 2014

Venture Firm M/C Partners Likes Fiber Service Providers



By Peter Bernstein
Senior Editor



There is a term in the broadly defined financial services industry that if you really want to know what is going on and where to invest it is always a good idea to follow the “Smart Money.” And, when it comes to having a track record for investing in the telecommunications industry, few venture capital firms can rival the smarts of Boston-based M/C Partners

As a review of their fiber and other telecom investments over the years has demonstrated, the firm looked at the impacts of the Telecommunications Deregulation Act of 1996, and saw opportunity in alternative carriers. In fact, they have gotten significant returns for their investors placing wise early investments in such companies as Metro PCS and Level3, as well as CLECs.  M/C has managed over $1.5 billion of institutional capital, generating returns in the top quartile for venture capital funds, and is currently investing M/C Fund VI, a $550 million growth equity fund raised in 2006 from the nation's largest state and corporate pension funds, prominent university endowments, private trusts, and strategic financial institutions. Making sure they have enough fiber still remains an important part of their diet.

While many would say, given whom the competition was/is and all of the challenges of building out fiber networks in the U.S., that the firm has been fearless in its belief in the value of CLECs. It is fearlessness that despite the disbelievers has been validated. This includes investments that were increased during the worst of times of the recent recession which have positioned the investments company as holding a big share of the fiber market in places the big guys have not and may not go.

The long introduction is context for a recent discussion I had with Managing Partner Gillis Cashman about why his firm continues to be bullish about the U.S. fiber market, and is willing to (pardon the pun) venture where other firms seem unwilling to tread.

The answer at a high level as to why M/C Partners remains focused on such investments was, “We know how to do this and get it right. Whether it is buying distressed assets or healthy ones and combining them, we have the focus, experience and success in the construction, restructuring and consolidation of broadband assets to address market conditions and maximize asset profitability and shareholder value,” Cashman explained.

“We think about our businesses by looking at short-term trends and longer-term opportunities. On the technology side there has been a lot of disruption that will continue whereas on communications services side things are much long-term,” he noted.

“What is interesting is that the music stopped after the crash, and in many locales the last mile did not get built.  There has been for all the reasons we all know a massive surge in power at edge of the network in computing power. Now edge is way ahead of the network. Infrastructure is being stressed or not in place. In fact, the great opportunity for investing in alternative fiber providers is that 60 percent of buildings with 20 or more employees are still connected with copper. This is going to rise to 50 percent in the next few years because of demand. This will be particularly true in smaller cities where local focus and density of connections will be critical for serving data centers and the enterprises in close proximity. It is why we remain very excited about investments and the entire space.”  

In fact, it is not just fiber alone that is attractive for M/C but includes the users of that fiber. Their latest investment of $50 million in data center services company Involta, which also targets those smaller markets is thus a complementary bet that makes sense given what the firm sees as customer concerns about application performance and the need to be physically close to a data center. In short, distance does not make the heart grow fonder. 

I asked Cashman about the trajectory of the industry build-out in terms of extending fiber to most residences and businesses in U.S. communities. He said that what he and his partners see is very akin to how both the cable and wireless networks have been deployed over time, i.e., they think for a host of reasons we are looking in many areas at a 7 to 25 year upgrade. 

Cashman made the following point which is worth considering. He explained that: “There is a big misconception that the big guys will build it and scale and squash little guys. Reality is it is far more efficient to buy from dense local network provider than build it.  We have a great dark fiber business of instance and go where the larger companies are not going, or certainly are not going quickly based on other investments they want to or need to make.  The needs in particular in Tier2 and smaller markets are not being addressed, and we have some great customers who are see no need to build in these markets when we are present.”

He concluded by citing the fact that recent studies have shown time spent online v. TV is still only 7 percent. This is going to change and as TVs go from 1080P HD to 4k to 8K. It is going to drive the need for a lot more bandwidth with quality of service controls to assure service quality and application performance.  That means in his view that local density and scale are key. It is why M/C Partners really like the fiber business and continues to look for investment opportunities. 




Edited by Maurice Nagle
 
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