While the end of summer typically marks a slow time in private equity, we at Ridgemont Equity Partners have been quite busy in the off-season, especially in the telecommunications sector.
Our group just finalised a spin-out from Bank of America at the end of July, and we have since announced an agreement to sell a portfolio company, Fibertech, to Court Square Partners; the merger of our portfolio company, Veroxity, into Lightower, a larger industry competitor; and an agreement to make a majority investment in Unite Private Networks (UPN) alongside its management team. UPN builds and operates high-bandwidth, fiber-optic data networks across 12 states in the Midwestern US for schools, government, carriers and enterprises.
The end of summer also marks the beginning of (American) football season and fantasy football drafts for fans everywhere. We’d like to take this opportunity to highlight the similarities between a good fantasy football team and a good private equity investment. Ridgemont has agreed to select UPN for our new portfolio (our fantasy team, if you will).
The universe of football players, as well as private investment opportunities, can seem limitless. The key is to field a team that has good downside protection but also has strong upside potential – players that have a demonstrated track record of success, have low risk of injury and play for excellent coaches in high-scoring offenses. When we began evaluating UPN’s business earlier this year, we recognized some of the same characteristics in this company.
The sector provides good downside protection because of the long-term, recurring nature of its contracts with customers, and high switching costs as the networks are involved in mission-critical applications for the customers. Network construction, though capital-intensive at the outset, is done on a “success” basis, and once networks are built they provide a solid barrier to competitive entry.
The sector also provides plenty of upside: bandwidth demand continues to increase at double-digit rates, and the fixed-cost nature of ongoing network management provides good operating leverage on future customer adoption – a “high-scoring offense” indeed.
The management team at UPN serves as an excellent “coaching staff” for the business – they serve their customers well, deliver networks on time and on budget and make the right calls on deploying capital efficiently. Lastly, the fiber sector has only one public company Abovenet (NYSE:ABVT), which we think is underappreciated by the broader market and we feel there is valuation upside as the broader market begins to recognize the sector’s attractive fundamentals. Think playoffs.
We prefer growth stories (Green Bay Packers) to turnarounds (St. Louis Rams) and employ leverage judiciously. The private markets are competitive, so we are constantly scouting our core verticals for underappreciated or hidden investment opportunities (like that rookie running back from San Diego).
And after our spin-out from Bank of America, we’re not sitting on the sidelines – we’re continuing to search for the next UPN, and actively investing while we begin to raise our first independent fund with outside LPs.
George Morgan is a partner and Kurt Leedy is a vice president with Ridgemont Equity Partners.