Marcos Torres
Hello and welcome to Strategic Alternatives, the RBC Capital Markets podcast, where we uncover new ways to raise capital, drive growth and create value, in an ever-changing world.
Marcos Torres
I'm your host, Marcos Torres, I run our Global Media, Communications and Entertainment Business within the Investment Bank. Today, we are exploring the forces reshaping digital infrastructure, from data centers to fiber to AI workloads to energy transition, and how they are transforming the way that these projects are financed, structured and scaled. To break it all down, I'm joined by Chip Wadsworth, Head of our Technology, Media, Telecom, Equity Capital Markets Business, and Nanda Kamat, Global Head of Project Finance at RBC. Great to have you both with us today.
Chip Wadsworth
Great to be here.
Marcos Torres
On the on the digital infrastructure side, what is driving the digital infrastructure growth, and how are the trends shaping credit assessment and financing structures? Maybe you go first, Chip.
Chip Wadsworth
So, look, AI – Artificial Intelligence – is a very simple answer, but it's also hard to argue with the answer. If you kind of look at all of the news that's been out there over the course of the last kind of year or two, especially since OpenAI stepped into the public domain, that has been one of the core forces that we've all been focused on. So, Hyperscalers and the capex that they are spending, and this is entities like Google and Meta and Oracle, even Microsoft, which has kind of stated that they're pulling back a little bit. The amount of capex they're putting into the marketplace for training and inferencing of their models. It's hundreds of billions of dollars, and it's near-term, right? This is in the next year to two years they're deploying that capital. I think on top of that, you see interesting JVs, like Stargate, which is this entity that's being put up between South Bank, OpenAI and Oracle. Even an entity like Deep Seek, which cuts against the grain of this very large amount of capex that's going to be spent, right? It's a Chinese-based open source AI model, that really has kind of turned the discussion around how much capex is needed on its head. Those forces combined, I think, are really driving a lot of the conversation. Now, saying that I also think the other piece to it is, you can't sleep on the cloud, right? The cloud has been an incredibly important backbone to the digital infrastructure space. And you kind of dial back 20 years ago, when Salesforce first went public, it has only continued to become that much more important. So, you put those two factors together, and I think those are the elements that have really driven at least where we stand today and what’s going to happen over the course next 12 to 24 months.
Marcos Torres
Thank you, Chip. Yeah, it's all moving so fast. Nanda, what are your thoughts on it, especially as it relates to just the financing side of it?
Nanda Kamat
Yeah, I know, all of the trends that Chip talked about are really driving huge capex spend and the need for financing. Data centers, I think historically, were financed in the real estate market, but that financing has moved primarily now to the project finance market, because of the long-term contracted cash flow with very high-quality tenants. And so, we're seeing that as long as you have a lease that has, at least, I would say, a 10-year initial term, you can project finance those things now. There's obviously other financing sources as well that we can talk about, but that's the biggest trend that we're seeing.
Marcos Torres
Yeah, it's incredibly complicated and obviously super quickly evolving sector, digital infrastructure. Chip, look, there's been a ton of volatility, right? Tariffs and just earnings and all the volatility in the equity capital markets today. How is that impacting digital infrastructure and data center clients in your view?
Chip Wadsworth
It's unfortunate, that’s for sure, right? 2025 was going to be the year of the data center IPO. I think if you look at our backlog, there are at least five, six, up to seven companies, both U.S. and non U.S., that could go public this year. And I think the volatility that's out there has really changed the conversation with those folks, right? When you have a VIX, which is a gage of volatility in the public markets that's in and around 21, 22, as we stand today. That typically means that the IPO market is open, but it's going to be price sensitive, and our dialog with those potential issuers is, given the fact that there's going to be price sensitivity, they have pivoted back towards other markets. So, whether it's the ABS market or even coming to RBC to use our balance sheet or going to Nanda to talk about project finance, there are a whole bunch of other different pools of capital that these entities can tap into that have prevented them from or at least slowed their path to being in the public markets. That doesn't mean they're not going to get there, but it just means at least right now, when that VIX is kind of in the 20s or so zip code, it's going to be a bit before they take that next step.
Marcos Torres
Yeah, that's a good segue. Your point about the investors and clients accessing other capital pools. From a project finance perspective, Nanda, how do you look at this in terms of what investors are looking for, how they're thinking about it, and, more importantly, how is sentiment shifting given the volatility?
Nanda Kamat
Yeah, so, I think the good news about the project finance market is it tends to be less volatile than definitely the equity market, and even the leverage finance market. So, I think the market is largely open, but obviously there's been quite an increase in base rates over the last few years. And I think, definitely clients are thinking about what their refinancing options are. So recently, we had a client who, rather than go to the ABS market, which they feel is expensive right now, did a securitization warehouse with RBC for their stabilized assets. And so, it's really driving, I think, sponsors, to look at all of the sources of capital available to them, and make real-time decisions around which market is going to offer the best execution and the best price.
Marcos Torres
RBC is deploying a significant amount of balance sheet capital into the sector. We've got, across the board, $125 billion capital in the U.S., and of that, about $15+ billion is in the CME sector, which includes digital infrastructure. And that is the highest growing part of that loan book. And so a lot of capital is going there. They're looking for alternative ways, in volatility, they're looking for alternative ways to continue to finance this, because the demand is there and they're going to grow these platforms. And so that's important. Obviously, geopolitical dynamics are influencing cash flows and risk assessment. When people are thinking through what platforms they finance and certain geographies, that's becoming incredibly more complicated than it used to be. And obviously the M&A landscape continues to evolve, when you think about consolidation and strategic repositioning as we go forward. Major, major factors shaping financing strategies and outcome, right? What do we build next? How do we finance what we build next? So, RBC, is there doing a lot from our own balance sheet? Maybe Nanda, you can talk through your perspectives around just again, capital stack decisions, and then we'll get Chip’s thoughts on it as well.
Nanda Kamat
I think what we're seeing is a variety of different financing tools that that sponsors are using. I focus on project finance, which I think is best for single-asset or even multi-asset, green-field financings, right? Another tool that we're seeing is DEVCOs, a lot of sponsors like DEVCOs, because it gives them the optionality to put a financing in place, and then just move assets in and out of it. So, it's a pretty flexible tool. For stabilized assets, the securitization market – it offers a good refinancing home for those assets.
Chip Wadsworth
Yeah, what's interesting, I think, about the lack of IPO product flow is a couple things. First of all, it isn't a demand issue, right? Our view is, we've spent a lot of time with public investors in and around the topic of data center entities going public, and there is a significant amount of demand on the sidelines waiting for those assets to make it into the marketplace. So, it's not a demand issue. It's really, in many ways, a supply issue, and I think a lot of that supply has been thwarted from getting to the marketplace because of its leverage levels, right? We're doing our best to educate the public market on why we feel like those traditional metrics should be looked at through a different lens. But to the cost of capital point, once these businesses get to the public markets, they then open up a series of other products that they can, they can lean on, and one of those is the Convert market. The Convert market in particular, we have seen very active in the data center space, and we're talking about one to 2% type coupons with supercharged premiums, up 75 to 100%, and being able to tap into that type of market, once you're in the public sphere, I think that's an element that many of these companies are missing out simply because they don't want to kind of take that leap, put themselves in position where they're going to have to have a valuation conversation that might be difficult at this point.
Marcos Torres
Thoughtful, thoughtful. Nanda, when you think about partnerships that are proving most effective and unlocking capital for digital infrastructure expansion. Can you talk through that a little?
Nanda Kamat
I think we're seeing a number of different partnerships. So, one is sponsor backed data center platform, right? So, a lot of the biggest private equity shops have invested in data center platforms, right? There's Blackstone, QTS, KKR, GIP, CyrusOne, etc., etc. When a developer gets that kind of backing from a very large sponsor, that unlocks a lot of capital right away. I think the other partnerships that are interesting and that we're seeing more of are, Hyperscalers partnering with power producers, power developers to sort of come up with behind-the-meter solutions. And I think we're going to see more and more of those, where you're co-locating the power source with the actual data center. And that sort of takes care of one of the biggest issues that data center developers are facing, which is the availability of power. I think the other partnerships that we have been seeing, and probably will see more of, is, developers partnering with some sort of private debt provider other than a bank, right? So private credit funds and there, there have been a lot of funds that have that have been formed specifically for digital infrastructure. And so, there is a variety of partnerships that are being used to address just what are, you know, enormous capital needs in this sector.
Chip Wadsworth
There’s a group of what we define as crossover investors, public side investors that look at private businesses, try and find them just before they crystallize in terms of a public asset and put money to work. We haven't seen that just yet in the data center space, but based on the conversations we've been having over the course last call it six months or so, it feels like that's another piece of the partnership puzzle that's going to play itself out.
Marcos Torres
Certainly a lot of financing creativity and partnership, creativity happening in the context of, obviously, public market volatility. Let's move on to the next topic. So, AI and the energy transition. What is the latest update on AI applications and how we see their influence on digital infrastructure going forward? Maybe we'll start with you, Chip.
Chip Wadsworth
Yeah, everybody's been asking: what does AI apply to, right? I think we are moving from the what to the how. I live in San Francisco, the RSA conference, which is a large conference in and around security software. And one of the core thematics was something called ‘agentic AI,’ which is basically using artificial intelligence agents to improve the productivity of business processes. And it was by far the most talked about subject at the conference last week, because it's, it's being implemented. And it's, it's pretty sizable in the way that it’s being deployed. It's really exciting. It's really it's really interesting in it, it dovetails back to why we are so positive about this sector, in this space. You ultimately have to have that infrastructure in place in order to allow those applications to flourish.
Nanda Kamat
For AI, it's interesting, just the differences from, say, a cloud facility, right? And so, we're having a lot of discussions with sponsors around, well, can you locate an AI facility outside of top tier one or tier two market, somewhere where there's availability of land and availability of power, and really, what kind of risks on renewals are lenders willing to take, right? Will we need AI training centers at that scale in 20 years, or will AI have been trained already? And so, I think it is really driving a lot of interesting conversations around what people are willing to do, and what sort of risks they're willing to take in financing.
Marcos Torres
We obviously do a lot of financing across a bunch of different industries, and it's just, the amount of creativity that that is happening in digital infrastructure, broadly around financing, is incredible. Okay, well, why don't we move on to the energy transition topic. How is energy transition influencing the development and financing strategies for data centers and communications infrastructure broadly?
Nanda Kamat
Power is one of the biggest discussion topics for data centers right now, and I do think that data centers are really complicating the energy transition story.
Nanda Kamat
In the last month, we've had conversations with two different power developers and utilities around multi-billion-dollar gas fired power projects that they're looking to build because of the demand for power coming from data centers. And I just, I don't think that that's going to go away anytime soon. Or you see Blackstone, who is a multi-sector fund, buying a power plant in Virginia, because they know that they have an off taker in their data center platform, right? So, I think all of this, the power discussion and the digital discussion is converging, really.
Marcos Torres
Yeah, converging and happening globally, so quickly. We talked about financing, and we also talked about the fact that clients are increasingly looking for Capital Partners, the right Capital Partners. So I'd love for you both to comment on just how RBC is delivering integrated and innovative solutions to be that financing partner to our clients.
Chip Wadsworth
A couple of things. For our IPO clients, our message is pretty straightforward. There are three pieces to it. The first one is, get ready, right? So, if you want to be a public entity, especially when the window of opportunity opens and closes more quickly than it ever has, put yourself in a position to choose the time when you go public, instead of allowing that market to dictate. The second thing that we're highlighting to folks is “go spend time with investors in a non-deal context,” right? You have a lot of flexibility these days to develop those buy side relationships. Use conferences like ours, work with RBC to go create a bespoke road show in New York or Boston or out here on the West Coast, and really develop the relationships with the buyers that ultimately participate in an IPO. And then, the third piece to this is be prepared to pivot right? There are so many options these days in terms of the private versus the public path that you can take. If, for some reason, the public path continues to be one that is difficult to reach, pivot into some of those private alternatives. I think if you approach it with at least, our IPO clients, if they approach the path with that kind of mindset, we think there's going to be a lot of success.
Marcos Torres
And I will say, just before I turn it over to Nanda, RBC, we've obviously got bankers across the globe focusing on this with very deep domain expertise. And the ideas is to deliver very specific and tailored financing solutions. We cross-collaborate, right? So, we have our corporate banking business, investment banking, global markets, and then, all the product partners, right, across the board. We talked about the two colleagues that are on the phone today, ECM and project finance, but We've also talked about warehouses, ABS, securitization, our own balance sheet, like, there are JV structures that are happening that we're organizing. So, there's a lot, a lot going on. And when you think about some of these transactions that that have more recently been done that really highlight the success of all that we're talking about, that RBC delivers, the AirTrunk transaction, working with our Australia team, and just literally across the globe with RBC offices and across all of our product partners to get that super-complicated multi-jurisdiction financing in-data infrastructure completed. I mean that that was a heavy lift, and we were incredibly aggressive there. And then the global reach of the platform, because we've got domain expertise in bankers across all different regions, whether it be Europe, APAC, here in the US, we've just got people that are talking to so many different people, in so many geographies, that that domain expertise and how we're thinking about something in Europe may help inform how we're thinking about something in Australia or vice versa. And so that cross-border knowledge base and domain expertise is important. Our goal ultimately is to make sure that we help fuel that growth, right. This is super-, super-important business for RBC, and we're not just putting our intellectual capital behind it, but more importantly, putting our money where our mouth is. So Nanda, I'll turn it over to you for some final comments on that piece of it.
Nanda Kamat
Yeah. I mean, I think what we're trying to do is give our clients the best advice regardless of product right? The good thing about RBC, being a broad platform, is that we have different capabilities. Not everybody wants to take the time to do a project finance deal, because it can be a little bit time consuming in terms of diligence, etc. The DEVCO, if you're developing a lot of assets, can be a really great, efficient tool for that. But then, if you do have a long-term lease with a hyperscaler, project finance is just going to give you the best leverage, especially if it's a construction financing. And so, I think just being able to be product-agnostic and speak across products and provide clients with advice around what they should do, I think, is really helpful. And then, we always tell clients in this space, just given the enormous capital needs, don't be dependent on just one pool of capital. So, get to know the ABS investors, get to know the banks, get to know the private placement guys, because ultimately, you're going to need multi-market solutions to just finance this volume of need.
Marcos Torress
Where's RBC, in your view, seeing the greatest opportunity for growth and differentiation across digital infrastructure value chain, and more importantly, how are we positioned to lead in the next wave of investment? We talked a little bit, Chip, about volatility. That will subside, right? And at some point there will be the next phase. And these companies are getting bigger and bigger and more global. And so, just thinking through growth and differentiation across digital infrastructure.
Chip Wadsworth
I do think one of the other kind of thematics here is, they have a number of sponsors, investors behind these businesses that ultimately will need liquidity and finding the path and helping those sponsor clients, achieve that liquidity at the tightest discounts possible, right? That thematic, I think, is also one that is really important here over the course next 24 months. When you get that flywheel going again, I think it unleashes even more of an opportunity for the investment cycle to work. So, we're focused very, very clearly on two sets of clients, the issuer client, but also the sponsor that's behind that issuer.
Marcos Torress
Yeah, that's a, that's a good point, Chip. And I think as these platforms get bigger and bigger, you will ultimately see them transacting or doing partnership deals with our bigger clients, right? Whether they be telcos or sponsors, to your point, but, but there's certainly a lot to do there, as these companies continue to consolidate. Just really quickly back on the growth and differentiation across the value chain, maybe Nanda, you can provide some thoughts there.
Nanda Kamat
Yeah, I think, you know, what differentiates us, probably, from a lot of our competitors, is that we have the full suite of capabilities across debt and equity, right? I think there's a lot of banks who are financing data centers who have the debt capabilities, but not necessarily the M&A or equity capabilities, and if you think about taking one of these companies private, which we've done, financing all of their growth capex needs, doing the ABS, doing the project finance, etc., and then taking them public. It is really a full lifecycle, and I think that that's a huge differentiating factor for us.
Chip Wadsworth
Yeah, I think, kind of think about where we have a real impact. It's that ecosystem, and our relationships within the ecosystem, both on the financing side, but even more importantly, just on the corporate side, the depth of the relationships that we have as a firm, with the decision makers at the corporate level. Critical, critical from an M&A perspective, critical from a financing perspective, and ultimately, critical, I think, as it relates to just the success profile of our business. So, I feel really, really good about where we currently stand and we're hopeful that the path to success for our clients is going to be very smooth.
Marcos Torress
As we have sort of said throughout the conversation, RBC has been there from the very beginning, right? We were in most cases, the first bank to help these companies start to grow and get their initial capital, and so we've been there for a long time, and have been spending time with an entire ecosystem at RBC globally for a long time. Well, folks, that's all for this episode. Nanda and Chip, thank you very much for your insights today. It's been great to have you.
Chip Wadsworth
Our pleasure.
Nanda Kamat
Thanks Marcos, appreciate it.
Marcos Torres
And thanks to you all for listening to Strategic Alternatives, RBC Capital Markets’ podcast. The episode was recorded on May 9, 2025. Listen and subscribe to the Strategic Alternatives on Apple podcast. Spotify, or wherever you listen to your podcast. If you enjoyed the podcast, please leave us a review and share the podcast with others. Thank you very much.