Q&A: Gillis Cashman, MC Venture Partners
After eight years at MC Venture Partners, Gillis Cashman made partner this month at the venture capital firm, which focuses on technology and communications startups. Cashman, who sits on the boards of Cavalier Telephone, Zayo Bandwidth and cable player Baja Broadband, spoke with Telephony’s Ed Gubbins about the future of CLECs and current economic trends shaping the telecom service provider space and investment in it.
On investment levels in 2008: It’s tough to say. Our firm had a good year last year. This year the debt market’s pulled back a bit, but we still see a lot of opportunities there. We haven’t made any decisions internally to slow down our investment pace. But I think valuations will come down a bit with the broader market.
On the impact of the debt market downturn: I think the pullback in the debt market is having a pretty big impact, with the terms and covenants now being introduced. The leverage levels are a lot lower than they were. It will affect M&A and investment. Hopefully it’s temporary. We’re definitely seeing an impact in the M&A market. You’re not able to lever up as much. Liquidity’s been pulled out of the system. Instead of getting 5x leverage to acquire a company, you’re not seeing those levels anymore. So guys like us, when we look at returns or at our [internal rate of return], it’s tough to make higher multiples make sense when you can’t get as much leverage.
On the CLEC business model: There’s a couple of models out there. It depends on the kinds of services you’re offering and the architecture of your network. Guys like Vonage and others who target VoIP and have very light facilities address the entire nation. But if you’re going to own the customer and provision local services, you really need to have local infrastructure. That takes capital. The ones that are more national are that way because they’ve deployed the networks to do that or they have a very thin offering. It’s tough to really provision robust services on a national basis. The majority of our CLECs have had a regional focus. It’s a very complicated business that takes a regional focus and regional management. A lot of our companies were able to gain scale on a regional basis. There have been a lot of in-market acquisitions--companies buying other operations within that region, folding those customers into a single network and driving a lot of synergies. Now CLECs are starting to look out of region, looking for avenues of growth not only through expanding product sets but also through expanding their geography. That was a function of the capital markets in 2007 and the debt markets being strong. The debt markets pulled back a bit—no, a lot—at the end of ’07, but people are still looking to expand geographically. I think you’ll see a couple big guys--Paetec obviously planted its flag as a national CLEC. XO is already out there nationally. Then you’ll still have strong regional competitors, and those most likely will be acquired by national guys or create super-regional players by acquiring other smaller companies within their region.
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