Devices like the satellites and transistors will enable a world where we can communicate instantly from anywhere. Where we can stay in touch with our friends no matter where they are in the world even if we don’t know where they are. A man will be able to conduct business from Tahiti or Bali just as effectively as he could from London in that age perhaps fifty years from now. Because having a fast and dependable internet connection was necessary to fully engage in daily life the pandemic also illustrated how digital our lives have become. The rate at which data is produced is expected to rise almost exponentially over the next ten years. One reason for this is the growing number of people using the internet worldwide.
A goal to achieve universal and meaningful connectivity by 2030, has being set which also means that everyone should have reasonably priced internet access. The demand for bandwidth per user is also rising due to shifting internet dynamics and use cases such as the Internet of things- autonomous cars, artificial intelligence and more people working from home than ever before. Significant investment in physical digital infrastructure is essential in this increasingly digital world because internet speed’s reliability and broadband coverage must all rise and data storage must be increased. Private investors have opportunities to invest in the digitalization sector due to the intricate funding constraints of governments which are made worse by the pandemic. Reliable high-speed fiber networks and data centers are especially appealing asset types within the asset class because of their role in supporting the expanding investment opportunities and the growing amounts of data generated globally.
Digital infrastructure was once thought to be a highly specialized and niche asset class. However, the asset class is becoming more commonplace as evidenced by the notable rise in deal activity in recent years and is becoming a mainstay in diversified infrastructure portfolios as the world grows more digitally connected and infrastructure needs rise. It is anticipated that digital infrastructure assets will yield returns that are unrelated to a number of other asset classes such as GDP-linked assets (like ports and airports for instance). To explain why digitalization is one of the four major megatrends, India’s Infrastructure has identified for potential infrastructure investment in its Infrastructure Insight. Through a number of case studies we show how several of India’s Infrastructure investments and fund initiatives are directly related to this quickly developing megatrend. We also identify short- and medium-term opportunities for infrastructure investors within the digital infrastructure asset class. The case for communication tower investment. Communication towers are structures designed to hold a variety of communication equipment for wireless applications including for mobile broadband telephone television and radio networks. The towers are increasingly being owned and run by businesses that primarily make money by renting out shared tower space to telecom companies under long-term contracts. The equipment they install on the tower is owned by the tenants who are also in charge of its upkeep.
Investing in communication towers has a number of appealing characteristics such as: A strong cash flow profile. The tower companies and telecommunications providers usually have long-term contracts with built-in price escalation mechanisms. High incremental cash flow margins are the result of adding tenants to the tower at little to no additional operating costs. A position in a monopolistic market. Due to a number of factors including the location-based nature of the businesses there is typically little overlap between the footprints of the competing tower providers. Building a new tower network requires a substantial amount of money and time as well as overcoming social and regulatory obstacles. As a result tenant contract renewal rates are usually high. There is little link to economic activity. Businesses and individuals alike rely on communication towers for a vital service.
Naturally there are risks associated with investing in communication towers such as the possibility that future innovation will result in a decline in tower demand. Network densification or the placement of transmission sites closer together is already being carried out by telecom companies. One reason for this is the introduction of 5G networks which can transmit more data but not as far as 4G networks (a few hundred meters versus a few kilometers with current technologies). This implies that in order to achieve the same reach as 4G/5G networks will need many times as many towers as existing ones. This is accomplished by mounting antennas on urban public infrastructure such as utility poles and street lights these are referred to as small cells. There doesn’t seem to be much chance that small cells will eventually replace telecom towers instead they should be viewed as complementary. While small cells help provide service to areas with high wireless traffic demand towers provide the ubiquitous coverage. Small cells are rarely used outside of densely populated areas because towers continue to be more cost-effective and efficient.
The possible consolidation of telecom companies poses an additional risk to investments in communications towers. Contracts will be broken and redundant equipment will be removed from the tower if one service provider purchases another. In addition to the loss of revenue this likely results in fewer larger buyers which may be able to erode the tower providers’ pricing power. Going forward this risk is still quite low especially in today’s world. In order to prevent monopolies and duopolies which would have a negative effect on consumers’ regulators have recently been opposing additional telecom provider consolidation despite the industry’s recent significant consolidation. Due to their strong cash flow profile and low correlation to economic activity telecom towers frequently make an attractive investment case however recent market activity has reduced the number of mid-market investment opportunities. In recent years there has been a notable amount of consolidation in the current tower industry in particular. Towers used to be a crucial component of mobile network operators’ operations but these days the operators are increasingly selling their tower portfolios to independent tower companies.
The market activity in the communication towers sub-asset class has made it the domain of large-cap unlisted infrastructure funds and listed companies. Investors have access to these bigger more liquid infrastructure companies through India’s low carbon core infrastructure strategy. However recent merger and acquisition activity in the market especially among the smaller players has also decreased opportunities to invest in communication towers in the listed market. The deployment of small cell wireless networks is an area to keep an eye on even though the mid-market investment case for telecom towers may be waning. Small cell technology has advanced to the point where widespread deployments are feasible including on utility poles rooftops and building sides among other locations near the source of mobile traffic. Similar to the tower business model the small cell provider would rent the locations to mobile network operators to install the small cells after gaining access to them through either long-term leases or ownership.
Given the relatively new technology the case for infrastructure investment in small cells has not yet been tested but India will undoubtedly keep an eye on this area for potential infrastructure investment within the digitalization sector. For many years the megatrend of digitalization has changed how people interact with one another and how societies operate. In addition to the growing number of internet use cases and international governments efforts to achieve universal and meaningful connectivity by 2030 appear to be driving the pace of change. Without a doubt the COVID-19 pandemics digital divides accelerated these initiatives. With these significant tailwinds it is no surprise that digital infrastructure is one of the fastest growing infrastructure sectors.
Digital infrastructure encompasses a wide range of asset types but generally speaking they have the advantageous traits of high entry barriers steady and predictable cash flows and the provision of necessary services. Because of the demonstrated inelastic demand for internet access digital infrastructure is also comparatively immune to economic cycles. Given that its returns are anticipated to be uncorrelated with a number of other asset types including more GDP-linked assets digital infrastructure should be a mainstay in diversified infrastructure portfolios. Investing in digital infrastructure can be done in a number of ways at the highest level the industry can be divided into data centers fiber and communication towers. Opportunities to invest in communication towers are dwindling from the standpoint of a mid-market investor because of the industry’s recent rapid consolidation. As evidenced by its current greenfield investments in fiber through India’s smart cities strategy and the acquisition of established fiber companies in Indian Infrastructure, finds fiber to be appealing.
Lastly investment opportunities in data centers are still growing due to the worldwide demand for data storage and the possibility of consistent utility-like cashflows. Infrastructure investors currently have a great opportunity to invest in digital infrastructure assets of all kinds. A competent asset manager can create alpha in this fragmented market by conducting thorough deal assessments navigating regulatory frameworks implementing operational excellence and creating growth platforms when market conditions are favourable. This is because the industry is inherently complex sometimes as a result of the rapidly evolving technology.
By: Hanishree Vichare
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