The connected experience: Challenges and opportunities in the telecommunications sector
- September 1, 2023: Vol. 10, Number 8

The connected experience: Challenges and opportunities in the telecommunications sector

by Denise Moose

Telecommunications infrastructure supports a wide array of business, government and economic services, but not all people have access.

Obstacles such as the “digital divide” bring challenges to telecom companies, which also proves to be challenging for investors focused on making commitments to the telecommunications space. This leads to a question: How are infrastructure investors working to bring these services to more people to help grow markets and deliver on the social goal of universal access?


Although digitization speeds up development, helps economic growth, brings people closer together and enables better use of resources, many countries struggle to invest in innovation, digital technologies and infrastructure because they can’t afford to finance it, according to a report from the Wilson Center titled Closing the Digital Divide. Although 70 percent of the population in developed countries purchased goods and services online, only 2 percent did so in the least developed countries. The unavailability of mobile broadband coverage deprives workers and consumers of the benefits from ecommerce on both the supply and demand ends.

Factors such as low literacy and income levels, geographical restrictions, lack of motivation to use technology, lack of physical access to technology, and digital illiteracy contribute to a digital divide, resulting in nearly 2.9 billion people around the world (an estimated 37 percent of the population) — particularly women and girls — lacking a telephone, computer or internet access. Universal access to broadband by 2030 would cost an estimated $428 billion, with 69 percent of this required in low-income countries and other underserved regions.

The report notes that although the digital divide is commonly thought of as a problem in developing nations, the United States is not exempt. The Pew Research Center reports 7 percent of Americans (about 23 million people) do not use the internet and 23 percent do not have access to a broadband connection at home. That includes nearly three in 10 people (27 percent) who live in rural locations, as well as 2 percent of those living in cities. Research shows that 40 percent of schools lack broadband, as do 60 percent of healthcare facilities outside metropolitan areas. Investors focused on the United States are pursuing several different strategies and opportunities to address the industry’s challenges and close this digital divide.

“Only approximately 40 percent of households in the U.S. have access to best-in-class fiber technology and competitively priced high-speed broadband,” says Jan Vesely, partner at EQT Infrastructure. “Most U.S. households are currently on lower speed and latency technologies such as copper and cable. In the B2C fixed-broadband market, we see similar characteristics in the U.S. as we saw in Europe, where we were the first infrastructure fund to develop a thesis on fiber-to-the-home [FTTH] globally, which has led to successful investments in FTTH players such as Fiberklaar [Belgium], Deutsche Glasfaser [Germany] and DeltaFiber [Netherlands].”

He adds that following EQT Infrastructure Fund III’s sale of B2B business Segra to Cox Communications in 2021, Lumos was carved out as an independent platform focused on the generational FTTH opportunity in the United States. EQT created a business plan to bridge the digital divide in the mid-Atlantic and build out fiber broadband to 1 million new homes in the region and is now successfully executing that plan.

“The U.S. government also views fiber as an essential utility and is highly supportive of accelerating the fiber rollout in the country, with $42 billion of support committed under the recent Broadband Equity, Access, and Deployment program and many other previous programs, such as the $20 billion Rural Digital Opportunity Fund and the $10 billion U.S. Capital Projects fund,” says Vesely.

Fred Robert, senior principal, infrastructure, at Investment Management Corporation of Ontario (IMCO), adds that more than 90 percent of residences in the United States have access to 100Mbps download speed, which is relatively fast compared with the rest of the world and sufficient for most consumer applications. However, the substantial digital divide, with rural areas, low-income households and certain demographic groups being disproportionately underserved, compounds other inequities and historical injustices in America. IMCO World View identifies addressing inequality as a key theme that will affect investment returns in the coming decade.

“To help address this issue, both American and Canadian authorities have implemented incentive programs worth tens of billions of dollars to support broadband or fiber deployment in rural areas to close this digital divide,” says Robert. “Ensuring high-speed internet availability is essential to support equal access to education, remote work, telehealth, ecommerce and important personal connectivity. Investors and governmental organizations should ensure that funding is also available for emerging technologies that could result in a step change in high-speed connectivity access, for example, through funding fixed-wireless and low-
orbit satellite initiatives.”


With issues arising across the United States, this leads to challenges when investing in the telecommunications sector. Ted Mocarski, senior partner at Novacap, explains many of these businesses are very attractive investment opportunities given the long-term life of their assets, recurring/re-occurring revenue streams and high contribution margins driven by the fixed costs of operating these assets.

“I think many people forget that despite this attractiveness, these are businesses just like any other business and need to be operated as such,” says Mocarski. “The value does not come from the asset alone. It comes from great execution with respect to sales, customer care, provisioning and other such opex categories layered on top of the network. So, our belief is that the real challenge comes from finding investors with deep experience managing businesses and these core operating issues, who will be better poised to post returns in tough markets like this.”

Robert adds the different sectors indicated all have different risks associated with them, and to a certain extent these risks also differ by geography.

“If we look at data centers, demand remains extremely strong, but the main challenge is procuring land and hiring experienced contractors for new development,” says Robert. “At IMCO, we have committed to reducing our carbon footprint by 50 percent by 2030. Procuring consistent green power in our data center portfolio is therefore becoming a critical enabler for our data center portfolio and is not easy to achieve, especially in regions where the local grid is powered by high-carbon emitters.”

Robert explains that within the fiber sector generally, the key risks are overbuilding by competitors and customer take-up, while supply-chain disruption and the labor shortage are not far behind. Commenting on the United States specifically, Robert believes the industry has been going through a land grab. While this continues, they are beginning to see new fiber-to-the-home entrants feel the pressure from incumbents aggressively defending their positions.

“Not all enterprise fiber networks are created equal; the successful operators are laser focused on timely service delivery and stellar day-to-day operations,” says Robert. “In addition, customer centricity and brand value are critical drivers of success in the space, as most digital strategies cannot rely on natural monopolies. Therefore, the strength of relationships with their key customers is critical, as it allows a coordinated expansion of the network where clients need it.”


Investors may also want to consider investments on a global scale and pay attention to which markets and assets provide the best opportunities.

Globally, due to efforts to increase broadband access, the European telecom network infrastructure sector saw $20 billion in sales, according to a report by Yahoo! Finance titled, Global Telecom Network Infrastructure Market Size to Grow USD 168.5 Billion By 2032. The European Union’s broadband strategy was recently released by the European Commission in January 2022 to drive the region’s digital transformation, as well as the 2025 vision of the European Gigabit Society. High-capacity networks will be used by the Broadband Europe effort to connect businesses and customers and promote innovation in products, services and apps.

The report also stated that during the anticipated period, there will be growth in the Asia Pacific telecom network infrastructure market. The Chinese government and business sector support the market for telecom network infrastructure, in addition to assisting telecom operators in recovering from the negative effects of COVID-19. According to projections, the rapidly evolving digital business models, world-class communications infrastructure and outsourcing infrastructure of the Chinese market all will be advantageous.

“Our focus continues to be on digital infrastructure assets in the lower mid-market,” says Mocarski. “Given the fragmentation that still exists in North America across multiple verticals in the DI industry, we are pursuing companies that are relatively small but have demonstrated great success in their original/core markets and are looking for a financial partner to expand.”

He explains that examples of this include the following: independent local exchange carriers with a substantial fiber footprint in their existing service area that have begun successfully to expand out with a fiber-to-the-home offering in adjacent markets but require additional capital to grow into more markets; localized build-to-suit tower operators with efficient opex models; localized data centers becoming relevant again given the need for localized data storage due to the growth in new applications such as ChatGPT; and companies engaged in the management of private wireless networks.

“Opportunities we are not interested in are startup companies or business plans that are fully funded at closing,” adds Mocarski.

Robert states that digital infrastructure forms the foundation of today’s global economy and enables the technology we depend on in every sphere of our lives — from remote work and banking to communication and ecommerce.

“We forecast global data demand doubling by 2025, fueled by content generation and consumption requirements, advancing technology, adoption of 5G, and artificial intelligence,” says Robert. “It is an important asset class in IMCO’s infrastructure portfolio that offers a wide array of global investment opportunities across different asset types, sizes, growth profiles and risks. We view the U.S. as a leader in AI adoption, and we see tremendous opportunity to invest meaningfully in edge computing. In Europe, where land and power access pose more challenges, distributed storage and computing present opportunities. Hence, we view fiber networks as a key enabler for the region.”

He adds that a core tenet of their strategy is to back the best management teams and invest in businesses that have a resilient competitive advantage.

“Today, we have meaningful interest in two leading digital infrastructure platforms, both of which have access to tremendous greenfield growth opportunities that they can complete at accretive build multiples,” says Robert.

Vesely notes that EQT Infrastructure funds have made investments in telecommunications around the world.

“For example, in the fiber sector, GlobalConnect has both fiber and data centers in the Nordic market, Deutsche Glasfaser is modernizing connectivity in Germany, Fiberklaar is in Belgium, and Melita is in Malta,” says Vesely. “Zayo and Lumos are U.S.-based.”

He adds that in the data center sector, EdgeConneX is a global hyperscale data center platform. “When EQT’s Infrastructure IV fund acquired the company in 2020, it was mostly focused on Europe and North America,” says Vesely. “Since then, it has expanded further into Latin America and has established a successful partnership in India, the Philippines and other Asian markets, which are at the early stages of cloud growth.”

Robert states that IMCO is constructing a global portfolio comprised of industry-leading platforms. “One example is euNetworks, a Pan-European fiber network catering to large enterprises, hyperscalers and data center operators,” says Robert. “euNetworks is well positioned to benefit from the continued trend of migrating to the cloud and distribution of availability zones across the continent. They are also seeing the emergence of AI-related demand, and their network footprint is expected to play a vital role in the rollout of these AI applications.”

Mocarski notes that they focus solely on the U.S. market, but he adds, “There are definitely interesting opportunities around the globe, but all markets are different and local knowledge is important for creating value. For instance, in many markets there were nationwide telephony providers, which resulted in less fragmentation. This drives a different way of looking for growth opportunities in those markets versus what we see here.”

For infrastructure investors looking to tap into the telecom sector, there is no lack of opportunities. However, each investment presents its own checklist of merits and challenges, and thorough due diligence on the market, the asset and the operator are paramount. When evaluating investment managers and operators, track record is always a key. Choose wisely.

Denise Moose is special reports editor at Institutional Real Estate, Inc.

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