One unknown about private equity investments in digital infrastructure is who winds up owning those assets. The PE business model entails selling assets after they have been restructured in some way that boosts the financial value of the assets.
In principle, buyers could be operators of digital infrastructure businesses, such as mobile operators, bigger data centers, other connectivity providers or even other investment entities. Institutional investors, for example, might be attracted to the stability of long-term cash flows from assets that are complementary to other asset classes.
Private equity, almost by definition, involves “fix and flip,” as returns are earned only when assets are sold. In that sense, PE operates as does venture capital, where returns are earned only when assets are sold.
But none of that suggests any particular preordained form of exit. Whether public or private sales happen, assets often are sold to operating rather than financial buyers. Smaller data centers are acquired by larger data centers; smaller fiber networks are bought by larger networks; smaller tower networks are purchased by larger tower operators and retail internet service providers are purchased by larger ISPs.
But assets might also be purchased on a longer-term basis by financial entities such as pension funds, more interested in predictable cash flows than operations, per se. The pattern of purchases can inform us whether something fundamental in the business model is changing.
Among the bigger potential changes is a shift from monolithic, vertically-integrated service provider models to more loosely-coupled models used in the computing industry. Wholesale access network regimes and mobile virtual network operator models provide early examples, as do wholesale tower companies.
Vodafone Portugal, for example, is buying Llorca JVCO Limited, parent company of MasMovil.
MasMovil was taken over by private equity funds Providence, Cinven and KKR two years ago, so those assets might return to service provider ownership.
In a typical PE deal, an investment manager (the general partner, or GP) pools money from investors (limited partners, or LPs) to purchase an operating company. After a certain number of years, the PE fund exits its stake from the company by selling it in either the public or the private market.
“Who” the buyers are matters in terms of industry structure. It matters whether business models are wholesale or retail, and whether ownership patterns are relatively short term or long term. Wholesale PE assets might be sold to new owners who operate using wholesale models (business to business), selling only to other businesses in the ecosystem (such as radio sites for mobile operators).
Similarly, PE assets might be sold to wholesale-focused providers of internet access and other communication services. That is a different long-term model than if assets are sold to a retail-focused service provider using an integrated model (owning both infra and supplying services).
All that matters since the decisions move the industry more in the direction of a disaggregated model (where roles are separated) or maintain the traditional integrated model (where roles are combined).
In a broad sense, digital infra ownership models might then range from a “computing” model (almost everything separated into layers or functions) to a traditional “telco” model (all essential elements are vertically integrated).
Where all the PE assets ultimately wind up will tell us quite a lot about the future direction of digital infra.
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