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The future of connectivity in EM & core digital infrastructure asset class characteristics

Mobile internet connectivity brings a wide range of social and economic benefits, helping to promote digital inclusion and supporting the delivery of essential services and key development objectives such as poverty eradication, healthcare, education, financial services, and gender equality. In a world emerging from the COVID pandemic, there has never been a deeper reliance on connectivity and software solutions to maintain, and advance productivity. Although, the world has adapted and overcome the challenges of remote working and living, our reliance on the internet, and by extension the infrastructure that supports it has been cast into sharper focus than ever before.



In the years leading up to the Pandemic, and indeed since the introduction of broadband connectivity in the early 2000’s the growth in communications, transactions and information transfer has grown exponentially – this has led to vast sums of money being invested into the foundations of the internet, which are split into two distinct parts:



  1. Physical communications infrastructure, ranging from Tower’co’s, Satellite communications, Fibre Networks, Undersea cables, Data centres and more. Today sufficient investment has allowed anyone in the developed world to have access to reasonable fixed line broadband speeds, and high-speed cellular connectivity.

  2. Software, applications, and consumer hardware that allows us to interact with business, friends, and family. There is seemingly no limit to the creativity of entrepreneurs, and likely infinite new use cases to be generated from 5G and even greater processing power of mobile handsets. Venture capital and public markets continue to avail significant sums in supporting these endeavours in our new hyper-connected world.

The benefits, both social and economic around connectivity, and for the scope of this article, the productivity gains delivered by new software and hardware start-ups taking advantage of high-speed connectivity are obvious. Therefore, the is no doubt that sufficient capital will continue to find its way into new and exciting infrastructure projects to improve connectivity in parts of the world that are already connected. However, we must not fail to neglect the fact that a huge percentage of the world remains unconnected, and a very large portion of the connected Populus in the developing world are still grappling with Packet Data or very slow data connections – the true population of individuals without access to high-speed data is staggering. GSMA estimates that globally 3.3bn people are covered by cellular services and not connected to mobile broadband, but a staggering 0.7bn people are not covered at all.

Pockets of liquidity dedicated to addressing these needs (except for development financiers or grants) is limited, however the scope of the opportunity is huge. Many unconnected individuals are cash-poor, and many don’t have access to hardware (phones and computers) capable of utilising this new connectivity, but hardware costs are falling, and demands are rising, those who enter this (somewhat) untapped market first will benefit from limited competition, and, in a world where data is a lucrative commodity – access to a brand new demographic of consumers.


Characteristics of core digital infrastructure investments

Fibre-Optic Networks

Cables, transmitting light pulses (not electricity) that carry data between offices, data centres, mobile towers, countries, and homes.

Backbone Network:

  • Under-sea: Primarily for connections of countries that are divided by bodies of water, cables physically run along ocean beds

  • Long-Haul: Primarily for connections between population centres, over land

Last Mile:

  • FTTX (Fibre to the “x”) for direct fibre connectivity to homes, offices, and mobile towers.

Characteristics:

  • Long payback period – up to 20 years due to high construction costs but with very long assets life 20yr+ allowing equity investors to realise material upside on assets once bank debt and project finance has been repaid

Risks:

  • Asset life: although as mentioned above, asset life is long, and fibre optic cables are typically more reliable than copper costly maintenance can be required

  • Technological Obsolescence: One of the key risks with fibre networks (this mostly applies to FTTH and metro networks) is the risk of displacement by another technology – for Fibre the most viable alternative is FWA (fixed wireless access) over 5G which can offer substantial improvements over copper connections with much lower deployment costs. However, fixed line fibre will typically be preferred for most urban connections due to stability, superior latency characteristics and lack of wireless interference risk.

  • Ownership and Rights of Use: Its important to review a fibre network’s access to termination and interconnection access points, thus being careful to assess the risk of reliance on 3rd parties for parts of some fibre networks that are not fully on-net.

  • Overbuild risk: this is a significant risk particularly in FTTX networks where multiple providers are installing the same capacity in the same areas. This is less of a risk in rural areas where cost per home pass is typically higher.

Data Centres

Data centres are highly specific, purpose-built buildings with very specific requirements. These buildings house and maintain the computer systems, and storage devices and other telecommunications infrastructure that allow modern communication to function.

Data centres, unlike traditional real estate are typically measured in size by using Megawatts instead of traditional metrics such as ‘sqft’. Additionally, unlike traditional real estate, seemingly small factors play very large roles in determining asset valuation – including, access to power supply, reliability, and redundancy of power supply, outside temperature, connection to fibre optic lines, proximity other internet exchanges or key locations such as stock exchanges amongst others.

Characteristics of cloud data centres

  • The asset class benefits from strong, stable cash flows from highly bankable tenants. Even with short term contracts, relocation is sometimes prohibitively expensive hence co-location facilities usually benefit from long term contracted cash flows

  • Returns are attractive, with PGIM estimating average global yield to be around 6-11% with REIT’s focusing on data centres outperforming all other types of REIT in 2020. Examples of US REITS are Equinix, Digital Realty and Cyrusone all enjoying low single digit dividend yields at the time of writing.

Edge Data Centres:

  • Edge data centres are small facility located towards the edge of a network. Facilities contain broadly the same hardware as their larger counterparts but cover a smaller footprint and are located closer to end user devices.

  • The market for edge data centres is expected to increase nearly three-fold by 2024 to USD13.5bn from just 4bn in 2017 (PWC) – themes driving this growth include:

  • Content Delivery - Hosting of Netflix content near your home to speed up buffering time.

  • Arrival of 5g

  • IOT – low latency processing for manufacturing and smart cities applications

  • Financial Services – High performance analysis and trading algorithms where speed is of paramount importance

Back to emerging markets… how can investors support Africa’s connectivity goals.

Despite lagging the world in terms of connectivity, most of Africa’s digital development is now accelerating, catalysed by the Pandemic there is a paradoxical opportunity to rebuild much of the economy with a focus on Digital. Start-ups and corporates continue to develop innovative web and mobile based applications and dynamic new business models. If investment in closing the digital divide can also accelerate there is a unique, exciting opportunity to capitalise on COVID’s negative impacts and revamp the delivery of life-transforming services such as health, education, financial services and more. Venture Capital and the private space should support these businesses and provide funding directly to local founders and entrepreneurs, with first-hand experience of the issues they are addressing.


Potential applications and solutions:

Deploying infrastructure in remote areas is only partially a technical problem, but more-so a challenge of ensuring connectivity in areas with spare populations and lower revenue opportunities is delivered with long term commercial sustainability. I am of the belief that connecting the next billion people will come through a combination of falling costs and clever deployments/optimisations of current technologies (https://www.qberacapital.com/post/solving-the-last-mile-problem-the-path-to-universal-connectivity-its-role-in-global-development) that allow small cell’s to be deployed in rural locations, but also through the utilisation of entirely new types of technology.


Since the late 90’s boom in satellite connectivity, the world has come a long way. Orbital lunch costs have plummeted, and hardware has become orders of magnitude cheaper. There are several competing traditional low earth orbit systems in place and planned for the near future, but also an entirely new class of satellite technology that allows vehicles in orbit to communicate directly with end user devices – no satellite dish required. Companies like Swarm Technologies and AST space mobile offer incredible applications for rural connectivity and IOT devices, thus I end on the note that perhaps, in a far flung future hyper-rural connectivity may not rely on mobile towers at all.


In conclusion, Investors have an opportunity to move quickly into Africa’s digital infrastructure needs. There is dire need for both Physical Infrastructure (Project Finance and traditional Debt/Equity) and Soft Infrastructure (Start-ups and software businesses via equity and convertible debt). The COVID crisis has re-enforced the importance of our new connected world and provided an opportunity for investors to sling shot many emerging markets into the digital age.