Financing wireless infrastructure in a disruptive age

Despite a high barrier to entry and rising valuations, competition for wireless infrastructure assets is increasing year on year. And while a variety of deep-pocketed infrastructure funds, investment vehicles and sovereign wealth funds now dominate the sector, the importance of credibility in the market oft prevails, setting bidders apart from the eventual acquirers.

That was the consensus among several investment, advisory, and industry leaders - representing Q Advisors, AMP Capital, Grupo TorreSur, and Tillman Global Holdings - who joined TMT Finance's TMT Connect session on Financing Wireless Infrastructure in July. Watch the Session on-demand here now

The investors with the advantage

According to one panellist, structural hurdles such as disparate legal frameworks across borders and high competition for a limited number of desirable assets are making it challenging to invest.

"Investors in wireless infrastructure need to think not just in terms of what the expected threshold return is going to be, but on a risk-adjusted basis too; that includes everything from political risk, economic risk, corruption risk, and cultural risk," said the panellist.

Another speaker noted that the threshold for rate of returns has dropped significantly in the space, making it increasingly more difficult for private equity firms to invest and deploy capital.

The sector's high barrier to entry isn't as much of a problem for infrastructure funds, sovereign wealth funds and pension funds, which are relative newcomers to wireless infrastructure investing.

These firms have the advantage of deeper pockets, as well as being able to create meaningful synergies with a wider swathe of acquired companies – providing quicker routes to scale via both organic and in-organic growth.

"If you start too small you can't get to scale quickly enough as all your overhead costs are going to eat up your account cash flow," added the speaker.

Optimal capital structures

Due to the capital-intensive nature of projects in the wireless infrastructure space, companies require hefty investments up-front. To avoid stock dilution, many companies in this sector traditionally finance their projects by corporate bonds or secure term loans from financial institutions, resulting in high debt-to-equity ratios.

However, given that tower valuations are based not only on information about the current tenants and the specific towers but also on a forecast of the probability and amount of future additional revenue, the panel discussed whether or not the debt-equity market has caught up with the new paradigm.

"Is there the ability for different funds to catch up and create bespoke solutions for different towers, similar to a project finance facility?" asked one speaker.

While it may be too early to answer that question definitively, the good news, according to one panellist, is that there's a large subset of lenders that are willing to look beyond what's in the initial contracts.

"There's plenty of renewal history and kinds of monopolistic characteristics to these assets," said the speaker. "These assets are highly in demand and the debt-equity market has lots of dry powder out there right now."

Financing diversification

Equally important on this topic, one speaker said, is to understand that wireless infrastructure is more than physical towers and structures: it's brands and spectrum too.

"Investors need to look beyond what the multiple of an asset's cash flow looks like on a daily basis," said the speaker. "Tower cash flow doesn't pay the bills at the end of the day."

As the carriers continue to outsource their operations, the speakers agreed there are opportunities to generate returns from different, more secular, aspects of the market. Whether it's colocation or becoming a network service provider on a wholesale basis, one panellist argued you can find a path to scale in any market if there's a clear diversification strategy underpinned by strong capabilities. Again, a further consideration is the degree of regulatory scrutiny to be expected for each type of infrastructure, in each market.

"Investors are willing to underwrite long term returns which are ultimately underpinned by the cost of capital," said the panellist.

The full panel session can be viewed on demand here.

TMT Connect is the new digital platform for TMT Leaders, M&A Executives, Investors, Financiers, and Advisers to share knowledge and partnership opportunities globally.