Ahead of TowerXchange Meetup Africa on 10-11th September, TowerXchange speaks with Ed Stumpf, Investment Director at Africa Infrastructure Investment Managers (AIIM), and the head of investment strategy, to understand where investors see opportunities to capitalise on Africa’s massively underpenetrated tower and digital infrastructure sector.
AIIM is one of Africa’s leading African infrastructure private equity funds, targeting long-term infrastructure project investments with US$2.8bn under management spread across 74 portfolio companies.
Ed Stumpf will be joining other African institutional investors to speak on the panel Investing in African Towers at Meetup Africa.
TowerXchange: Where do you see the most interesting opportunities for investment in African digital infrastructure currently? What factors are driving this?
Ed Stumpf, Investment Director, AIIM:
While the macroeconomic backdrop in many African markets remains challenging, we continue to see pockets of compelling value in the digital infrastructure sector where the secular tailwinds (of rising smartphone penetration and high data consumption growth rates) are to some extent disconnected from broader macroeconomic cycles.
In South Africa, we are seeing opportunities for consolidation of digital infrastructure, especially in the fibre sector which remains highly fragmented with more than 70 access fibre network operators. Most recently we announced the planned acquisition of Octotel, a leading operator in the Western Cape, which complements the activities of our existing investment in MetroFibre in other provinces.
The towerco market is now well established in Africa with around half of the 185,000 towers on the continent owned by towercos. We continue to see good runway for further investment in the tower sector, both on a selective acquisition and build-to-suit basis, as networks look towards RAN densification. The GSMA forecasts that 4G and 5G will more than double by 2030 to comprise around 2/3rds of connections at that time.
Build-to-suit tower operators should look to capitalise on increasing density and coverage demands as markets transition to more bandwidth-intensive RAN technologies; AIIM has recently committed further capital to Eastcastle Infrastructure which continues to build out its tower portfolio in the DRC and Nigeria. We are also selectively exploring acquisition opportunities in the tower sector.
From a rigorous focus on build-to-suit strategies a few years ago, we are again looking at M&A opportunities where this helps accelerate the path to towerco scale in a particular market.
In data centres, the move from co-location to hyperscale (driven by accelerated adoption of cloud products and services) is driving opportunity to scale our N+One datacentre platform both organically and through selective regional acquisition.
The trend towards liberalisation of some regional energy markets – allowing for private sector renewable generators to wheel power through national grids (such as we are seeing in South Africa and potentially Morocco and Kenya) is presenting interesting opportunities for us to complement onsite embedded generation facilities with greater renewable energy penetration by following a portfolio approach which blends the profiles of a portfolio of wind, solar and storage technologies.
TowerXchange: What are some of the key challenges facing digital infrastructure investors, and what metrics do you look at to identify opportunities for investment in digital infrastructure?
Ed Stumpf, Investment Director, AIIM:
While the fundamental growth drivers for digital infrastructure remain robust, key challenges include local currency volatility, particularly for access layer infrastructure for domestic consumption where the investors are typically raising US$, and consumer spending constraints, which cause increased churn rates for network operators; especially where competing connectivity options exist. These issues vary widely by country and end-user demographic and have increased our focus on being highly selective in the investments we pursue.
Different categories of digital infrastructure have their nuances, but generally we tend to focus on markets with larger downstream economies which create an adequate base demand for establishing digital infrastructure platforms of scale. We are proactive in seeking out such opportunities and are increasingly looking at joint venture strategies with strategic players where they are looking to mobilize financial investor capital to accelerate infrastructure deployment.
We are generally more cautious on greenfield single asset risk, in favour of a buy-and-build or growth equity strategy whereby we can pursue expansion within the context of a business which has a level of more predictable cash yield.
We look at risk adjusted returns in this context and are highly orientated around the unit economics inherent in the business plan, focusing closely on underlying revenue (ARPU and take-up drivers) and unit costs and capex to ensure the business model is sustainable.
When assessing opportunities across multiple asset classes versus a specialist focus, we prefer the latter given different commercial risk dynamics and valuation benchmarks across digital infrastructure sub-sectors. At the same time, we are seeing that an eco-system approach is crucial and packaging of a solution for clients may for example make the case for an African data centre operator to invest into connectivity infrastructure and/or cloud services more imperative that what may be the case in more developed countries.
TowerXchange: To what extent do you see lack of access to reliable, affordable, green power as a barrier to digital infrastructure expansion and as an investor in the energy sector, what positive steps have you seen to alleviate power concerns?
Ed Stumpf, Investment Director, AIIM:
Despite abundant renewable energy resources, the lack of transmission infrastructure to connect the best regions for wind, solar, hydro to the areas of greatest commercial and industrial load is a key concern in Africa.
We are encouraged by the liberalisation of the electricity sector which we are seeing in certain markets, chiefly South Africa where the government has opened the electricity grid to wheeling while also removing the 1MW licensing threshold for generation of power by private players. This model is being progressed by various other countries such as Morocco, Egypt, Kenya and Zambia.
Grid constraints in each of these markets vary but the open-access architecture enables more comprehensive renewable energy solutions including the aggregation of different renewable generation technologies.
Such liberalisation therefore paves the way to aggregate customers, including smaller scale commercial and industrial users, on the one hand while providing energy from a mix of different renewable generation assets (wind, solar and hydro) thereby allowing for greater penetration of renewable electrons than would be possible on embedded or bilateral renewable energy solutions.
We are actively building one such platform in South Africa; NOA, an integrated generator and aggregator of electricity from a portfolio of renewable sites across the country and to date have committed US$180 million to this strategy.
Beyond power at the site, we believe there is a viable opportunity for towers to support micro-grid development. It is important for micro-grid deployment to focus on productive use electrification and as such that anchoring such strategies through service to towers or small and medium enterprises could reduce business model reliance on concessional or grant funding sources to ensure sustainability.
