Making the connection: opportunities for mid-market PE in TMT services
The challenge for many in mid-tier private equity is finding opportunities to create value in the capex intensive Technology, Media and Telecoms (TMT) sector. Demand for connectivity over the last two years has gone through the roof and there’s no reason to believe it will fall away anytime soon.
Servicing tier 1 OEMS and Telcos
Macro trends in TMT around emerging technologies, land grab approaches to deployment and rapid pace of change and consolidation in the market is sustaining a growing ecosystem of service providers, targeting areas such as network design, maintenance, inspection and strategy. These boutiques have the specialist knowledge that larger scale providers lack and are far more agile than their in-house competition.
Tier 1 equipment manufacturers and connectivity providers are also becoming more comfortable with outsourcing to newer, more agile providers. This is in part due to their continued investment in their data teams. These teams are now better-informed buyers and understand the value third parties bring turning their data into meaningful reports which can be used to both improve customer experience and improve internal functions.
Whilst the average connection speed available is fast in 2022, many telcos struggle to balance the speed and capex deployment required to gain first mover advantage on their 5G and/or fibre networks whilst maintaining and monitoring their existing networks. Many operators are now seeking ways to reduce opex spend on legacy networks and other business units. The success of many TMT Services companies is the pace they can deliver their services and the value add in terms of data visibility and reporting. This will be hard to maintain as they scale and the investment required to do this must be clearly articulated to ensure they continue to meet the needs of customers.
New tech, old products We’re seeing emerging technologies like drones, IoT and AI used to get a foot in the door of TMT companies, whilst exciting, the technology itself is not always the game-changer. It’s the ability to turn data into insight, leveraging these technologies to allow decisions around maintenance and deployment to be predictive rather than reactive. This facilitates better project management and a reduction in network risk. These are key to creating customer value in the longer term. Investors will need to look beyond the current use cases and innovation in tech to get a firm grip on the potential of any target company.
Recurring revenue services
Consolidation and associated M&A deal flow is driving much of the growth in the services market; however, these revenue streams are often one off and transactional. Investors should be asking management teams how they plan to evolve their revenue recurring services. Helping the team to identify a credible solution, will provide significant opportunities to establish relationships, consolidate the business and successfully scale. Helping management teams to fully articulate the value of offering is crucial to achieving this.
Public sector initiatives
Finally, ambitious plans such as those to reduce the digital divide by improving rural connectivity are opening the door to a more receptive end customer. As Telcos seek to provide connectivity to areas with difficult unit economics (often as part of a subsidy or regulatory agreement), the internal teams are seeing the value add of the clarity and flexibility provided by specialist network design, maintenance or inspection providers.
Please speak to Charlie, Simon or Mike if you would like to hear more about our work in this area.
Charlie Mundy, Core teamEmail Charlie
Simon Hemsley, PartnerEmail Simon
Mike Callow, PartnerEmail Mike