Opinion: Emerging markets present attractive investment opportunities

The telecommunications, media and digital (TMD) industry has a proven history of strong growth and attractive returns in emerging markets.

In fact, the telecom sector has proven to be one of the most attractive sectors for emerging markets investing in the last three decades. This is corroborated by data from the IFC/World Bank, which shows that investments realised by the IFC in the telecom sector over a 30 year period to 2009 generated the highest returns within its portfolio, outpacing that of other sectors including healthcare, consumer, energy and other utilities. Whilst the story going forward will be more nuanced, the ongoing growth of the TMD industry in emerging markets should allow investors, wisely choosing the right assets in the right locations, to generate attractive returns over the medium-to-long term.

In the old game telecom operators were able to take a simple yet highly effective approach to entering markets by adopting a ‘build-it-and-they-will-come’ strategy. Mobile operators selected markets with lots of latent demand for basic communication services, limited infrastructure, low penetration, what in hindsight may look like the underpricing of licenses by regulatory authorities and limited competition.  Mobile operators that used this approach typically generated strong returns on the strength of overall market growth for voice services. Using a combination of industry databases, Delta Partners estimates that in 1995, mobile operators in emerging markets represented around 15% of $80bn in global mobile market value versus over half of $1tr in global mobile market value by 2013.

A new game with new rules is now emerging in the industry. Subscriber growth is slowing as penetration reaches maturity levels. According to GSMA, average penetration in emerging markets leapt from 19% in 2004 to 99% in 2014. Regulators have opened up markets aggressively, with multiple competitors jockeying for critical mass.  For instance, the largest markets in Africa now have seven mobile network operators on average, versus four operators in the largest markets in Europe. An industry that was used to reporting double-digit revenue growth every year is now reporting single-digit top-line growth, with margins remaining constant at best. That said, emerging market operators may well be better placed relative to their developed market peers, the largest of whose returns on invested capital have now fallen to single digits. Telecom players across the globe are evolving and continue to develop new strategies to be successful within the new rules of the telecom space.

Specific, significant pockets of growth and associated investment opportunities remain in the industry and can be found across the value chain and across most emerging geographies. Some examples include:

  • The lack of fixed infrastructure and the relatively high price of consuming imported digital content (due to expensive international bandwidth) has constrained broadband usage in emerging markets, leading to a tremendous latent demand for broadband data and related services. According to the Telegeography data, the average cost for international bandwidth in the largest three African and South East Asian markets was c $2.5k per Mbps per year, equivalent to over half of average GDP per person.  In Europe by contrast, the equivalent three largest markets were paying c $50 per Mbps per year or 0.1% of average GDP per person. Significant ongoing investment into international fibre and the mirroring of in-market content by the likes of YouTube are reducing these costs and helping drive double digit growth in data subscribers.
  • New emerging segments that are showing strong demand for a broad range of new IT and telecom-related products and services benefiting from better data connectivity.  For example, with the rapid growth of emerging market economies the ICT needs and demands from corporate and SME customers are expanding while also becoming more complex. Comparing a sample of operators from across Africa, the Indian Subcontinent and South East Asia with a sample of European operators reveals emerging markets operators generate less than a tenth of their revenues from the business segment versus over a quarter in Europe, showing the magnitude of the opportunity that exists.
  • Telecom players are using their infrastructure and data assets to become enablers for a broad range of products and services that traditionally belong to other industries. We are seeing telecom players directly launching products such as mobile money that disrupt traditional industries and offer new services to previously unserved populations. Additionally, telecom players are using their access to valuable subscriber data to provide a so-called “mediation layer”, serving as enablers for digital players to offer enhanced and innovative services to end customers through the operators. One example is CashCredit, an innovative provider of micro-financial services via mobile operators, into which Delta Partners recently invested. CashCredit partners with mobile operators to offer micro financial services to mobile subscribers, leveraging the data and customer relationships of the operator partners. 

Despite bearish press coverage and negative market sentiment on investing in emerging markets during the first half of this year, strong demographic and economic fundamentals support selective investment in telecom in emerging markets over the medium term. Key tailwinds include:


  • Global economic growth over the medium term will increasingly be driven by emerging markets. The IMF projects that emerging markets will account for 74% of global GDP growth through 2017, growing on average twice as fast as developed markets, which should continue to benefit the telecom sector.
  • Mobile and particularly data usage are driven by youth. According to Nielsen, 84% of Chinese youth use their phone beyond text and voice compared to 47% of adults, and 83% of American youth use advance data features compared to 32% of the adult population. Meanwhile, the UN predicts that emerging market populations are expected to add close to 400m people between 2012 and 2017. These populations will remain relatively young, with an average age of 27 in regions such as the Middle East and the Indian subcontinent. 
  • Mobile and data consumption is becoming one of the first discretionary consumables (beyond basic food and shelter) of the expanding middle classes. According to Angus Maddison at the University of Groningen in the Netherlands and Homi Kharas at the Brookings Institution in Washington, DC, the continued expansion of the middle class in emerging markets will result in sustained consumption growth as an increasing proportion of the population rises above subsistence levels and begins to enjoy discretionary disposable income. This income will increasingly be spent on products and services offered by telecom operators and other players in the TMD ecosystem.

    These strong fundamentals, combined with attractive valuations for assets in emerging markets, should allow experienced investors with longer-term horizons to generate attractive returns by investing in the TMD sector. Despite overall optimism, investors should remain cautious and remember there is no such thing as a single “emerging market” today, and opportunities as well as risks must be assessed on a country-by-country and deal-by-deal basis.

    Dominic Halfpenny is a director at the private equity division of Delta Partners.



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