Fellow monkeys:
Which area of private investing do you think will see the strongest secular growth in the next 10 years? My own thoughts are:
Thoughts?
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No pardon required - leveraged growth equity is the type of growth equity firms you see more traditional investors like CVC getting into.
These are fast growing companies but not “rocketship” “hockey stick” “venture-backable” companies (very infrequently consumer). They are often software or tech-adjacent / tech-enabled services, but will grow at a healthy double-digit clip and be able to sustain a couple of turns of debt.
My own two cents: the market here is nowhere near matured and there are many diamonds left to be found. Many companies are going to be entering this stage, I believe.
Now, right back at you. Can you please explain your 1-3 list? Thanks very much.
Appreciate your response. I have long had the same thesis about infrastructure from my travels (I also consider it a potential impact category (cold storage, unlike toll roads, can quickly boost most output and QOL measures), although it’s more of a hunch from poking my head around and observing.
I don’t know anything about direct lending (I had to Google the second to get a more-than-surface-level understanding), so anyone who could further opine on its future as an investment strategy would be welcomed in doing so.
I suppose my parting question would be: although these are desirable investment strategies from the POV of capital allocators, will they deliver serious upside to investors themselves? I recall reading around these forums that carry and management numbers are compressed as low as 1 and 10... it seems not everyone can get 3, 4, 5% management fees like the VC world ;)
I would say that certain types of infra investing are stable because they are counter-cyclical. Even if they are not counter-cyclical, per se, their concession lengths are usually 10-30 years which serves as a means of de-risking on the equity and debt side.
(I don't mean to be a shill for the industry in which I work, but infra telecom is what I know best). This is especially true for infra verticals like telecom/fiber which provide services that are becoming more and more inelastic. Covid proved this. Even during a pandemic, cellular plans and internet-to-the-home have remained stable / expanded despite being the highest cost per month besides home or car. They are B2B and B2C. Complementary industries such as gaming and HD streaming have only grown during WFH (XBOX's are sold-out). Additionally, these projects are often provided preferable terms by the governments of the cities/counties in which they are building, ie: waiving permitting fees, offering grants, etc.
Not to mention, major carriers like AT&T, Verizon, and Sprint/T-Mobile do not have the balance sheet to address and own their own infrastructure in Tier 2/3 cities. Therefore, many funds will invest in building the infrastructure, and then sign off-take agreements to lease their fiber / 5G networks to major players (de-risking the project significantly).
TLDR: infra funds have a large addressable market, their service are often B2B and B2C, infra funds can focus on attacking industries that offer products/services that are or are becoming inelastic
I have long thought that the only business model that can rival software's is communications infrastructure, though I specifically think towers are one hell of a model.
Infra sharing lowers cost for carrier customers
Incremental economics are amazing
Most towers hyperlocal monopolies so those incremental economies don't get competed away
Insanely low churn
The demand you alluded to above
Low tech risk
Long term non-cancellable leases (!)
Effectively their customer's most senior creditors (this is why I think they are effectively similar to B2B SaaS - probably the quote Robert Smith will be known for when he dies, none of that sob story crap about having a hard time fundraising in EMEA)
Can convert to a REIT for tax purposes
Someone also once told me a unique aspect of pricing when it comes to towers but I didn't understand it / don't remember it so let me know if this rings a bell. Cheers.
The unique aspect of pricing when it comes to towers is that the bandwidth that customers are going to need going into the future can only come from laying fiber. This means that 80% of the fiber-to-the-home and fiber-to-the-business infrastructure already exists if a telecom carrier solely wants to offer 5G cells in an area. Essentially, you can build out a FTTH / FTTB business and just add unlit (not activated) 5G small cells to towers to which fiber has been laid. It's just a cool accessory to providing internet to residential and business customers.
3G and 4G have a much larger wavelengths but lower frequencies. 5G is the opposite since higher frequency allows for better transmission of higher and higher quality data. Higher frequencies mean lower wavelengths. Since the focus is on higher frequency, you need more 5G cells to cover the same area once covered by 3G and 4G. Most 5G cells can also accommodate more than one radio which means you can put up one 5G cell, but lease it to ATT, Verizon, and Sprint/T-Mobile. Meaning that you can put up one vertical asset (by creating a pole or attaching to a light / utility pole), and monetize it from numerous carriers who want to have the "best coverage". If a more mobile-focused carrier wanted to expand their 5G network, they would have to build a fiber network even if they did not plan to offer FTTH / FTTB. Since this is the case, to add the cherry on top, you can negotiate a guaranteed off-take for service, but you can even demand a one-time fee to start service that costs far more than the cost of the cell to the developer of the network (and you can offer it to every telecom carrier that wants to attach). It sure is expensive to the telecom carrier, but it is far cheaper than the carriers trying to build out infrastructure to create a 5G network.
Essentially, fiber can exist without 5G, but 5G cannot exist without fiber. While the IRR for 5G cells as an individual asset is incredibly attractive, it only exists on the foundation of fiber. This is why infra PE in this area is so interesting right now.
Private credit without a doubt. Particularly with PE returns coming down significantly / the level of financial engineering required now to get to a 12-15% net return for most funds.
Why would I be on the equity side with the risk there fighting for a 15% return when I can lend money to a similar quality company (or the same company), have fixed annual cash flows reducing my exposure, a higher position in the capital structure in the case of any downturn or liquidation, and participate in the upside through an equity linked scheme.
Of course it isn't as simple as I've put it above, but I think this as an asset class has a lot of room to grow / should see a lot of momentum over the next 5-10 years. The risk reward profile vs. pure equity is too attractive for it to not.