The digital infrastructure sector, once a sizzling investment opportunity, faces a new reality. While a flood of cash poured in during 2021, many companies are struggling to deliver against business plans and achieve desired multiples. However, despite this, for investors with strong leadership at the helm, exciting growth opportunities remain.

As the sector steers through this transition, digital infrastructure funds and investors find themselves weathering a storm of challenges, including underperforming fibre investments. To navigate these choppy waters, skilled leadership and a deep understanding of the complexities and strategic responses are needed to stay afloat.

From optimism to adaptation

The European fibre investments landscape has undergone a dramatic shift. Initial optimism has given way to a need for innovative adaptation. Market saturation, fuelled by overenthusiasm, is resulting in an overbuilt environment. Recent inflation rises, increased interest rates, and higher labour costs further squeeze returns, forcing a reassessment of expectations and growth strategies.

Examples like Astound Broadband, in the US, and Canadian-based, Xplore, highlight the potential pitfalls. Acquired with high hopes, both companies fell short of their 12% IRR target, with earnings growth declining.

Europe has faced similar struggles. The rise of alternative network providers (altnets) has disrupted incumbent digital infrastructure providers, leading to stress on existing fibre businesses. Notable casualties include Glasfaser Direkt and Infravia’s JV with Liberty Global, HelloFiber JV in Germany.

However, despite these challenges, opportunities for renewal and growth remain. North America and Europe, while falling short of their anticipated investment targets, are pioneering resilient investment pathways.

Realigning for evolution and growth

The digital infrastructure sector is entering an exciting phase of transformation, driven by a strategic realignment towards sustainable growth. The valuation of fibre assets, which peaked in 2021, has adjusted to more grounded levels, reflecting a healthy market correction. This shift places a premium on agility, network quality, rapid consumer uptake and service excellence for long-term success. It is encouraging companies to adapt their organisational structures, creating new roles and promising opportunities for those ready to embrace new challenges. Investors who can secure the right talent will be best positioned to capitalise on these changes.

Consolidation wave is just beginning

Major consolidation within the fibre-to-the-home (FTTH) market is expected, with the current plethora of providers shrinking to just a handful within the next few years. This mirrors trends from the early 2000s. This consolidation presents a dual pathway for smaller entities: to merge into larger conglomerates with robust financial structures or to carve out a niche with a distinctive unique selling proposition (USP). Expectations are that 2024 will likely be a defining moment for many, prompting critical assessments of executive leadership needs and strategic direction.

Leadership in a new era

The initial gold rush mentality surrounding digital infrastructure is giving way to a more measured approach. The focus is shifting towards a more deliberate strategy, where leaders must make critical choices about their companies’ paths forward. Investors will need to find new ways to incentivise existing leadership to remain focused on steering their companies towards a successful exit strategy.

And the role of the CEO, in particular, is under the spotlight, with investors scrutinising CEOs’ ability to identify and unlock the full potential of their investments. In some cases, a CFO with a strong strategic vision may emerge as a viable candidate for the CEO position to guide the company to success.

As the digital infrastructure landscape experiences a significant consolidation phase, two key leadership imperatives emerge for investors:

Building the right team:

With mergers reshaping the industry, investors must assemble teams tailored to the larger, more complex businesses. Investors will need to look for leaders with a trifecta of skills: deep commercial expertise, strategic foresight to navigate evolving markets, and the operational / technical agility to adapt quickly. Seeking talent with expertise in adjacent markets, such as data centres, can offer valuable insights, positioning them well for success.

Incentivising leaders for the long haul:

Extended hold times and lagging value creation may test the patience of leaders. To mitigate potential frustrations, investors should consider implementing shorter-term, performance-based incentives to keep key talent motivated throughout the consolidation phase. These structures not only keep key talent motivated but can be a powerful tool in ensuring alignment of interests and driving successful outcomes.

This consolidation wave represents a pivotal moment, with an emphasis on strategic, forward-thinking leadership. However, pragmatism, not ego, will likely dictate the pace of this evolution. Infrastructure funds that prioritise strategic leadership with a clear vision for the future will be best positioned to navigate this evolving landscape and emerge stronger and more resilient than before.