Pent-up demand for high speed internet services in homes and businesses offers a resilient investment opportunity that can withstand macro-economic turbulence, Scott Baker, partner at Oak Hill Capital, a New York-based private equity firm, told PE Hub this week.
The firm recently committed $250 million for the formation of Omni Fiber, a company providing fiber-to-the-premises (FTTP) internet services. Omni Fiber will focus on underserved communities in the Midwest, with initial projects in Ohio, Pennsylvania and Michigan.
Oak Hill, which invested out of Fund VI, strayed from its investment script of partnering with founder or family-owned businesses. Baker said the firm avoided paying a premium to acquire an already existing platform but instead hired an experienced management team that will grow Omni Fiber.
“In all aspects of our lives today, high speed and reliable connection to the internet is critical,” Baker said.
He said fiber-to-the-premises internet service is attractive due to a combination of infrastructure and growth characteristics.
“On the infrastructure side, it has very defensive business model characteristics,” he said, adding that the industry has high barriers to entry but is a steady and well-protected form of investment. “The business is subscription model-based, very predictable, ongoing, repeatable business with high cash flow margins.”
On the growth side, Baker said: “It’s a very nice industry backdrop that is attracting a lot of interest from all classes of investors.”
Demand for high-speed internet grew excessively during the pandemic, largely as companies closed offices and shifted to remote working. For many, that trend will likely stay as companies adopt hybrid working models.
In the education sector too, many schools switched to remote learning during the health crisis. Telemedicine is another rising trend that is driving the need for reliable, high-speed internet services, Baker said.
Entertainment, especially streaming services, also presents an opportunity for the growth of fiber-to-the-premises services. For businesses, cloud computing and SAS software is another avenue that will likely spur growth for the sector. “All of those trends are driving demand for consumers to have better and faster, more reliable internet connections,” Baker said.
The government also is earmarking revenue meant to develop faster, reliable and high-speed internet services, especially in rural and underserved communities.
Omni Fiber is the sixth FTTP investment for Oak Hill Capital since 2014. According to Baker, Oak Hill’s strategy is constantly seeking platforms and ways to cover as many geographies as possible “because we see a good long-term opportunity to build these fiber networks across much of the United States.”
In June, the PE firm made a majority investment in Greenlight Networks, another FTTP internet provider in upstate New York.
In Omni Fiber, Oak Hill will focus on organic growth to scale the company. “The special sauce in achieving it is our execution,” Baker said.
Key focus will be on selecting markets and geographies in which to operate, designing fiber networks, arranging construction, establishing sales and marketing, installation and customer service capabilities, he said.
However, there is stiff competition in the internet provision business, something that can potentially pose a threat. The ability to stay ahead of the curve will yield desired results, he said. “There is a race going on to build businesses and to build networks in as many communities as possible and as fast as possible.”
The macroeconomic environment has slowed dealmaking. Some sectors are feeling the pinch of the economy in different ways that will slow growth. However, Baker expressed confidence that the fiber-to-the-premises internet space has strong resilience, claiming that during the past economic tumult that started in 2007, broadband subscriptions grew.
“Performance in the past has shown that this is not a cyclical sector, even in an economic downturn,” he said. “The sector is not particularly economically sensitive.”