According to PwC, the telecoms, media and technology (TMT) sector dominated global M&A deals, accounting for approximately one-quarter of both deal volume and value in 2022.
While its well known that private equity firms are very active in the industry, as well as infrastructure funds and banks, one of the lesser-known financial institutions doing work in the space is development finance institutions (DFIs).
DFIs are specialist development banks designed to support private sector development in developing countries in support of economic development projects. They can be multilateral, regional, national or subnational in nature and are typically set up by and owned by governments or non-profit organisations, with the mission of realising sustainable development goals and human rights.
Its investment interests aren't limited to any one area and includes the likes of transport, energy, water, Information Communications Technology (ICT), telecoms as well as other infrastructure.
Based on this definition, Susana Cordeiro Guerra, manager of institutions for development at Inter-American Development Bank (IDB) says, "The business model of DFIs therefore differs from “traditional” financial institutions, that tend to be majority owned by the private sector with a universal, wholesale or retail financial intermediation mandate that would tend to be more driven on a profitability business model based on the risk appetite as delimited by its shareholders and management."
Speaking specifically on its role in the digital connectivity space, she explains that "DFIs have the mandate to support public policies that may provide access to individuals and firms, which entails supporting laws and regulations that promote equative and affordable access and usage of broadband, fostering public and private investment in digital infrastructure, and enabling a balanced and transparent market development".
As a result, DFIs are expected to provide financing, technical assistance and advisory to policymakers, regulators, and market participants both in public and private sector.
Speaking to Jackie B Surtani (pictured above), regional director, Singapore office at Asian Development Bank (ADB) on differences between DFIs and other institutions, he says "unlike commercial banks or investment banks, that are listed on the stock market, we [ADB] are owned by 68 different governments."
The two largest shareholders of ADB are the US and Japan, with others including China, India, the UK, France, Switzerland and Australia. It key mission is to "alleviate poverty in Asia Pacific".
"Every project that we do has to have a clear development impact. That's biggest difference between us and a commercial, or an investment bank," says Surtani.
As a triple AAA rated bank, ADB assess every project with very rigorous credit standards and are extremely focused on the Environment, Social and Governance (ESG) criteria of each project.
"We are very strong on making sure that every project we lend to maintains very strict environmental guidelines as well as strict social guidelines. This is where ADB really prides itself."
Return on investment
Given that DFIs aim to bridge divides and develop underserved markets, it would be easy to assume that they don't worry as much about the return on investment in the way that other financial institutions do, and you'd be half right.
"DFIs do not necessarily follow the dynamic of return on investment as a “traditional” financial institution would operate," explains Guerra.
"The main objective is to seek to prioritise how to drive the optimal development impact based on risk appetite. As such, DFIs must fulfil its fiduciary duty to preserve and enhance its capital base, as well as its credit risk standing, and allocate its capital on the basis of long-term financial sustainable business models to ensure its viability over time."
Surtani explains it a different way, saying that DFIs like ADB have to be careful not to crowd out or crowd in the space.
"Our job is to catalyse other private sector letters. With our transactions, we want to mobilise private sector capital. We want to bring in commercial banks and we want to bring in other multilaterals as well," he says.
"We never want to be accused of pricing a loan or doing something that somebody else could have done or just because we offer the client a cheaper rate, they went with us."
With an approximate $1.7 trillion a year in infrastructure requirements across Asia, Surtani says "ADB can't do it on our own", so in terms of its return requirements, "what we do is we price at market".
Taking some risks
Given all this, the risk profile is presumed to be higher for DFIs too, but that's not necessarily the case.
"Because DFIs are generally suited to develop and expand unserved and underserved financial markets, it is logical to assume that they will assume a higher degree of risk in comparison to “traditional” financial intermediaries," says Guerra (pictured below).
"Most of these business models would seek to provide financing in terms that would go beyond current market supply-demand dynamic and transition currently unviable business models towards the development of new and deeper financial markets."
But just like any other credible financial institution, DFIs are never reckless as that has a direct impact on its overall mission.
"We're not a charity, so we're not going to take crazy risks," says Surtani. "If we take crazy risks, we're not going to get our money back. If we don't get our money back, that's going to affect our AAA rating and what people don't realise is if we don't have our AAA rating, we don’t have competitive funding which we then aren't able to deliver to our clients."
Speaking directly on the digital connectivity industry, Guerra says DFIs generally support public sector projects and enable private sector development, to a point.
"The underlying dynamism of technology-based projects has undercut risk appetite and as a result overall financing has been generally below demand needs," she says.
In ADB's case it was one of the first to invest in Kacific Broadband Satellites International, the satellite broadband internet service across Asia Pacific. The deal was for a $50 million agreement comprised of loans from ADB and the Leading Asia’s Private Infrastructure Fund (LEAP).
"That was a deal that very few people were willing to look at because it's a company based in Singapore that provides internet connectivity to the remote islands of Indonesia, Philippines and all the Pacific Islands, taking what we call a full market risk," Surtani says.
"This is the kind of thing that maybe traditional banks will not look at, but for us, it delivers connectivity to the some of the 3 billion people in the world who don't have internet access."
This goes beyond video streaming and gaming, and in turn provides services such as telemedicine, remote learning and education to these previously underserved areas.
The telecoms opportunity
With so many areas of development interest for DFIs in telecoms alone, it is hard to see where the priorities are.
In the case of the IDB, Guerra says that "digital connectivity is without question an important priority area for development for Latin America and the Caribbean".
"Now more than ever, Governments require support to develop public policies that will broaden access to its population, support the use of technology to expand growth and productivity for firms and enable private sector investment in digital transformation."
As a result, IDB plans to support regulation that aims to foster connectivity markets and access to these connectivity services as a basic human right as well as build institutional capacity for Governments to enable investment in digital infrastructure.
An example of this for IDB is the Digital Connectivity Collaboration Hub platform, announced in April which will support Brazil’s efforts to boost broadband access and promote digital inclusion.
"As for the specific scope of IDB operational initiatives are driven by the demand of its borrowing member countries in Latin America and the Caribbean, from a digital connectivity standpoint, the scope of such initiatives may encompass a wide variety of digital infrastructure components, according to the needs and priorities of each borrowing member country," says Guerra.
While each project is unique and has to have its own development story to be considered, Surtani says that an interesting area for ADB is telecoms towers. Using its headquarters in Manila, Philippines as an example, he says "internet connectivity even in the capital city, Manila, is just okay. If you go to the provinces like Mindanao and Visayas, which are the two areas that we are focused on, they need more telecom towers."
For its part, ADB granted a $40 million loan with Tiger Infrastructure Philippines, to build 380 telecoms towers in Mindanao and Visayas, in the Philippines.
The future for DFIs lies in its growth and continued cooperation. According to Guerra, DFIs must expand their scope to enable the mobilisation of private sector resources to grow its impact in developing countries, to achieve ambitious Sustainable Development Goals and to mitigate the impact of climate change.
"These require leveraging public investment resources for the benefit of enabling and prioritising participation from the private sector."
