Closing the returns gap in the telecom sector
Telco returns are under pressure from persistent CAPEX and slow growth. As financial sponsors increasingly own communication service providers (CSPs), they need a new operating model, one that drives return on invested capital (ROIC) above the weighted average cost of capital (WACC) without overburdening the balance sheet. Telco-as-a-service (TaaS) converts lumpy build CAPEX into flexible OPEX, accelerates innovation, and reduces technology risks. This Viewpoint explores how sponsors can perform due diligence, execute, and exit on a CAPEX-light thesis for CSP investments.
Over the past decade, CSPs have faced a persistent paradox: rising capital intensity amid flat revenue growth. CSPs remain locked in heavy, capital-intensive investment cycles (e.g., AI deployment, 5G standalone [SA] rollouts, XGS-PON upgrades, OSS/BSS [operations/business support system] transformations, cybersecurity, and edge deployments), yet topline growth remains muted. In Europe, CAPEX now accounts for roughly 20% of revenues, up from around 16% a decade ago. Globally, revenues are barely outpacing inflation, with industry analysts projecting about 3% CAGR through 2028. As a result, the sector’s returns are structurally compressed. When WACC exceeds ROIC, CSPs must rethink how to sustain innovation and technical relevance while easing capital burdens.
Given the structural compression of the sector’s returns, large CSP groups have exited several markets in recent years. This creates opportunities for private equity (PE) investors to invest in CSPs at low valuations, with more than 180 CSPs worldwide now owned by PE firms (see Figure 1).
Notable examples include:
Arthur D. Little (ADL) believes that the ongoing fragmentation of the telecom sector, coupled with these recent PE transactions, signals a fundamental shift: financial sponsors are no longer just peripheral infrastructure investors. Instead, they are increasingly becoming direct owners and operators of integrated CSPs. They are actively reshaping cost structures, governance models, and capital allocation to align with PE-style efficiency and return disciplines. This shift in shareholding creates opportunities for financial sponsors to break free from legacy constraints, opening the door to CAPEX-light, service-first models that address the aforementioned ROI squeeze by significantly de-risking innovation. This is the core thesis of TaaS.
PE firms are increasingly investing in CSPs, driven by a refined investment thesis focused on value extraction. Unlike traditional strategic investors, PE owners can focus more on value drivers than on technology or operational constraints, enabling them to turn around companies more quickly. They achieve this by:
As PEs continue to refine their CSP investment thesis, they must now account for how TaaS can de-risk innovation, simplify their tech stack, rationalize organizational size, and ultimately improve returns.
TaaS refers to the consumption of telco-related capabilities from third parties and, more specifically, other CSPs. In essence, CSPs sell network and platform products to other CSPs as software-as-a-service or managed services, typically with usage-based pricing (OPEX), and in some cases, hybrid models. In practice, TaaS allows a CSP to focus on its core strengths (e.g., local assets, enterprise distribution, and spectrum rights) while leasing standardized capabilities that others can deliver more efficiently, at a lower cost, and with greater speed.
The benefits for TaaS buyers include:
For PE sponsors, the attraction is clear: lower payback periods, reduced technology risk, and clearer exit stories built on outcomes, not convoluted bespoke platforms.
TaaS value propositions can be segmented into three layers (see Figure 2):
For PE investors acquiring CSPs, these three layers offer consistent structural advantages:
The proliferation of TaaS models is now evident across the industry, signaling that TaaS is no longer just experimental. Several CSPs have pioneered TaaS offerings, and their success stories demonstrate the accelerating market shift. Notable examples include:
These cases show that TaaS has moved beyond hype. PE investors can now actively pursue market opportunities where TaaS meaningfully enhances their investment strategies.
As TaaS reshapes the telecom landscape, it offers PE investors a new approach to sourcing decisions. Instead of the traditional “build and own” model, TaaS enables a more flexible strategy, allowing for modular, on-demand technology acquisitions. To capitalize on this, PEs should adopt a clear make/buy/partner playbook:
With TaaS advantages in mind, PEs must manage several trade-offs carefully:
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