Investors Watching Net Neutrality Rules and Other FCC Actions: Pai

Investors aren't concerned with much that regulators do, but some are closely watching the FCC's reimposition of Title II net neutrality rules, discrimination rules and the agency’s bulk-billing proposal, said former FCC Chairman Ajit Pai, now a partner at private-equity firm Searchlight Capital. Pai spoke during a Free State Foundation webcast posted Tuesday. Also joining the webcast was former Commissioner Mike O’Rielly, who served with Pai.

“Regulatory and legislative decisions can have a very significant impact,” with price regulation “the easiest example of that,” Pai said. The prospect of federal, and particularly state, price regulation, “significantly deters us from wanting to make the investments in some cases,” he said. “It’s just part and parcel of [deciding whether] is this a business-friendly environment or not?”

For businesses to spend money, they need a “reasonable expectation” they’ll get a return on investment, Pai said. Private equity firms also care about merger policy, he said. “Private equity is not just about making the investment but exiting an investment once you’ve improved the business,” Pai argued. When regulation delays transactions, it discourages investment, he said.

Pai said when he was at the FCC he didn't fully appreciate the role private equity firms play, “the value that they can bring,” or how they operate. Every firm is different and there can be variations between how funds operate within a single firm, he said. Searchlight has a buy-out and a digital infrastructure fund, and each has different expectations for the rate of return and time horizons for holding investments, he explained. The firm also has a credit fund “which operates more opportunistically and is doing more short-term investments,” Pai said. “That sort of thing I didn’t really appreciate at the FCC.”

Pai detects private equity's growing skepticism with the FCC and a “tone” that “private investment in this sector might be a bad thing.” Private equity backs companies that are building new infrastructure and hiring, Pai said. “We’re really doing a good job in these markets,” he added. Private markets “have a very important role to play.”

Searchlight sees investment opportunities in copper assets and overbuilding them with fiber, Pai said. He noted the firm’s investments in Frontier assets in the Pacific Northwest, which were about 85% copper and 15% fiber “and we essentially tried to flip that,” he said. “We’re building more fiber every day” and are looking at funding through the broadband equity, access and deployment (BEAD) program, he said. Searchlight made a similar investment when it bought Consolidated Communications in the Northeast. “We’re overbuilding ourselves,” he said.

Some of the BEAD rules are favorable for investment, Pai said, noting that investors remain concerned about price regulation. The initial letter of credit requirements (see 2311090067) were “a real restraint on working capital -- you’ve got to tie up a lot of money that would have gone to deployment,” he said. Relaxation of NTIA's “buy America” requirements (see 2402230064) has proven helpful, he said. The guidance from NTIA “has been pretty complex to navigate” and every state is different, he said.

Searchlight is avoiding some states because the requirements are too difficult, Pai said. State plans that are working best are those that allow private investment, he said. It has been tough for states to add the staffing they need to administer BEAD in their broadband offices, he said. Pai predicted BEAD deployments will be slower than initially expected. “We’re still in a holding pattern for some 46 states.”

Pai questioned whether BEAD will lead to broadband coverage of the entire U.S., noting the last 5% of anything is usually the hardest. NTIA can learn from the FCC's mistakes in funding programs, he said. Pai also predicted that fixed-wireless and low earth orbit satellites will play a role in serving the hardest-to-reach areas.