The fourth utility

The fourth utility

17 May 2021 | Natalie Bannerman

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Vincent Gerritsen, head of UK and Europe at H.R.L Morrison & Co, discusses the buzzing infrastructure investment market with Capacity’s Natalie Bannerman, and explains why the firm has a “telco DNA.

Gas, water and electricity are the three basic, uncontested utilities. Broaden that out and you might include things like waste management and garbage disposal, but there is a fourth – “Digital infrastructure is increasingly seen as the fourth utility alongside gas, electricity, water, because it’s really becoming a primary need of society,” says Vincent Gerritsen, head of UK and Europe at H.R.L Morrison & Co, one of the first dedicated infrastructure asset managers.

Speaking on opportunities in the space, Gerritsen reminds us that as well as the commercial benefits, digital infrastructure also is key to a more democratised society.

“For an inclusive society, digital infrastructure and broadband access play a key role. Digital Infrastructure will also make a major contribution to economic recovery as nations emerge from a challenging year.”

The roll-out of fibre in support of 5G has also opened the door to new projects and, by extension, financial opportunities.
“Telcos are focused on roll-out of fibre networks to retain existing and win new customers and are increasingly deploying 5G networks also requiring densification of fibre networks, creating a strong backdrop for digital infra investment opportunities,” Gerritsen says.

This aside, Gerritsen says there is no one size fits all when it comes to digital infrastructure investing. The right type of investment depends on an investor’s risk/return appetite.

If an investor is looking for more stable returns, “long-term contracted telco tower portfolios would sit more at the core end of the risk spectrum,” he says.

It’s a similar story with hyperscale data centres with long-term contracts. “Those provide stable cashflows with sizable cash yield,” he adds.

As for fibre roll-out opportunities in more densely populated areas, Gerritsen says this sits at the higher end of the risk spectrum as these are commercial roll-outs in a more competitive arena with an increased risk of overbuild.

Looking at the more subsidised, or even concession-based, fibre projects, Gerritsen says that “participants have effectively an economic monopoly thanks to subsidies, or an actual monopoly on the back of concessions for certain areas.”
Fibre projects with these characteristics are more stable when compared with greenfield roll-outs in competitive densely populated areas.

As for Morrison & Co, Gerritsen says that: “We tend to focus on scalable platform investments that offer follow-on growth and development investment opportunities through which significant value can be added for our investors, instead of solely focusing on already existing operating investments that are long-term contracted.”

Overall, it’s all about where, as an investor, you want to play in terms of risk return profile and what type of terms you are looking for.
Over at Morrison & Co “we have a strong telco DNA,” shares Gerritsen. Many of its executives, including its CEO Marko Bogoievski, come from the telecoms industry. In the case of Bogoievski, he was previously CFO of Telecom NZ and now serves as chair of Vodafone New Zealand, another Morrison & Co asset.

Through the listed infrastructure investment company Infratil that it manages, Morrison & Co acquired Vodafone New Zealand back in 2019, just before the effects of Covid-19 began to reverberate across the world.

Since the start of the pandemic, Gerritsen says that data usage has gone up 50%; but the question is, will this trend continue?
“New Zealand is one of the countries that has experienced limited impact from Covid-19 because it has been very strict with lockdowns and implementing measures to prevent spreading,” he explains.

“So currently, they’re not in a lockdown situation anymore and this provides an interesting case study of what is likely to happen when other countries, such as those across Europe, come out of the Covid situation. What we’re seeing is that these increased data usage habits appear to be sustainable post-lockdown.”

The drivers of said data explosion remain largely the same as they’ve always been, as with the growing deployment of 5G networks, content and of course the proliferation of the cloud.

“Both content and cloud are significant driving forces. Companies are moving their compute and storage more and more into the cloud. As more complex data structures develop and security requirements increase, many businesses have decided not to do this in-house,” says Gerritsen.

“Connectivity networks and structures are being put in place to come up with more efficient and advanced solutions. If you look at the development of the Internet of Things, if you look at the development of artificial intelligence, if you look at quantum computing – we’re only at the beginning.”

M&A
With the likes of Virgin UK and O2’s £31 billion proposed merger soon to go ahead, and the advanced discussions for another merger between Telenor Group and Axiata Group Berhad, it’s clear to see that M&A is at its peak across the telecoms space, largely due to the costs to build new data-centric networks. But sharing might just be the way forward.

“There’s a big benefit of shared infrastructure because otherwise it simply becomes too expensive and not economic to own independently, especially as telecommunication networks densify and require higher levels of investment,” Gerritsen explains.

“So we do see a trend happening, whether it’s enterprises or corporates seeking others to run their data centres on a larger scale and get better economics, or mobile network operators carving out their tower portfolios moving into a carrier neutral portfolio benefiting from optimisation and sharing.”

However, Gerritsen rightly questions the commercial and regulatory barriers that may prevent more of this type of network sharing to occur.

“There is a benefit of sharing but to what extent will regulators allow sharing before they say, actually this is becoming too much of a monopoly and how do we make sure there’s still competitive environments? That will be an interesting dynamic.”

In the case of Morrison & Co, its investment strategy focuses on growth platforms with greenfield development options backing strong management teams to achieve their growth ambitions, growing the likes of its CDC Data Centers business in Australia three-fold over the last three years.

No conversation these days can overlook the influence of OTTs/cloud/hyperscalers in the telecoms space. The investment landscape is no exception.

Acknowledging that these parties drive significant growth and need for new digital infrastructure, Gerritsen says an interesting part of these dynamics is the opportunity for partnerships and investors’ involvement.

“To what extent do these businesses self-build versus lease? To what extent does this provide an opportunity for investors to deploy significant capital and de-risk investments through long term contracts?” he asks. “It has been a very strong accelerator and driver behind the growth of data centres.”

This aside, across different geographies, such as in the Nordics, Gerritsen has observed a growing number of content and cloud providers acquire land to develop their own data centres.

“That’s something to watch. How will these content and cloud providers behave going forward? I personally think it will be a hybrid between third-party provider solutions and self-builds, providing maximum flexibility.”

February 2021 saw Morrison & Co make a public commitment to sustainable investment led by its long-standing purpose to “invest wisely in ideas that matter” – a pledge not often seen from investment and portfolio companies.

“There’s two levels, you’ve got Morrison & Co, as an organisation we’ve committed to becoming climate positive within our own operations. It means we’ll be looking to eliminate our carbon footprint and be wiser in terms of how we travel and those types of potentially carbon-intensive activities. Where we’re not able to do that, we are offsetting through programmes that help local communities.”

With a presence across the US, Europe and Asia-Pacific, and a growing team of experienced industry veterans – including the recently appointed digital infrastructure expert Gary Sugarman in the US – the investment firm is showing no signs of slowing down.
“There’s ample growth opportunities in the digital infrastructure space. We are using our strong telco DNA and operational telco experience and insights from existing investments to support management teams in their growth ambitions, adding value for our investors,” says Gerritsen.

“We’re looking to build out our data centre exposure using insights and relationships from our successful data centre platform in Australia and are looking at platform investment opportunities both in North America and Europe.”

The company also has its sights set on securing strategic network assets, “whether it’s in the fibre space where there’s opportunities to do new network roll-outs or through some form of market consolidation”.

Interestingly, Gerritsen says that subsea fibre could be an “attractive space” where they do have experience within Morrison & Co they could leverage. Finally, and in line with its existing investment in Vodafone NZ, another area of interest includes “integrated telcos”.
As for plans for emerging markets like Latin America or Africa, Gerritsen says: “Never say never.”