The Rural Broadband EIS Fund Sponsored by Enterprise Private Equity Limited
Jun 25, 2015
The Rural Broadband EIS Fund
Sponsored byEnterprise Private Equity Limited
Highlights
• A new area for EIS investment• Substantial unsatisfied demand• Limited competition• Experienced management team• Fund strategy focus on – maximising returns– minimising risks, and – facilitating exit
• Indicated Fund IRR of 21% net over four years
Why rural broadband?
80% 74%
Rural households depend more on broadband than urban areas & more readily buy it when it’s available
A great unexplored opportunity!
Big Demand
Applications are exploding
Cisco predicts a 5-fold increase in Internet traffic over the next 3-years
Centred on the family
Why rural broadband?
BT Concentrating their investment to reach the ‘first 70%’ of premises, where the competitive threat is obvious, applying for Government support to reach 90%
Virgin Serves ca. 50% of UK premises – and not planning to expand significantly beyond that
• The “last 10%” of households is beyond an incumbent’s capacity or inclination….
• In the UK, it contains at least 2.5m properties• And it is our sweet spot!
Why rural broadband?
Source: Calix report to the FCC in the USA
Conventional industry wisdom says it’s not economic
The evidence says otherwise….
The US has discovered the cost of delivering fibre-optic broadband is approximately the same in rural and urban areas:
• Higher take-up rates in rural areas reduce the acquisitions costs
• Lower dig costs mitigate the longer distances between customers
The opportunity
“Final 10%” > 2,500,000 premises
£1,000-£1,500 to deliver a fibre each one
… creating about £150 annual gross cashflow from line rental alone…
… with a cash payback in 7-10 years…
… but exit in five years at industry multiples of 10x cashflow provides the value uplift
In Europe it’s already happening
Source: European FttH Forecast, 2011-2016Graham Finnie, Chief Analyst Heavy Reading
A European market realityMost new fibre-optic broadband is not being installed by incumbents
So why hasn’t it started here?
Because:1. BT’s & Virgin Media’s investors*
expect cashflow, not “speculative” investment
2. BT has little incentive to replace a highly cash-generative copper network
3. BT has faced very little competition in rural areas
4. The demand has never been as clear as it is right now
5. Government grant funding is only just now becoming available
* and management incentive schemes
While it’s new to the UK….Numerous commercial successes, including:• OnsNet, The Netherlands 90%+ uptake
AltiBox, Norway 66% uptake• Hiawatha Broadband, USA 84% uptake
Notable scale successes include:• Reggefiber recently raised €250m• Illiad recently raised €200m
Notable exit values include:• Hafslund Fibernett 14.6x
EBITDA• MetroWeb 10.7x
EBITDA
Industry’s lessons
Lessons from OnsNet• Community engagement,
what OnsNet calls the “us feeling”
• Traditional “supplier-led” approach is not enough
• Local services are key to demand
Lessons from BT• Consumers need to have
choice of familiar brands• Make it easier for national
ISPs to sign up• “Open Access” always
trumps “Vertical integration”!
The team
Michael Armitage Founder of Broadway Partners, the Asset Manager, with 30 years in Telecoms/City
Hugo Pickering Cotswolds Broadband founder Manoj Khosla 30 years City experienceMartin Sherwood Key principal at Enterprise Private Equity
with extensive EIS experience
Plus, project teams within each Investee Company
Directors
Adrian Wooster Specialist in rural broadband currently advising the Government
Kees Rovers Community fibre pioneer
Advisory Panel
Michael Armitage Founder of Broadway Partners, the Asset Manager, with 30 years in Telecoms/City
Hugo Pickering Cotswolds Broadband founder Manoj Khosla 30 years City experienceMartin Sherwood Key principal at Enterprise Private Equity
with extensive EIS experience
Adrian Wooster Specialist in rural broadband currently advising the Government
Kees Rovers Community fibre pioneer
Directors
Adrian Wooster Specialist in rural broadband currently advising the Government
Kees Rovers Community fibre pioneer
Advisory Panel
Directors
Fund strategyThe Rural Broadband Fund’s strategy is to invest where:• Demand is highest• Competitive threats are weakest• Potential exits are clear
Fund strategy
Aligning interests helps to capture externalities
Minimise costs
Micro-trenching
Community wayleaves
Rapid deployment
Maximise uptake & revenues
Demand stimulation
Businesses
Public sector
Mobile
Minimise risk
Co-investment
Alignment with Government policy
Investee companiesCotswolds Broadband
• Most rural county in South East• High per capita income, high incidence of home-
working and weekenders• 9,000 households, £5.5m capex
North Dorset Broadband• Strong community focus, high incidence of
home-working• 5,000 households, £4.5m capex
South Hams Broadband• Stable resident population with strong tourism
dependency• 1,200 households, £1.1m capex
…. plus, a large pipeline of prospects
Target returns
Mid-case
• Returns of £1.54 for each 70p* • Equivalent to an IRR of 21% over four
years
Up-side • £2.55 for each 70p net• Equivalent IRR of 37%
Down-case
• £1.07 for each 70p net• Equivalent IRR of 11%
* £1 less 30% tax relief
Assumptions:• 20% sweat equity• Assumes exit in year 4• Target returns post fees and management incentive
Exit route
• Multiple potential exit routes – Trade sale/industry consolidation– Sale of assets to infrastructure, pension or private
equity funds– Refinancing via lending institution
• Keys to successful
“scale”“industrial strength”“standardisation”
from the outsetThink
Details of the offer
• Fees charged to the companies, not the Fund– Investors get tax relief on 100% of their
investment• Issue costs 7.5% of funds raised on first £2m– 6.5% thereafter
• Annual management fee of 2 x 1%• Intermediary commission of 3%, or 2% plus
0.35% for four years
Details of the offer
• Minimum investment of £10,000– In increments of £5,000
• Minimum Fund subscription of £2m• Offer closes earlier of January 31st 2013 or full
subscription, unless extended
Conclusions: why this fund?
• Unsatisfied Demand– In rural areas: greater than urban, pent-up, and unsatisfied
• Limited Supply– Limited competition thanks to incumbents’ balance sheet, cost
structure & organisational constraints • Manageable Risk
– Risk mitigation via Open Access model, high levels of community engagement, focused execution
• Attractive Returns – Enhanced returns via RCBF grant money
• Clear Exits– Via industry consolidation, infrastructure investors, or re-
financing
Don’t just listen to us…..“The internet has the power to overcome the problem of rural isolation. It can revolutionise rural job opportunities, community life and the whole rural economy…. It will bring far more opportunities to rural England than the previous innovations of canals and railways, putting people in touch with rest of the world….It’s outrageous that there are still parts of the country where the internet is still painfully slow because they haven’t got broadband yet.”
Owen Paterson, Defra Secretary, speech 12/9/12
“Cotswolds Broadband’s vision of a broadband service that covers the UK in its entirety is a key part of the future of rural Britain. Without companies like this, we are in danger of disenfranchising large sections of our population”
Martha Lane-Fox
Assistance
Martin SherwoodT 020 7487 8482M 07768 765 542E [email protected]
Christian ElmesT 020 7487 8483M 07809 686 439E [email protected]
The Rural Broadband EIS Fund
Sponsored byEnterprise Private Equity Limited