Monday, April 01, 2013

Less diagnosis, more cure

My previous post could easily be criticised as an example of diagnosis without any proposed remedy, the eternal curse of the analyst and self-proclaimed pundit. However, it was really intended as a starting point, from which some proposals could be explored. So here's my first.

As I was looking through BT's shareholder register (as sourced from Bloomberg) in researching the previous piece, a few names popped up which intrigued me, so I scoured the list to find all similar entities (at least those which could be identified - no doubt there are others in nominee accounts or funds which are not visible to me). These were local government authorities and similar organs of government. Whether or not the holdings are all still current is unclear, but, if Bloomberg's data is correct, then at some point over the past 15 months or so, a rather long list of local/regional governmental entities (Isle of Wight County Council, Corporation of London, London Borough of Hammersmith & Fulham, London Borough of Lambeth, Falkirk CC, Carmarthenshire (Dyfed) CC, Surrey CC, Staffordshire CC, Nottinghamshire CC, Somerset CC, North Yorkshire CC, Warwickshire CC, Kent CC, Shropshire CC, City of Westminster, Northamptonshire CC, Hertfordshire CC, Hampshire CC, Cambridgeshire CC, City of Edinburgh, Middlesborough CC, Derbyshire CC, South Yorkshire Pensions Authority, Lancashire CC, East Riding of Yorkshire, and West Yorkshire Pension Fund) held, between them, 95.28m BT shares. At today's share price, that represents a value of £265m.

Invariably, these are held as part of pension schemes, with the fund managers in charge selecting BT for its relatively defensive characteristics and dividend yield. All perfectly natural.

However, I can't count the times I have heard economic development people from councils all over the UK complaining about poor connectivity, and the need to pursue another solution in order to differentiate their town/city/county, to attract and retain business, and to improve the quality of life for their residents. Again, there is an uncomfortable disconnect here, between the local authority pension, which parks part of its fund in BT shares in order to preserve and grow value for its beneficiaries with low risk, and the necessarily more forward-looking council members and civil servants, who are trying to deal with the uncertainties of the future stemming from economic downturn and austerity. In some cases, their efforts might necessitate a path which avoids BT entirely, in conflict with the interests of BT shareholders, e.g., the pension fund.

So, where would a forward-looking local authority with a bit of capital to invest (I know this in itself is a contentious assumption in the current climate) turn to reap the long-term benefits of the wave of investment in true fibre access which the country requires to keep pace with other economies in Europe and Asia?

At the moment, nowhere. The handful of small companies out there actually trying to change the status quo are all privately funded, and it's difficult to envisage a conservative pension fund, particularly from the public sector, making a direct investment in such vehicles.

However, what about a fibre infrastructure fund, seeded by private sector insurance/pension funds or a large family office, managed by an independent team of industry experts, in cooperation with delivery partners and a consortium of service providers, which could deliver long-term stable dividend streams, and even the potential of a liquidity event via public listing at some later date? It could be a single national fund, or several regional funds, as best aligns the investors and recipient projects.

This is not a new idea, particularly. What I have in mind is not dissimilar at all from what the great team at Broadway Partners are working on, though my version would be more skewed to larger concentrations of population, and with institutional backing, though I see no reason that an EIS scheme couldn't be part of the mix.

If such an entity existed, with strong enough backing from credible institutional seed investors and service providers, I believe it would be a perfect place for local authority pension schemes to allocate at least some of the funds which they have historically parked in BT. And, as a private fund, the projects undertaken by the entity could sidestep the shit-storm that always accompanies anything with a whiff of state aid about it. Thus, the local authorities could directly invest in a vehicle with the single, explicit aim of providing true fibre connectivity in the UK, which might even directly benefit the investing authorities, if they ended up being selected for development by the independent fund management team. At the very least, I believe they would receive handsome and stable financial returns over the long term.

As is always the case when fibre is involved, I know there are many out there who will argue that this is an impractical solution, with myriad reasons why it would not work. I believe, not only that it could easily work, but that we will see precisely this model emerge elsewhere. As with fibre itself, the main question then will be how far behind the curve the UK is willing to remain.

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