AMP Capital: European growth and investment criteria

AMP Capital’s Infrastructure equity business, worth around AU$14.6bn, is active across several key verticals globally, including communications infrastructure. With two European tower assets they have five years’ experience of direct investment in the market. TowerXchange caught up with Adam Ringer, Investment Director at AMP Capital, to find out more about how they evaluate the European market and where they see opportunities for growth.

TowerXchange: Can you introduce AMP Capital, your background and footprint? 

AMP Capital is majority owned by AMP, a large Australian life insurance and pension provider. AMP Capital is the asset management arm, which is 85% owned by AMP and 15% by Mitsubishi UFJ Trust and Banking Corporation. This ownership structure is helpful in accessing the large pension fund markets in Australia and Japan.

We’re conscious of the fact that we are investing people’s pensions and that informs our investment strategy. Europe is a significant market for us for fundraising as is North America, so we have a truly global footprint. AMP Capital as a whole invests in listed equities, fixed income, real estate, infrastructure equity and infrastructure debt. I work in the infrastructure equity division. Our global infrastructure equity business has an AUM of AU$14.6bn.

TowerXchange: Which verticals do you focus on? 

We invest beyond communications, in energy, transport and also what we call infrastructure health - that is asset-backed healthcare services such as elderly care homes and specialist care businesses. We have recently expanded into this area in Europe, transferring our long-term track record in this space in from the Australian market, and this is expected to be a growth area for us. AMP Capital is a mid-market operator, we look for investments with a USD 500mn to USD 1bn enterprise value. They can be lower or higher but that’s our sweet spot.

In the communications sector we look across the board: we invest in towers but also in fibre and we are looking to invest in data centres.

TowerXchange: How do you evaluate investment opportunities in towers? 

How we evaluate investment opportunities depends on whether we are looking at broadcast or pure telco assets. For broadcast, the big question is in a given market, whether DTT is going to be around in 20 years time, whereas in telecoms the growth path is exponential. The interesting situation is businesses which do both, which is what the majority of traditional broadcast Towercos now do. So for broadcast we’ll look at how penetrated DTT is - for example in Spain it’s 70% but in the Netherlands it’s just 1%, so there is more visibility on DTT longevity in rural countries like Ireland or Spain.

Secondly, we look at how the mobile data market will evolve: mobile is ubiquitous now in terms of data coverage, but what is the market like in terms of the prevalence of fibre? Macrocells are becoming more efficient (even in last three to four years they have become so much better) so there’s room for both macrocells and fibre in a market. Third we look at revenue contracts - we’re always looking at cash visibility and cash generation. Then we look at the average life of those contracts, and the risk in those contracts. For example, some towercos have multiple contracts with different MNOs, others have one with one MNO. A towerco with a 20 year contract but with just one client has more credit risk than a towerco with shorter contracts but multiple clients. It’s important for us to look at renewals: when and what does the renewal look like? When we invest in a new capital asset, we typically look for capital recovery plus a return over the contract length not over the asset life.

Contracts in Europe are getting longer and less linked to lease up and churn.  We have seen sale and lease backs under 20 year contracts that have take or pay terms. Some markets and regulators restrict the length of contracts, but as we see more and more build-to-suit and densification, we’re going to see more contacts of this nature to support this build.

TowerXchange: What do you think will drive growth in the European market? 

Market growth is dependent on geography, but in general in Europe the growth for data demand is exponential, and this is expected to continue. There’s also a huge market opportunity in the decommissioning of towers; I haven’t seen so much of this to date but it makes a lot of sense for the European market. In most markets you had four operators with four networks who are now consolidating through either RAN sharing or tower sharing. In practice, the operators find decommissioning hard to do as small operational shifts to their own network take a lot of time and money, but independent towercos can help. People will be trying to make it work in the future and it’s a big opportunity for independent towercos.

The high requirements for densification, new build and consolidation are key growth factors for the European market.

TowerXchange: What do you see as the biggest risks in European towers?

Cost inflation in some markets is an issue, in some cases ground lease portfolios are structured so the Towerco is beholden to the people who own the land. We avoid these situations.  In other markets you have more control over this.

TowerXchange: How do you think 5G will affect market growth?

Adam Ringer, Investment Director, AMP Capital: 5G is a massive opportunity in European communications infrastructure. It’s progressing much more in the US at the moment. In Europe, DAS will be huge as well as small cells but it’s taking a while to come through. We are developing DAS in Spain via Axion’s JV with WIG. I don’t think the small cell agenda will detract from macro cells, you’ll need both and there will be 5G solutions on towers as well. But clearly 5G is all about data capacity, taking on the amount of data that 4G/LTE can’t. When it comes to setting up IoT, it will go beyond just people using phones, and will connect devices humans don’t use, making the growth even steeper.

TowerXchange: How do you compare European towers with the rest of the world? 

Eight years ago the European tower landscape looked totally different to how it does now in terms of independent towercos present and how many investors are looking at the space. The market has matured a lot but still has a long way to go vis a vis the US market. I wouldn’t say it’s crowded now, but there are more people involved. There’s a big difference between valuations of a US and European portfolios, and the key reason for that is the tax treatment in the US.

TowerXchange: Tell us about the tower assets currently in your portfolio.

We own two towercos in Europe; Towercom in Ireland and Axion in Spain. We bought Towercom in 2013. Towercom sits in our Irish fund which is an open-ended, evergreen fund, meaning we can hold it for the long term and as investors, we see a lot of growth in that market. Towercom has been run well by fantastic management, and it’s a pure telecoms player, so no broadcast commitments. The towers were formerly the Eircom backbone so it’s essential infrastructure and this incumbency has been helpful.

We bought Axion in 2016 and it is held in our global infrastructure fund, which is different to our Irish fund as it’s a closed ended vehicle, so therefore we consider future exit strategies as a core part of our investment thesis. Although Towercom has a fantastic position in Ireland there has not been much tower consolidation or need for MNO-focussed build-to-suit, whereas in Spain, Axion sees opportunity for this, which it has begun to execute on, and we’re excited about that. Axion has a large broadcast element as well. It was originally formed from the sale of towers by the Andalusian regional broadcaster. Axion is also Spain’s largest independent national broadcaster of private radio.

We are always looking for more opportunities. There’s a lot of relatively well-known portfolios for sale in the current market, which have been well publicised. We will look at all of them, but whether we progress is another issue, as some of them are broadcast-heavy assets, and for us mobile-focussed towers are more attractive. Our focus depends on the individual situation, and on the factors mentioned above, but we are very active in the space and keen to look at all the opportunities which present themselves. However, we continue to progress cautiously as the space becomes more competitive.