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 msherwood@enterprisepe.com

Christian ElmesT 020 7487 8483M 07809 686 439E celmes@enterprisepe.com

The Rural Broadband EIS Fund

Sponsored byEnterprise Private Equity Limited