Silvana Schenone and Sam Ricketts of Jardens. Photo / Supplied
OPINION:
New Zealand faces a critical challenge concerning the quality and longevity of its infrastructure after decades of under-investment.
The infrastructure deficit has become increasingly apparent in recent months with climate events further highlighting our vulnerability. There is significant pressure on central and local government bodies to increase investment across transport, water and social infrastructure, on top of other priorities, such as housing.
While government investment is essential to building resilience in New Zealand’s infrastructure, the solution to the infrastructure deficit is multi-faceted, with private capital also having an important role to play. Private capital has the potential to accelerate the significant investment required to address New Zealand’s infrastructure deficit and can take myriad of forms to best address differing objectives and requirements.
Private investment in the New Zealand infrastructure sector is not a new phenomenon, with significant private investments across the 1980s and 1990s into ports, airports, energy and telecommunications infrastructure.
The Central Government’s Mixed Ownership Model programme, which culminated in partial IPOs of Meridian, Mercury and Genesis across the mid-2010s, further increased private investment into energy infrastructure and dramatically improved their performance and capital discipline.
In the past couple of years, several notable transactions have involved private investments into the New Zealand infrastructure sector (see table).
The strong number of recent investments highlights the increasingly deep pool of private capital focused on the infrastructure sector and growing demand for high-quality infrastructure investments in New Zealand.
This presents a significant opportunity to leverage investor demand for the benefit of the country through attracting investment into maintaining, upgrading and expanding infrastructure capacity to meet New Zealand’s long-term needs.
Interestingly, the market has developed a range of investment structures to best address the requirements of different types of infrastructure investments and objectives of relevant counterparties with several recent examples of private capital being deployed in different ways.
Looking at the selection of recent private infrastructure investments in New Zealand, we have seen four primary structures utilised being outright acquisitions, joint ventures, capital partnerships - often together with long-term contractual arrangements governing ongoing use of the underlying infrastructure assets - and “greenfield” transactions raising capital for investment into newbuild infrastructure - such as Lodestone Energy, which has raised more than $300 million already to fund the development of a portfolio of solar farms across the country.
A recent example of an outright acquisition was StraitNZ (an integrated shipping and logistics services provider) where Jarden advised the successful investor, Morgan Stanley Infrastructure Partners. Likewise, the Eastland Network and Waste Management transactions are further examples of outright acquisitions in the New Zealand infrastructure sector in recent times. In an outright acquisition, the vendor’s links with the business are essentially severed following completion of the transaction.
On the other hand, the recent sale by Vector of 50 per cent of its metering business to Queensland Investment Corporation (QIC) was structured as a joint venture. The joint venture arrangement allows Vector to leverage QIC’s extensive experience, scale and access to capital to support its ongoing growth aspirations for Vector Metering while also allowing Vector to release capital to reinvest in other parts of its business.
Further to the more traditional models, there has been an increasing trend towards capital partnerships in the infrastructure sector.
The capital partnership model allows new private capital to be introduced without the loss of operational control, partnering, in most cases, New Zealand expertise with institutional, rather than strategic, investors.
Retaining local talent and preserving onshore decision-making are also important considerations.
Partnering with institutional investors frees up capital, upfront and going forward, for operators to explore additional investment opportunities and promote the continued growth of our country’s infrastructure network.
The three recent mobile tower asset transactions are examples of the capital partnership model, where the vendor enters into long-term agreements, retaining the ongoing use of the mobile tower infrastructure and strategic oversight despite selling the majority or the entirety of the underlying infrastructure assets.
Jarden’s team recently advised Spark NZ on the landmark transaction that saw the first carve-out of a mobile network operator’s passive tower assets in New Zealand.
For Spark NZ, its passive mobile tower assets network (TowerCo) remained a central part of its ongoing business, despite the company holding a minority ownership position post-completion.
Ontario Teachers’ Pension Plan invested approximately $900m to acquire a 70 per cent stake in TowerCo (later renamed Connexa), with Spark remaining the anchor tenant and retaining a 30 per cent stake.
Spark entered into a 15-year agreement with TowerCo, with rights of renewal, to secure access to existing and new towers, with a build commitment of 670 sites over the next 10 years.
This transaction enabled Spark to return up to $350m of capital to shareholders and reinvest in further growth opportunities including expanding its data centre portfolio and investing in new technologies, to further enhance outcomes and service for New Zealanders. Spark’s TowerCo transaction was followed by similar transactions by Vodafone NZ and 2degrees to sell their passive mobile tower assets - in those cases without retaining any ownership stakes but, like the Spark NZ transaction, continuing to have ongoing access to the underlying tower network through long-term contractual arrangements.
As well as partnering with listed companies, large private investors have also been increasingly active in looking at taking listed infrastructure companies private often to be used as platforms to deploy significant further capital into sectors with attractive thematics such as energy transition.
While this trend has not been seen as strongly here yet - other than perhaps Australian Super’s approach to Infratil in 2020 - it is becoming increasingly prevalent in Australia with listed infrastructure companies now seen as an endangered species in that market.
Since 2020 the number of listed infrastructure and utility companies on the ASX has halved, predominantly driven by Australian and international pension investors adopting more aggressive strategies to deploy capital into infrastructure.
The most recent and high-profile example is ASX-listed Origin Energy, a large integrated electricity and gas business that announced in March 2023 a binding deal with a consortium comprising of Brookfield Asset Management and MidOcean Energy for A$18.7 billion (Jarden is acting as adviser to Origin).
In our view, New Zealand needs to adopt an open-minded approach to funding sources if we want to resolve the infrastructure crisis in a timely and meaningful manner.
The strong demand from private infrastructure investors and the flexibility of investment structures has already shown that private capital is a credible alternative to fund desperately needed infrastructure investment.
Embracing this approach and diversifying funding sources will speed up the development of New Zealand’s infrastructure landscape, while providing strong returns to private investors, and ultimately a win-win for our economy and people.
· Silvana Schenone and Sam Ricketts are co-heads of investment banking at Jarden, which is an advertising sponsor of the Herald’s Capital Markets report.
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