Supply and demand
Fresh from leading Rubicon Capital Advisors team on a nursing home portfolio transaction and a data center campus, managing director John Kirwan explains there is an underlying structural demand for both healthcare and digital infrastructure making them more resilient for investment. This underlying driver is not typically seen in traditional core infrastructure.
The healthcare challenge
Rubicon acted as the exclusive sell-side financial advisor to Irish company TLC Consolidated Unlimited in the 100% equity stake in the TLC Nursing Home Portfolio. The purchaser is Orpea Group, a French publicly-listed company with a global portfolio of over 1,000 dependency care facilities. a strategic move by Orpea to enter the Irish nursing home market.
Nursing homes provide long-term care to elderly and high dependency residents and form a key segment of social infrastructure. In the current low yield environment where infrastructure players are turning to core-plus sectors, the asset class offers largely government sourced and inflation protected revenues in a growing and capital-intensive industry.
A December 2019 report on key trends by Ireland’s Department of Health found Ireland is beginning to catch up with other European countries in terms of population ageing.
Minister for Health Simon Harris said: “The largest proportional increases in the population in Ireland will be in the category of those aged 85 years and older. The number of people aged 65 and over will grow from one-fifth to over one-third of the working population over the next two decades which will have implications on how we fund our health services. This is a good thing – people are living longer, but we need to ensure they live well.”
Kirwan notes these demographics represent a “dramatic change” and across Europe the sector’s robust growth fundamentals are driven by a widening demand-supply mismatch. The provision of elderly care has very high barriers to entry, due to its capital expenditure needs and the operational expertise required to ensure compliance with stringent regulatory standards. The high regulatory threshold, the continuously ageing global population and government support for this essential service has led to strong demand from infrastructure and other long-term investors.
The UK, Germany and France have seen the greatest level of investment volumes over the previous five years owing to significant demand for care homes within these countries (occupancy rates typically above 90%) and well-established healthcare infrastructure.
The French market has generally relied on informal and state care with roughly 53% of care homes owned by the state,.However, these restrictions on the private sector are beginning to be relaxed, meaning that investment into the French market is likely to increase.
Spain and Italy both have less developed care home markets owing to the emphasis on informal care, however Spain is expected to have the second largest over-80 population (surpassed only by Japan) in 2050, and investors are likely to seek to capitalise on the Spanish care home market and its comparative free market structure.
Bringing a global outlook home
Rubicon’s global outlook, however, places the Irish headquartered firm in a strong position to leverage access to its global financial investor base for its burgeoning home market.
The Nursing Home Support Scheme in Ireland is underpinned by the Irish Government as it ensures that elderly care is universally available regardless of means. Kirwan also notes the market remains highly fragmented, presenting a significant opportunity for potential purchasers to establish a platform to acquire, build and consolidate assets.
Like many other infrastructure sectors, the central government support of elderly care in Ireland also adds to its attraction for international investors and Kirwan believes healthcare will be prioritised by governments post-pandemic.
A ramp-up in healthcare investment in Ireland was on the cards before the pandemic arrived to test a creaking public health system. Ireland’s healthcare infrastructure woes were already the single biggest public policy issue before coronavirus arrived. A widely cited poll following February’s general election found that health was the number one issue that decided how people voted (32%), followed by housing (26%) and that appeared to have sealed the fate of Taoiseach Leo Varadkar’s government.
P3 Bulletin understands the Health Service Executive is pushing through with its plans for a bundle of Community Nursing Units to be delivered across the country under a P3 contract while the Irish government’s Higher Education P3 Programme is also progressing despite the crisis.
Kirwan believes that to date the private sector has been very efficient in funding and delivering new purpose built infrastructure for healthcare and elderly care without the need for direct government financing. This private sector participation will become more importantas the Covid-19 crisis puts a “massive strain on public budgets” and availability of funding for public infrastructure diminishes.
The virtual revolution was televised (but mostly streamed)
Pre-pandemic there was already a growing intervention by the state in many jurisdictions to ramp up the development of telecommunications infrastructure. Intensive schemes such as the roll out of high-speed broadband were already considered essential for urban and rural economies to grow.
This had led to growing intervention by governments such as Ireland’s National Broadband Plan, the UK’s National Digital Infrastructure Fund (NDIF) and with capital intensive fibre-to-the-home concessions procured by governments across France.
Post-pandemic universal telecommunication infrastructure has emerged as not just essential for economies but the essential tool to keep people safe and to prevent health systems becoming over-run.
Like the vast majority of workplace communications in the post-pandemic world, Kirwan’s catch up with P3 Bulletin was courtesy of the latest digital infrastructure available to those who could stay at home and away from the healthcare frontline. Kirwan notes that getting into the habit of communicating the way we are now will persist post-pandemic and the increased use of devices will see a surge in demand that outstrips supply.
This forecast in demand, like healthcare, is not seen in traditional core P3-type infrastructure.
Just before an actual virus became front page (and backpage) news worldwide, the roll-out of 5G and the need for state intervention was a hot topic in mainstream and industry press.
Kirwan notes that in comparison to conventional digital assets such as broadband and smart meters, the step-up to 5G is “exponentially larger” and “much more interesting” with the infrastructure that is needed to transmit “impressive”. He explains how 5G requires an extensive yet closer network with antennas likely to be required on lampposts, streetlights and other public assets. It will also generate more data.
In 2019 there was much industry commentary on they ways that data would shape how transport, social and utility infrastructure will be delivered and maintained. However, there was also a further realization that data is very much a growing sector in itself.
Kirwan states there will be a “massive increase” in demand for the transmission and storage of data. He adds data infrastructure is more immune to business cycles and the sector will be even more resilient following the Covid crisis.
The companies dominating this asset class are unsurprisingly the US technology titans that define how people communicate and work increasingly as 2020 unfolds. Apple, Amazon, Facebook, Google and Facebook have invested billions of dollars in city-sized campuses across the US to store data and their physical footprint is growing overseas also, notably in Ireland.
While these hyperscalers dominate the data storage infrastructure landscape, both governments and business recognise the need for a ramp-up in data storage infrastructure. With high intensive capital required Kirwan believes the private sector is needed to deliver the capacity.
Canada, a market Kirwan knows well from his time with Scotiabank, remains the trailblazer in developing data centres with P3 models. Federal and provincial government projects are delivered by companies including Plenary Group, Balfour Beatty, Forum Equity Partners and Walsh. However P3 is now widely mooted as a model to deliver such facilities, particularly in emerging markets.
Meanwhile many of the principal P3 and renewables investors including DIF, Macquarie, Amber, AMP Capital and Star America have added data centres to their portfolios.
Clout in the Cloud
US giants Amazon, Microsoft, Google and Facebook have all built and expanded data centres across Ireland. While Apple, who along with the other hyperscalers has significant operational and financial interest in Ireland, was to develop a data centre in Galway on a site by the fields of Athenry but was thwarted by the Irish planning process. It is therefore no coincidence that many of Ireland’s leading project finance lawyers have also advised on data centre projects.
Technology is a critical part of the Irish economy. The critical mass of expertise from Ireland’s data centre boom has also led to these tech giants placing key members of their Irish team at the heart of projects in EMEA and beyond. Rubicon has now added its clout to Ireland’s cloud expertise after it acted as exclusive sell side advisor on purpose-built data centre campus to developed across two sites in Ireland, with full details to follow next week.
However these facilities require more than project finance expertise to be developed, they also need power, and lots of it. Kirwan notes data centre owners such as the hyperscalers are increasingly requiring direct access to renewable energy, and the Covid crisis will not diminish that demand for clean energy.
Kirwan concludes that not only will the ramp-up in renewable power and energy transition investment continue post-pandemic in response to climate change; but the climate agenda will be emboldened as the pandemic has made people realise how their world is a “fragile place”.
“Governments will not be let off the hook again.”
John Kirwan is the Managing Director & Group Head at Rubicon Capital Advisors and is based in London.