The second cable: connectivity risk in small jurisdictions

Several of the jurisdictions where the firm holds entities are served by one submarine cable, with a microwave or satellite path as a fallback that cannot carry the traffic. The financial sectors in those places settle payments, hold custody records and file returns over that connection. Cable faults occur somewhere in the world most weeks, usually caused by an anchor or a trawl, and repair requires a specialist vessel that may be three weeks away. The exposure is understood locally and almost never priced.

The commercial problem is that a second cable is unattractive to the operator of the first. Landing a system costs between forty and one hundred and twenty million dollars depending on distance and shore works, and the incremental traffic on a small island does not repay it. The first operator therefore has every reason to defend a monopoly it did not have to build twice, and the market produces the wrong answer with no party behaving badly. This is a structural condition rather than a failure of management.

Where the firm has taken positions, the transaction has combined a consortium of users with a long-dated capacity contract. Banks, telecommunications operators, a publicly owned utility and occasionally a data centre commit to buy capacity for fifteen years at a price that funds the build. The equity return is modest and the contracted revenue is dependable, which suits a holding sized against long-dated liabilities rather than against a five-year exit. We underwrite these as infrastructure and not as technology.

Regulation decides whether a second cable is possible at all. A landing licence, a right of way to the shore and access to a station are granted by the jurisdiction, and in a small market all three consents can be held by the incumbent. Our diligence starts with the consents and only then reaches the engineering. A project with a signed landing licence and an unsigned station agreement is not a project. It is an option on a negotiation with a party that does not want it.

The demand case has improved for reasons unconnected to population. Financial services, remote operations and the storage requirements written into modern record-keeping obligations have raised the traffic floor in jurisdictions whose resident numbers have not moved. A market of sixty thousand people can generate the traffic of a much larger one when it hosts fund administration, insurance and payments. That divergence between population and traffic is the observation our Caribbean and Indian Ocean coverage is built on.

The wider point applies beyond cables. Information infrastructure is a deployment sector for the firm because the assets are dull, contracted and difficult to replicate, which is the opposite profile to the origination sectors that fund them. A veterinary registration and a landing station have nothing in common except that neither can be created quickly by a competitor with capital. Capital earned where entry is slow is best placed where exit is slow for someone else.

Published 2021-09-15 by the Private Equity division. Research is prepared for eligible counterparties and does not constitute advice.