HICL Infrastructure: Celebrating 10 years since IPO

Tony Roper talks more about HICL’s growth over the last 10 years and why it’s of particular interest to retail and pension fund investors alike.

Tony Roper, Manager, HICL Infrastructure

View the HICL Infrastructure profile page

HICL Infrastructure (“HICL”) has just reached a key milestone in both its own evolution as well as that of the broader listed infrastructure sector; 10 years since its IPO as the first listed infrastructure fund on the main market of the London Stock Exchange. In that period it has generated a net annualised investor return of 10.7% and grown its market capitalisation almost 10-fold since its original IPO capitalisation of £250m. It is the sixth largest fund in the entire investment company universe and the third most actively traded (source: AIC).

The listed infrastructure sector has experienced phenomenal growth over the last 10 years.  Another 11 investment companies have launched which focus on social, renewable and economic infrastructure, as well as infrastructure debt, giving the sector a present capitalisation of over £10bn. This growth, and HICL’s in particular, has not been driven by outsized returns or disruptive new technology. Rather, in an environment of low interest rates and general risk aversion, the relatively predictable, high-yielding nature of the underlying investments, coupled with the low volatility and uncorrelated movement of HICL’s share price to the wider market, has been of particular interest to both retail and pension fund investors alike.

HICL invests in long-term concession contracts to operate and maintain ‘assets’ like schools, hospitals, government buildings, roads and railways on behalf of procuring public sector entities.  As the equity financing party, it is responsible for ensuring the quality of service that the end-users expect from the assets.

Procured under the PPP (public private partnership) model, both in the UK, in countries in Europe, in North America, Australia and New Zealand, these projects typically have ‘availability-based’ payment streams that are often directly linked to inflation.  The ‘availability’ reference is derived from the fact that as long as the asset (e.g. a school or hospital) is available for use and operated in accordance with the predetermined contract standards, the project company will receive its contracted payment.

HICL uses specialist subcontractors (e.g. Serco, Interserve, Carillion, Engie) to operate and maintain these facilities. The projects benefit from a strong contractual framework which is designed to align interests of all stakeholders and allocate risk amongst the private sector parties best placed to bear the responsibility; thus payment deductions for poor performance are generally passed through to the relevant supply chain provider. High standards of corporate governance, in line with best ESG practice, are also a feature of HICL’s projects.

The existing portfolio creates a stable and inflation-linked income stream from which to pay shareholder dividends. The latter have risen from 6.10p per share annually to 7.45p in the year to 31 March 2016 and, as the portfolio has an average remaining concession life of over 21 years, this cashflow profile is ideal for those seeking yielding investment with long-term capital preservation and pursuing a liability-matching strategy. Good daily liquidity of over 2 million shares provides access to an otherwise illiquid asset class. As the retail and institutional communities have become better acquainted with these characteristics, HICL and its infrastructure peer group have generated a loyal following.

The rising asset prices across the board have clearly helped the performance of the existing investments, driven in part by a scarcity of suitable new opportunities. Looking forward, the resilience of the portfolio’s cashflows should insulate investors from changing economic conditions, as was seen during the financial crisis. The Company has a Board of seven independent directors who have worked with InfraRed, the Manager, to create the current portfolio that is performing as predicted.

With a sector that now has a ten year history, including strong performance during the financial crisis, there is good evidence of how the infrastructure asset class has performed well as an ‘alternative’ asset class.