Core infrastructure fund International Public Partnerships (INPP ) is raising the bar on the return required from new investments as it comes under pressure to step up share buybacks.

Rather than using the previous 7% static annual targeted return, the £2.9bn fund’s manager Amber Infrastructure will consider whether proceeds from further asset sales would be better spent buying shares in the fund at a 20% discount or new investments.

Investment director Chris Morgan gave the recent example of INPP selling out of four low-risk-low-returning offshore transmission (OFTO)  senior debt investments, raising £200m, £77m of which was put into the higher returning Moray East transmission.

The board recently announced a £30m share buyback programme, funded with the OFTO proceeds after paying off the remainder of the £350m debt facility, which analyst Peel Hunt said was ‘muted’ relative to its peers.

‘If you look at the share price at the end of February, and I don’t think it’s moved materially since then, you’re getting the best part of a 9.5% return from the fund on a net basis. That’s attractive relative to a UK government bond, for example, which is yielding almost 5%. So I think there’s a really attractive entry point at the moment,’ Morgan (pictured) told Citywire.

Annual results for the year to the end of December showed net asset value (NAV) of the global transport, education and energy portfolio fell 4.1% to 152.6p per share, reflecting the payment of dividends and a ‘modest’ rise in discount valuation rates from 7.5% to 8.4% as government bond yields moved higher.

Dividends of 8.13p per share were up 5% on the previous year and covered 1.1 times by earnings, although this marked a fall from 1.3 times in 2022, which Morgan said was a result of uneven revenues.

The board is targeting a 3% increase to a total of 8.37p from the quarterly dividends this year, putting the investment company on a 6.8% forward yield.

Chair Mike Gerrard expressed the board’s confidence in the robustness of the inflation-linked portfolio. ‘Even if the company does not make any new investments, the projected cash flows are sufficient to fulfil INPP’s progressive dividend policy for the next 20 years,’ he stated in the annual report. This visibility is fiver years longer than rival BBGI Global Infrastructure (BGGI ).

Morgan emphasised Amber’s ‘frustration’ at the discount that opened up in 2022 as interest rates and bond yields surged. The formerly highly-rated fund has suffered a similar de-rating to rival HICL Infrastructure (HICL ), although the latter contributed to its share price weakness by cutting its dividend growth guidance up to 2025. INPP has not done this and has also been selling assets above their valuations.

‘It’s incredibly frustrating because the actual portfolio is performing very well, operationally and financially in line with expectations. We’ve grown the dividend every year since launch in 2006 and are doing as much as possible to address the market disconnect,’ he said, noting that a fall in government bond yields following a cut in interest rates would likely help.

The discount means shareholders have received a zero total return over five years, with dividends included, despite a 28.4% total return from the portfolio, according to data from Deutsche Numis. 

Peel Hunt analyst Markuz Jaffe applauded the fund’s recycling of capital and the repayment of short-term debts. ‘However, given INPP’s size, the level of share buybacks to date appear relatively muted,’ he said.

Stifel’s Iain Scouller gave the shares a ‘buy’ recommendation saying that given the ‘solid’ long-term performance, robust balance sheet and dividend growth, they should trade closer to NAV.