Infrastructure was once regarded as something of a boring asset class. Established investment funds such as International Public Partnerships (INPP ) and HICL Infrastructure (HICL ) that pioneered this hugely important niche started by offering a simple proposition – bond-like returns for income-focused investors via dependable government-backed income streams. There was always the prospect of some capital growth, but the focus was very much on dividend yield as well as growth in the income.

Over time the infrastructure segment grew and new spins on the same theme emerged. Those solid government income streams from owning companies maintaining hospitals and schools changed into renewable energy projects – wind and solar – with some fixed income streams alongside a growing range of variable income flows. Again, the emphasis was largely, though less exclusively, on dividends and dividend growth.

Then in the last few years another variation emerged on this real asset theme – growth infrastructure assets. The strategy here was to follow the large private equity funds up the risk curve to back real operating businesses that still produced a regular income flow but were in reality more like operating companies.

Two sub-sectors succeeded in raising billions of pounds of funding for energy storage/efficiency and digital infrastructure. Alongside these two niches there emerged a hybrid of outfits such as 3i Infrastructure (3IN ) whose portfolio mixed more traditional infrastructure businesses such as water companies or rail businesses alongside some of the racier propositions such as data centres. Arguably music royalty funds could also be shoehorned into this growth category although their focus was always much more on a steady income.

These growth-oriented infrastructure asset funds shared some of the same selling points as the first generation of funds – a well-backed dividend yield based on compounding cash flows via real assets – yet it was also apparent that there were some crucial differences. Chief amongst these was the idea that these infrastructure funds focused more on growing net asset value (NAV). Sure, an income was paid, frequently in the 4%-6% range but the underlying total rates of return were projected to be closer to 8%-11%, implying that capital growth was equally important, if not more so, than the dividend.

Most investors got the message – these were like traditional operating company equities but with a more generous dividend yield. But it now seems that a more traditional income-focused investor contingent hitched a ride, or at least they did until recently.

Take the example of Digital 9 (DGI9 ), a digital infrastructure fund that has seen its share price move from a premium to a yawning discount to NAV. It recently announced that it intended to ditch its dividend – not before time in my view – and then watched in horror as its share price slid by more than 40% in one day alone, although it has since bounced back a little.

But Digital 9 isn’t the only victim of a profound switch. The battery storage niche which includes Gresham House Energy Storage (GRID ), where I am a non-executive director, Harmony (HEIT ) and Gore Street (GSF ) has abruptly derated from chunky premiums to heavy discounts in the space of just a few months.

Even 3i Infrastructure with its well-established portfolio of diversified operating businesses, which include digital infrastructure, has moved to an extraordinary near-15% discount, despite only recently releasing another set of very solid trading numbers.

The big story here is that growth infrastructure assets have fallen out of fashion – put simply the current level of discounts would suggest that many investors no longer believe in the core growth story. I’d also maintain that many of these funds, encouraged by their brokers, ended up with too many income-oriented investors who were bound to be obsessed first and foremost with the dividend, dividend cover and dividend growth prospects.

By contrast any mainstream equity investor in traditional real world operating businesses understands that business runs in a cycle. Some years the business prospers, in others it suffers. In good times the dividend is easily affordable but in bad years there’s pressure on the payout and sometimes – once in a blue moon – the dividend is pared back or occasionally not paid.

However, for multi-asset, income fund managers – a core buyer of infrastructure funds – the idea of not paying a dividend is a game changer. Again, by contrast, for most mainstream, non-fund equity investors it’s just a blip, where you look past the numbers and focus on the long-term compounding capital growth story, with the dividend a nice to have. But that’s not what we currently have, which helps explain why share price discounts are so big and getting bigger.

In this narrative I’ve mapped out above I don’t want to ignore happenstance and events. A large part of why Digital 9 has found itself in the doghouse is because of its own misfortune in doing mega deals with lots of debt, such as TV and radio infrastructure provider Arqiva, losing a manager and trying to find ways to fund its growth business in Nordic data centres.

Still, it is worth noting that despite the horrified reaction to D9I’s news, the core trading story isn’t that bad. The interims revealed that portfolio revenues had increased 10% with underlying earnings increasing 5% in line with management expectations. Consolidated revenue also came in 4% above forecasts and ebitda at 5% above budget for the six months to 30 June.

Equally over in the battery storage space there have been plenty of idiosyncratic challenges, not least that power prices are variable and do change, impacting revenues. Nevertheless, very little has really changed in terms of the underlying long-term growth dynamics, except perhaps that National Grid could do more to help push a proper decarbonisation transition that uses less gas as a backup and more batteries.

An especially cynical observer might go one step further and make one last observation. One could argue that the evolution of infrastructure funds into growth assets was never suitable. More and more of the funds look and feel like actual operating businesses with variable revenue streams, profits and dividends. Perhaps the idea of selling these ‘funds/opcos’ to income investors was never a good idea in the first place?

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