We are fully into the results season for investment companies with 31 December year ends. Amongst these are the infrastructure funds BBGI Global Infrastructure (BBGI ) and International Public Partnerships (INPP ). I scoured both their statements last Thursday for any disclosure of the impact of share price falls that have afflicted both companies, but in vain. Maybe they are just not used to thinking about it. Over 2022, the loss to shareholders for INPP was 6.1% and for BBGI 6.6%.

BBGI shares trade close to net asset value (NAV), but, this is a big comedown from the heady premiums of 20% more above NAV a year ago. The share price rose on the back of the results, possibly encouraged by news of a 6% targeted uplift in the dividend this year and next.

By contrast, INPP is targeting dividend increases of just 2.5% over the next couple of years, which looks to me like a real-terms cut in income after inflation and feels a bit unambitious. That’s because INPP claims to have greater inflation-linkage within the contracts in its portfolio, saying it should deliver a 0.7% uplift in revenues for every 1% increase in inflation. The equivalent figure for BBGI is 0.5%. INPP’s board may just be being conservative so that they can surprise on the upside but, for the moment, that will not do much for its 11% share price discount.

However, there are bigger bargains in the infrastructure sector today that might reward closer inspection. GCP Infrastructure (GCP ) shares trade nearly 24% below NAV and offer a yield of 8.1%, while Pantheon Infrastructure (PINT ) stands on a 20.5% discount with a prospective yield of 5.1%.

PINT has featured here recently because it came up as a discussion topic in the Citywire forums. This is a trust that is just getting going having listed in November 2021. It will take a little while for the investments that it made with its flotation proceeds to start generating meaningful NAV uplifts, but when they do, the managers’ expectation is that these will be chunky enough to meet the long-term target of average returns of between 8% and 10% a year.

I thought it might be useful to answer some of the points brought up in the forum discussion.

Unlike infrastructure funds such as BBGI and INPP, PINT is designed to produce both income and capital growth. In that respect it is much more like 3i Infrastructure (3IN ), which offers a yield of 3.6%, than those two investment companies. There is a quid pro quo for this. The dividend income in the early years is going to be lower (4p this year and then the target is progressive growth from there), but still respectable.

The next question was about the lack of well-known names in the portfolio. PINT is investing in infrastructure projects alongside other big specialist investors in the sector. These are not listed companies but some of those investors – investment bank Macquarie and investment groups Apollo and KKR – you will probably have heard about.

Most of the projects are overseas, but PINT does have a stake in National Gas which owns the gas transmission grid in the UK. PINT was able to buy an interest after National Grid sold a 60% stake in it to Macquarie, British Columbia Investment Management Corporation (which manages Canadian pension funds) and a consortium of other investors in March 2022.

Another one you may have heard of is Primafrio – you may have been stuck behind one of their trucks at some point as Primafrio is a logistics company specialising in chilled goods. It is a family-controlled business, but it brought in Apollo to help fund its expansion and PINT has been able to invest alongside them.

There was a concern that some of these may be wasting assets. For the most part I think that is not true, but PINT’s plan is not to buy and hold these assets forever, but rather to sell them on when they become more valuable. The managers make sure that there is an obvious exit route from these investments before it invests.

Then there was a debate about returns. As the forum participants noted, the discount rate that PINT uses to value the future cash flows from these investments is about 14%. That reflects a much greater degree of caution in the market about the cashflows from these assets relative to the often government-backed cashflows of assets in more conventional infrastructure funds. Again, like 3i Infrastructure, PINT is taking on additional risk to make a higher capital return.

Higher rates of interest could put upward pressure on the discount rate, which would lower the NAV. However, the effect of raising PINT’s discount rate from 14% to 14.5% is far less than the effect of raising the discount rate on BBGI’s portfolio from 6.9% to 7.4%, for example. In addition, PINT is investing because it thinks that the discount rates on its assets will fall as they become more mature and are de-risked.

For example, National Broadband Ireland is building out a fibreoptic network in rural Ireland, encouraged by the government. As the network progressively moves past the construction phase and starts signing up customers (most of which are getting broadband for the first time and cannot access it any other way) the project becomes less risky, and the discount rate falls. That should mean that PINT gets to sell at a decent profit.

What is more, PINT is still making investments in this environment of higher rates and returns from new investments should reflect this.

GCP’s board have made it clear that the discount does not reflect the performance of its portfolio or the positive tailwinds supporting the company. Factors such as stubborn UK inflation are positive for the NAV. The advisers are looking at taking advantage of rising rates to improve the quality of the portfolio without sacrificing the headline return. GCP announced a £15m share buyback programme on 14 March. PINT’s board followed on Friday with plans for a £10m buyback.

It really is not obvious to me who is selling and why, but bargains are appearing for those with the cash to take advantage of them.

James Carthew is head of research at QuotedData.

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