Infrastructure investment companies: demand, benefits and political risk

Over the last ten years the Infrastructure and Renewable Energy Infrastructure investment company sectors have grown by over 700%, from £2.04bn of assets (4 companies) in May 2009 to over £16.7bn of assets (17 companies) at the end of May 2019, demonstrating strong demand. However, over the last two years, the political debate about the funding of infrastructure has intensified, with no new projects to be implemented under the Private Finance Initiative (PFI) and Labour’s nationalisation policies gaining media coverage.

At a media roundtable held today by the Association of Investment Companies (AIC), Frank Schramm, co-CEO of BBGI S.A., Giles Frost, manager of International Public Partnerships (INPP) and Philip Kent, manager of GCP Infrastructure Investments, discussed their investment strategies, political risks, and the social and economic impact of what they do. Their thoughts have been collated alongside comments from Harry Seekings, co-head of infrastructure at Infrared Capital Partners which manages HICL Infrastructure.

Can you explain your investment strategy?

Frank Schramm, co-CEO of BBGI S.A., said: “We often joke that boring is beautiful and we have a ‘boring’ investment strategy which has worked well for us since going public in 2011. It has allowed us to deliver compounded returns in excess of 11% per annum. We have a low risk, long-term investment policy and, as a globally diversified infrastructure investment company, we provide responsible capital to build and maintain transport and social infrastructure. Our typical investments include roads, schools, hospitals and justice facilities and we are typically paid by highly rated government counterparties for delivering and maintaining important infrastructure. An example of one of our projects is the Ohio River Bridge Project in Indiana/Kentucky, US. Together with the government and our partners, we have delivered a new 760m long cable stay bridge, 500m twin vehicular tunnel and associated road network that has reduced travel times and improved the flow of goods and people in the region.”

Giles Frost, manager of International Public Partnerships (INPP), said: “INPP provides responsible investment in public infrastructure to support the delivery of essential public services. Whether the infrastructure required is for schools, court buildings, power transmission, transport or waste water, our purpose is to support the needs of society and the environment for both today and tomorrow. Our horizons are long-term, where we seek to generate highly predictable portfolio performance by investing in a combination of low-risk infrastructure assets which produce long-dated, contractual cashflows. In turn, this allows us to provide our investors with long-term, inflation-linked returns either to provide reliable long-term income or an effective liability match.”

Philip Kent, manager of GCP Infrastructure Investments, said: “GCP Infrastructure seeks to provide investors with regular, sustained, long-term dividends and to preserve capital over the long term through exposure to a diversified portfolio of UK infrastructure debt and similar assets. It primarily targets investments in infrastructure projects with long-term, public sector-backed, availability-based revenue projects across the renewable energy, PFI and supported living sectors. A recent example includes the company’s £80m investment in Race Bank, an operational 573MW offshore wind farm located off the coast of Norfolk. Race Bank’s 91 turbines are forecast to provide enough renewable energy to power over half a million UK homes.”

Harry Seekings, co-head of infrastructure at InfraRed Capital Partners, investment manager of HICL, said: “HICL invests in infrastructure assets at the lower end of the risk spectrum – often referred to as ‘core infrastructure’. These assets are usually located at the heart of local communities, they have monopolistic features and facilitate the delivery of public services. HICL’s three key market segments are: Public-Private Partnerships (PPPs), where there is a contract with public sector counterparties to provide social infrastructure (e.g. a school or a hospital) in return for a long-term, steady and contracted revenue stream; demand-based assets where revenues vary with volume or usage, the best example being a toll road; and regulated assets, where returns to investors are set by an independent regulator, for example a water company.”

What are the benefits of infrastructure investment companies?

Philip Kent, manager of GCP Infrastructure Investments, said: “The closed-ended structure of a listed investment company offers investors daily liquidity in shares exposed to highly illiquid direct investments in infrastructure projects that offer dependable, long-term income. Unlike open-ended funds which need to sell assets or retain cash balances to satisfy selling investors, investors buy and sell investment companies through a live price on the London Stock Exchange. This enables managers to take a long-term view to investing in infrastructure projects, opening the door to greater choice and portfolio diversification whilst substantially reducing portfolio churn.”

Giles Frost, manager of International Public Partnerships (INPP), said: “The type of infrastructure assets INPP invests in are typically very hard to access without the specialist expertise provided by our investment adviser. We originate new investment opportunities ourselves and don’t just rely on government-led procurement to grow our portfolio for us. This means direct infrastructure investment has a high barrier to entry, even for the most sophisticated institutional investors. What listed investment trusts like INPP afford investors is the means to easily access the asset class in a simple, tradable share structure like any other FTSE security. Since listing INPP thirteen years ago, we have seen a democratisation of alternatives allocation as a result.”

What are the positive social and economic impacts of your investments?

Frank Schramm, co-CEO of BBGI S.A., said: “Infrastructure projects can have an immense impact on the local communities and the environment. During the construction of the Mersey Gateway Bridge in the UK, BBGI’s project team established a volunteer scheme including a four-week training programme where people could learn a range of personal development skills. After completion of the course, the volunteers were offered the opportunity to support the project’s visitor centre and help to tell the story of the project to local schools and community groups. The projected long-term economic benefits are expected to include over 4,000 permanent new jobs, regeneration activity and inward investment of over £61m a year in gross value added from new jobs by 2030.”

Harry Seekings, co-head of infrastructure at InfraRed Capital Partners, investment manager of HICL, said: “Economically, the benefits of private capital invested in public infrastructure include risk transfer through construction and/or the operational phase, ring-fenced capital maintenance budgets, and the application of private sector expertise and resource. The benefit to taxpayers of risk transfer, in particular, is significant as it incentivises the private sector to deliver capital programmes within budget and on time; and to keep assets well maintained and operating efficiently.

“Through portfolio companies, HICL invests in physical assets, which are often high-profile and located at the heart of communities, and which support the delivery of public services. Investors in infrastructure must be aware of, and sensitive to, the interests of all the stakeholders. This mindset helps to create long-term, sustainable value for HICL’s shareholders.  A recent example of this responsible approach to stakeholder management was the resolution of the issues arising from the Carillion liquidation, which demonstrated the sustainability of the Public-Private Partnership model.”

Philip Kent, manager of GCP Infrastructure Investments, said: “Infrastructure, by definition, includes the provision of assets that serve a public benefit.  All infrastructure therefore has direct user benefits, such as improved provision of services such as healthcare or education, reduced journey times associated with transport infrastructure and reduced carbon emissions from renewable energy generation. Further, infrastructure projects also have indirect or dynamic benefits – typically associated with larger projects. GCP Infrastructure invests in renewable, PFI and supported living assets in the UK. By way of illustration, the company has facilitated the operation and/or construction of renewable energy facilities with a total combined output of c.2,500GWh per annum, enough to power nearly 1 million UK homes. Renewable energy projects comprise 60% of GCP Infrastructure’s investment portfolio.”

Giles Frost, manager of International Public Partnerships (INPP), said: “Infrastructure investment is a customer service business. The assets in which we invest have an impact on the daily lives of many people across the world and it is this responsibility we take very seriously. Last year, we held more than 3,000 hours of management meetings with our public sector clients to ensure the smooth operation of our assets, including those schools in our portfolio which provide educational facilities to over 190,000 pupils. We believe in engaged societies and our portfolio provided space for more than 150,000 hours of community use.”

What’s your outlook for the infrastructure sector – risks and opportunities?

Harry Seekings, co-head of infrastructure at InfraRed Capital Partners, investment manager of HICL, said: “Political risk is inherent in the business model of infrastructure investment due to the essential nature of the assets and the counterparties involved. Particularly pertinent for the sector is the evolution of thinking on infrastructure financing. InfraRed has contributed to public consultations on the future for delivering infrastructure investment, and is taking a proactive approach to engaging with policy-makers on the benefits to taxpayers that responsibly managed private investment can deliver.”

Frank Schramm, co-CEO of BBGI S.A., said: “Our investment activities involve sourcing and originating, bidding for and winning social infrastructure and other availability-based infrastructure projects. The overall pipeline for availability-style transactions remains generally strong. We will maintain our selective acquisition strategy in assessing any potential new assets and remain confident in our ability to originate investment opportunities. We anticipate these will come from a variety of sources, including a North American strategic partnership, which has already resulted in the acquisition of five operational social infrastructure assets amounting to approximately C$191m.”

Philip Kent, manager of GCP Infrastructure Investments, said: “As infrastructure development is closely tied to government policy that promotes such development (and often relies on the existence of specific government support), political risks are inherent in an infrastructure investment.  Political risks span macro risks associated with being exposed to a specific geography and the legislation governing that location, such as corporation tax rates and building regulations.  Further, given the direct nature of government support, any changes to support arrangements that are more targeted at a project or sector can have a material impact on the value of infrastructure investments.”  

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Notes

1. The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment.  Today, the AIC represents a broad range of closed-ended investment companies, incorporating investment trusts and other closed-ended investment companies and VCTs. The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help members add value for shareholders over the longer term. The AIC has 360 members and the industry has total assets of approximately £190 billion.
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