Managers’ views on infrastructure opportunities and the proposed long-term asset fund.
Infrastructure investment companies have shown their resilience over the past year, maintaining dividends to shareholders despite the global shutdown and generating a 42% total return.1 With the UK’s new Infrastructure Bank launching later this spring and the government’s levelling up agenda, prospects look bright for infrastructure investments.
How are managers viewing the new Infrastructure Bank? What are the emerging opportunities in infrastructure portfolios and what are managers’ views on the proposed long-term asset fund? The Association of Investment Companies (AIC) has spoken to managers from the Infrastructure and Infrastructure Securities sectors.
Annabel Brodie-Smith, Communications Director of the Association of Investment Companies (AIC), said: “Investors who are concerned about rising inflation might want to consider infrastructure investment companies. These provide relatively stable income, often contractually linked to inflation, and the AIC Infrastructure sector is currently yielding an attractive 4.7%.
“Infrastructure is a defensive asset and the sector has held up well during the pandemic, offering valuable diversification to investors’ portfolios. However, it’s important investors remember that neither capital nor income returns are guaranteed and if you have any doubts you should seek financial advice.”
The UK Infrastructure Bank
Steve Cook, Portfolio Manager of Sequoia Economic Infrastructure Income Fund, said: “We welcome the introduction of the new UK Infrastructure Bank – tackling global warming is an increasingly pressing issue and it is crucial that the government does meet its 2050 net-zero emissions targets. We are pleased to see the government highlight the need for further investment in the economic infrastructure sectors covered in the National Infrastructure Strategy, which should result in greater opportunities for new jobs and higher levels of productivity.”
Duncan Ball, Co-CEO of BBGI Global Infrastructure SA, said: “Overall, the Chancellor’s announcement in March this year was positive, and we welcome the details about how the UK Infrastructure Bank would work and its areas of focus and objectives. Anything that supports investment into areas where the private market needs to be stimulated is useful, and the Bank’s broad environmental agenda of tackling climate change by meeting the UK’s 2050 net-zero emissions targets aligns with BBGI’s ESG work and focus. Implementation, getting networked into private capital and clear mandates and timetables are all going to be critical. We’re optimistic that it’s a positive thing for the sector and BBGI. It’s too early to be more exact on its impact, but we continue to believe in the power of responsible private finance to deliver essential public infrastructure.”
LTAFs versus investment companies
Giles Frost, Co-Founder of Amber Infrastructure, Director of International Public Partnerships (INPP), said: “While new models are always of interest and clearly the existing UCITS model has been very problematic for investors in less liquid assets at times of stress where gating has been applied, the listed investment company model has stood the test of time. In our view, the benefits of the investment company model where shares are traded in volume on a daily basis on the stock exchange continues to be the best way for most investors to access the infrastructure asset class.”
Philip Kent, Fund Manager of GCP Infrastructure Investments, said: “We think that in any structure the ability to match the illiquid nature of infrastructure investment with investors’ capital is key. The closed-ended nature of investment companies works very well in this respect. The key for any long-term asset fund will be the timescale for redemptions: it takes a long time to prepare, market and sell an infrastructure asset. Any deadline for such sales, however much notice is provided, risks sales occurring for reasons other than optimal timing, for example driven by market cycles or asset demand.”
Frank Schramm, Co-CEO of BBGI Global Infrastructure SA, said: “The planned long-term asset fund (LTAF) structure is aimed at allowing wider access to assets such as infrastructure and private companies which are not regularly traded. An open-ended fund investing in illiquid assets presents challenges, so it will be critical to have the right structure, rules and protections for all investors.”
Impact of the pandemic
Phil White, Managing Partner & Head of 3i Infrastructure, said: “Infrastructure assets held up well during the COVID-19 pandemic, other than transportation businesses and projects that were exposed to a fall in demand. Investor appetite remains strong, particularly in areas such as renewables and digital infrastructure. We are proud of how our portfolio companies have responded to the COVID-19 pandemic, keeping essential infrastructure operating smoothly and supporting employees, suppliers, customers and their communities. Our companies continued to power businesses and households, treat waste, keep cargo moving around the world and sterilise medical equipment.”
James Smith, Fund Manager of the Premier Miton Global Renewables Trust, said: “The COVID-19 pandemic, and the lockdowns triggered as a result, did not have a substantial effect on my portfolio given that renewable energy assets tend to have underlying revenues that are mainly contracted at long-term fixed or regulated prices. The market turbulence did however throw up several opportunities to buy attractive assets at deeply discounted levels.”
Giles Frost, Co-Founder of Amber Infrastructure, Director of International Public Partnerships (INPP), said: “INPP aims to deliver long-term benefits for all its stakeholders by investing responsibly. Our 130 global infrastructure assets and businesses have continued to facilitate the provision of and deliver essential public services throughout the pandemic, as well as protect the health and safety of staff and users, and that has underpinned the resilience of our portfolio’s performance. With secure cash flows from government-backed and regulated assets, we delivered another 2.5% annual dividend increase to our shareholders.”
How do you see your portfolio evolving over the next five years?
Phil White, Managing Partner & Head of 3i Infrastructure, said: “Our portfolio consists of defensive businesses providing essential services to their customers and the communities they serve, often benefitting from long-term sustainable trends. Prior to the pandemic, climate change and environmental concerns were an area of focus for investors but it is now clear that the pandemic has heightened awareness of sustainability issues. We are seeing increasing interest from infrastructure investors in the energy transition sector as the scale of the investment required becomes apparent, and regulations, subsidies, market demand and project economics become more supportive.
“The pandemic has also accelerated the need for greater digital connectivity and created ever greater data storage and usage requirements. This is driving deal flow in areas such as mobile communications towers, subsea fibre-optic cables, terrestrial fibre-optic networks and data centres. While competition remains intense, we will continue to seek opportunities where we have a competitive advantage, where we can engage at an early stage or leverage relationships to identify new investments that complement the portfolio and can deliver attractive risk-adjusted returns.”
Philip Kent, Fund Manager of GCP Infrastructure Investments, said: “GCP sees a significant infrastructure investment requirement associated with the UK’s commitment to decarbonise. The UK has legally binding targets to achieve net zero emissions by 2050 and to reduce emissions by 78% of 1990 levels by 2035. Achieving these targets will involve the continued deployment of renewables to decarbonise our electricity sector, but also investment in other asset classes such as heating, transport, industrial emissions and agriculture. It will further require the development of carbon capture and storage solutions. As a company that targets infrastructure projects benefiting from public sector support, we see this transition being the principal focus of public sector support (whether through new regulations, carbon pricing or other support) over the next five years and it will therefore be a focus of investment.”
How do you approach ESG in your portfolio?
Philip Kent, Fund Manager of GCP Infrastructure Investments, said: “GCP has never set out to be an ESG fund (indeed ESG was not really in existence at IPO over 10 years ago). However, with investments across renewables, social infrastructure and social housing all of the company’s investments achieve positive environmental or societal benefits. Infrastructure as an asset class lends itself well to ESG-focused investments: infrastructure by definition has a core social purpose. Given the increased importance of ESG to many of GCP’s investors, it is a clear consideration in any new origination – in line with Gravis’ responsible investment policy. Further, the company is actively working to develop its own ESG strategy.”
Giles Frost, Co-Founder of Amber Infrastructure, Director of International Public Partnerships (INPP), said: “We align our investment approach to the UN’s Sustainable Development Goals and integrate ESG factors into the investment lifecycle in line with the Principles for Responsible Investment. Our energy transmission and gas distribution assets help power over 12 million homes and businesses in the UK and our social infrastructure portfolio provides safe schooling for over 195,000 pupils. These are more than anecdotes; they underpin the real purpose behind why we invest in infrastructure.”
What’s your outlook for infrastructure investing?
Steve Cook, Portfolio Manager of Sequoia Economic Infrastructure Income Fund (SEQI), said: “We look to the future with confidence – although the pandemic brought considerable uncertainty and challenges for SEQI, we are pleased with the resilience that the portfolio has shown. Our NAV continues to recover and, with infrastructure investment being a key economic stimulus in a post-COVID world, we are well positioned to take advantage of significant opportunities which will generate attractive returns.”
Frank Schramm, Co-CEO of BBGI Global Infrastructure SA, said: “The pandemic has in fact strengthened the structural demand for our facilities across UK, North America, Australia and continental Europe. Patients still need high-quality healthcare facilities, pupils and teachers must have safe, secure buildings in which to teach and learn; road users still expect well maintained highways and bridges; and local governments need blue light (fire and police) and other public buildings to uphold their commitment to local communities. We are proud to enable the delivery of all these services at a time when society arguably needs them more than ever.”
Giles Frost, Co-Founder of Amber Infrastructure, Director of International Public Partnerships (INPP), said: “Investment appetite for infrastructure has risen significantly over the last year, driven by retail and institutional investors acknowledging the benefits of a defensive, inflation-linked allocation which is uncorrelated to the wider equity market. We see a renewed demand for private sector investment to support government-led initiatives developing national infrastructure as a tool for economic recovery and growth. INPP has as strong committed pipeline of over £200 million in investments to demonstrate this.”
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Notes to editors
- 42% is the weighted average share price total return of constituents of the AIC Infrastructure sector from 1 May 2020 to 30 April 2021. Source: AIC/Morningstar.
- 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 £249 billion.
- Disclaimer: The information contained in this press release does not constitute investment advice or personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment decision. Past performance is not a guide to future performance. The value of investment company shares, and the income from them, can fall as well as rise. You may not get back the full amount invested and, in some cases, nothing at all.
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