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Political threats, failed IPOs and highly competitive market for asset acquisitions have taken the shine off the sector
Thursday 03 May 2018 Author: David Stevenson

Infrastructure has been a favourite among investors and politicians alike. Investors like the high yields on offer while politicians prefer to wax lyrical on infrastructure projects and spending at election time as they are usually linked with job creation.

Unfortunately infrastructure funds – vehicles such as investment trusts which provide investors with access to the asset class – have hit a few bumps along the road and have fallen out of favour with many people.

Several infrastructure funds have failed to get their IPOs (initial public offerings) off the ground after struggling to get enough support from the investment community. And many funds already on the market have seen the shine come off their valuations.


The first setback for the sector was Labour’s assault on public private partnerships (PPP) at the party conference in September last year. The political party set out plans to nationalise billions of pounds of privately-funded infrastructure contracts should it win the next general election. That put the fear into many investors and some infrastructure funds started to fall in value.

Numerous infrastructure-based investment trusts have also scrapped IPOs over the past six months.

For example, Tri-Pillar failed to join the stock market last December despite targeting assets in the US and Europe such as healthcare, education, road and communication projects.

More recently, Gravis Capital Management, which runs investments trust GCP Infrastructure (GCP), cancelled its £200m float of the Global Diversified Infrastructure Fund after failing to meet its minimum target of £75m.

Several telecom tower infrastructure investors have pulled their London IPOs after failing to get enough investor support including Helios Towers and Arqiva.

Yet another problem impacting UK-listed infrastructure funds was the implosion of construction services group Carillion at the start of the year.

Well-established funds such as John Laing Infrastructure Fund (JLIF) and HICL Infrastructure Company (HICL) had direct exposure to Carillion’s facilities management contracts with healthcare assets.



Given these setbacks, what was once an expensive sector with funds trading at hefty premiums has now been brought crashing down to earth.

John Laing’s Infrastructure fund is now trading at a 4.7% discount to net asset value, well below its average 7.2% premium over the past 12 months.

HICL is now on a price at par with its NAV although at one point last year traded at a whopping 19.2% premium.

Widening of discounts has not been universal though. For example, 3i Infrastructure fund (3IN) is trading at a premium of 4.7% and GCP Infrastructure is on an 8.1% premium to NAV.


Utilico Emerging Markets (UEM) fund manager Charles Jillings says that European infrastructure is ‘finely priced’ and the cost of debt has gone up with the prices also towards the top end.

That may explain why investor appetite has soured towards parts of the infrastructure market. It is also for this reason that Jillings is now targeting assets in markets such as Brazil, which he views as having bottomed out and set for a revival.

At various stages, Jillings’s weighting of the Utilico portfolio to Brazil has changed. He had a 33% weighting to Brazil at one point, dropping to 8% during 2015 and now around 20%.

For example, 18 months ago he bought into logistics specialist Rumo, a company which may benefit from the escalating tariff wars between China and the US.

China may purchase its multi-billion dollar-a-year order of soya beans from outside the US, with Brazil being a likely candidate. Rumo has been adding capacity to its rail networks to increase the amount of soya that can be exported from Brazil.


Another globally focused infrastructure fund, Premier Global Infrastructure Trust (PGIT), had a difficult time in the first quarter. The investment trust’s share price fell by 19.5% and its net asset value declined by 14.8%.

One reason cited by the fund managers James Smith and Claire Smith for the trust’s performance was due to some of its equity holdings in the utilities space in the UK and US being bond proxies. These types of companies are especially sensitive to interest rate changes and were sold off.

With infrastructure funds impacted by a plethora of issues, from politics to single company risk, it is worth reappraising your portfolio to check that you aren’t over-dependent on the sector, particularly as a source of income.

Your dividend money may keep appearing but the value of capital may not be so solid in the near-term unless circumstances change.

However, there may be one saving grace in the form of asset sales. For example, HICL has just sold its equity and subordinated debt interest in a schools project for £56.2m, representing a 20.8% premium over the directors’ valuation as at 30 September 2017.


‘We believe that HICL’s disposal will be well received by investors seeking comfort on the value of the portfolio, albeit the disposal is relatively small,’ says the investment trust team at stockbroker Numis.

‘In general, we believe the assets of the listed infrastructure funds are conservatively valued relative to secondary transactions within the private infrastructure market. In our view, this limits the potential for persistent discounts across the listed sector.’

Numis believes the sector had become oversold earlier this year. ‘Although the perception of political risk is likely to continue to weigh on share prices for some time, we believe they remain an attractive source of predictable, long term income, with the benefit of a high degree of inflation linkage.’ (DS)

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