Infrastructure as an investible asset class has gained traction over the past decade. There are now over 100 infrastructure funds for the retail investor to choose from in UK. One such is the HICL Infrastructure Fund [LON:HICL], a FTSE250-listed, GBP3.3bn investment trust established in 2006.
HICL Infrastructure is managed by InfraRed Capital Partners, a London-based infrastructure investment specialist with over USD14bn assets under management and aims to offer investors: “stable, sustainable long-term returns from investments in core infrastructure that is critical to the functioning of society.”
The fund management function is led by InfraRed’s Edward Hunt, an Australian fund manager with thirteen years at InfraRed in both Sydney and London. The fund focuses on core infrastructure investment in developed markets. The investment trust was originally HSBC bank’s infrastructure investment fund and focussed on Public-Private Partnerships (PPP), Private Finance Initiatives (PFI), Regulatory Infrastructure (gas, water, electricity transmission and distribution assets) and Demand-based Infrastructure, such as student accommodation or toll-ways.
Banking heritage back to 1920
InfraRed itself came out of Charterhouse Bank, which had a heritage back to 1920. Charterhouse was acquired by HSBC in 2000 and listed six years later, then after a Management Buy-Out emerged as InfraRed. InfraRed also manages another FTSE250-listed investment trust, The Renewables Infrastructure Group (TRIG) [LON:TRIG]. Three years ago, Canadian Insurer, Sun Life, with over CAD1.3 trillion assets under management acquired 80% of InfraRed.
The investment trust, therefore, has considerable clout and able to pick and choose the cream of global, developed market infrastructure projects. The fund’s strategy is to create a diversified and balanced portfolio of similar-sized equity investments, all with broadly-comparable risk-reward characteristics, where no one investment can dominate.
The Investment Trust holds a portfolio of over 100 investments and the constituents are from the public sector, specifically government-sponsored or government-backed projects, that have regulated revenues.
Early stage capacity
Thirty-five percent of the fund can be held in earlier-stage opportunities, that haven’t completed construction, but have the characteristics and potential yield of other similar investments in HICL’s portfolio. This can be as early-stage as the potential investment projects bidding for concessions, as long as the management team and business plan acquiesces with the more mature investments in the fund’s portfolio.
Carrying-over the HSBC approach, HICL’s team also seeks demand-orientated infrastructure investments such as pay-as-you-go toll roads, tunnels and bridges, or electric vehicle charging points, and is willing to invest as the demand curve builds.
Infrastructure is one of the assets-of-choice of institutional investors, and it’s never a bad idea to go where the big money leads. The asset class has both bond and equity characteristics and is driven by an imbalance of demand and supply, with the need for infrastructure services perpetually rising, regardless of the phase of the economic cycle, and supply constrained by a lack of government finances.
Even completed infrastructure has a life-cycle – as we are finding out in the UK with the water transportation and supply sector – and will need replacement. By its very nature infrastructure has a long life, often more than 30 years, and the returns from infrastructure exhibit lower volatility than other classes, due to its ‘core’ nature.
HICL Infrastructure Fund defensive characteristics
It’s also a hard industry to break into, given the vast monies involved and the level of governmental, regulatory and strategic control, so companies that end-up operating in the industry soon find themselves with oligopolist or monopolistic control of the market (as we are also finding out with regards to the water sector in the UK), as there is no other competition.
For pensions funds, the smoothness and stability of returns from infrastructure means that they can match their liabilities with revenues from infrastructure. Because of the core and essential nature of the service that infrastructure companies provide, they are a hedge against inflation which their prices can track regardless, as a result of the inelastic demand for their services. Finally, with governments backing them, infrastructure projects have very low failure and default rates – even if the operating company loses its concession (such as with the railway sector in the UK) – the project (in the railway’s case the tracks and stations) remain.
This explains the profusion of infrastructure funds and investment trusts – many of which are predominantly held by institutions.
In HICL’s last set of results, the investment trust offered a total shareholder return of 6.3% for the year ending March 2023. This was quite a bit behind the 12.8% HICL had offered its shareholders in 2022. That said, net asset value was up by 1.8p to 164.9p due to the fund’s high inflation correlation, but limited a bit by a 0.6% increase in the weighted average discount rate. In a tough year, the defensive characteristics of HILC’s portfolio came to the fore.
Hunt and his team ploughed GBP545m into three new investments last year, and then followed this up after March with a further investment into Altitude Infra. The fund exited Queen Alexandra Hospital in Portsmouth for a GBP108m consideration and partially exited its investment in the Northwest Parkway toll-road project in the US, selling 30% of its stake for a consideration of USD86m.
The Investment Trust also expanded its war-chest, increasing a revolving credit facility it held to GBP650m and issued new equity to the tune of GBP160m. The company also undertook a private placement, that had the effect of converting its existing short-term liabilities to longer-dated funding, reducing interest rate risk and diversifying the investment trust’s sources of funding.
HICL Infrastructure Fund offers dividend security
HICL declared an 8.25p per share dividend through to March 2024, which it then extended to 2025, something it was confident in declaring due to some of its PPP investments reaching maturity and allowing HICL to reclaim its capital investment.
It’s not all plain sailing though – there are risks to infrastructure investment, not least political changes (see HS2), regulatory risks (the water companies might well learn about this soon), Leverage risk (and 2022 was a year where everyone felt the pinch of rising interest rates), and by its very nature infrastructure is an illiquid asset, hard to sell quickly. Then you have to account for natural and man-made disasters (such as the Nordstream Gas Pipeline).
Moreover, big money often means big fees, and HICL is not the cheapest fund to invest in, with fees payable to the manager including the tapered management fee 1.1% for assets up to GBP750m, 1.0% for assets between GBP750m and GBP 1.5bn, 0.9% for assets between GBP 1.5bn and GBP 2.25bn 0.8% for assets above GBP 2.25bn and 0.65% for assets above GBP 3bn plus GBP 0.1m p.a. advisory fee, according to the AIC, with a lock-in agreement that can be terminated with 36 months’ notice.The investment trust’s shares opened trading on 20th June at 132.9p. HICL has offered a -17.9% year-to-date return, a -22.5% one-year return with its shares ranging between 132.4p and 180.6p over a 52-week period. The FTSE250-listed company has a market capitalisation of GBP2.7bn.
Nevertheless, the outlook for core infrastructure investment remains buoyant, powered by key growth drivers, including decarbonisation and digitalisation. Equipped with a healthy balance sheet, diversified sources of funding and InfraRed’s global capability, HICL is well placed to pursue its strategy with discipline and ambition.
