Large scale infrastructure projects need long-term planning, construction and maintenance as well as patient and committed capital from the get go.
That’s why investors interested in the sector often find themselves looking to infrastructure investment trusts for access to opportunities in the space.
The closed-ended nature of a trust, like that of the HICL Infrastructure Company, allows the investment manager to put money to work for the long-term without the need to think about daily inflows and redemptions. But this isn’t the only advantage to the structure, as HICL’s manager Harry Seekings explains: “We believe the investment trust structure of HICL is perfect in many senses for investors because they can buy a share in HICL and gain access to a diversified portfolio of infrastructure projects. We have 117 investments at the moment and it’s not possible to buy them any other way.”
With the largest of these holdings taking up around 8% of the portfolio, investors are not exposed too heavily to a single investment - a characteristic designed to mitigate the effect one project can have on the long-term growth of the fund.
Seekings puts this steadiness right at the heart of the company’s aims: “We are seeking to deliver long-term stable income from a diversified portfolio of infrastructure investments, positioned at the lower end of the risk spectrum.”
In practice, this means backing projects in three main areas, in order to benefit from regular repayment for years to come. Around 70% of the portfolio is invested in public-private partnership (PPP) projects with the company delivering and maintaining an asset over a period of around 30 to 35 years in exchange for a steady payment stream from public sector clients.
Another 20% of the portfolio is invested in demand-based assets where revenues depend on the usage of a structure such as a toll road. And lastly, around 8-9% of the trust is allocated to regulated assets - these are typically monopolies where a regulator is balancing the interests of customers and investors. Examples here include one of the trust’s largest holdings Affinity Water, and its exposure to offshore transmission cables connecting offshore windfarms to the UK national grid.
For the manager, all of the investments made by the company must have a common context of providing stable, predictable and, importantly, long-term cashflows. A welcome benefit Seekings points out is the low correlation this income shares with the wider UK market, providing investors with greater diversification through alternative payment sources to the traditional big dividend payers.
Private sector Labour pains?
Recent political conversations around infrastructure projects have raised questions over the future durability of the sector, if the UK were to have a change in government.
However, Seekings is keen to point out the value added by private sector participation in public-private partnerships: “I don’t think there’s any great secret around the Labour Party’s plans to potentially nationalise regulated utilities and they’ve even talked about terminating some private finance initiative (PFI) contracts as well.
“I think we’re some way from that happening at the moment but I think if we take a step back it’s worth reflecting on why the private sector was involved in the first place. PFI contracts transfer significant delivery risks to the private sector - to provide, construct and maintain assets which are then used by the public sector services. We take on those risks and we believe the return the portfolio generates compensates shareholders for taking those risks.”
More on the HICL Infrastructure Company
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.