3i warns on “returns compression”

The London-listed firm, which sold its formerly largest asset last week, will review its performance objective in the coming months as infrastructure prices continue to rise.

Fierce competition for assets is making it difficult for fund managers to find investment opportunities in line with their return objectives, according to 3i Infrastructure.

In an interim trading update released today, the London-listed firm said that “competitive market conditions”, particularly in the core infrastructure segment, was resulting in a “compression of implied returns”. While this created an environment conducive to lucrative exits, the company added, it also made it more difficult to source assets likely to guarantee the levels of performance investors still have in their sights.

3i Infrastructure was part of the consortium that sold Eversholt Rail, one of the UK’s three largest rail rolling stock businesses, to Hong Kong-based conglomerate Cheung Kong for £2.5 billion (€3.35 billion; $3.80 billion) last week. The company pocketed £358 million in proceeds from the sale, having initially invested £151 million in the business.

“As part of this year’s [annual] review, the board will review the Company’s return objective in order to ensure that this is sustainable over the long-term,” the company said in a statement. “The outcome of the board’s review is expected to be communicated to the market before the announcement of the company’s annual results in May 2015.”

3i Infrastructure’s portfolio income totalled £28.2 million in the three months to 31 December 2014, including a dividend of £15.5 million received from Eversholt at the end of the period. Portfolio income for the nine months to 31 December 2014 amounted to £60.9 million, slightly down from the £64.3 million the company generated during the previous period.

This was partly explained by the lower dividend 3i Infrastructure received from the UK’s Anglian Water Group (AWG), amid a regulatory review that revised the base return downwards a few weeks before Christmas. “Following the publication of the final determination from Ofwat, [the UK water regulator], in December 2014 and expectations of reducing UK inflation, the company does not expect a further dividend from AWG in the financial year ending 31 March 2015.”

The period saw 3i Infrastructure make £26.5 million of new investments, in addition to the £2.6 million it deployed in existing assets. Fresh investments made by the company during the quarter include the La Santé public-private partnership (PPP) project in France and the A9 Gaasperdammerweg PPP in the Netherlands.