“UK pension trustees just don’t know about us for some reason.” These were the words of John Laing Infrastructure Fund (JLIF) fund managerAndrew Charlesworth as he spoke to Infrastructure Investor about the difficulties UK listed infrastructure funds have had in attracting interest from institutional investors.
On the face of it, this is puzzling. Since the first such funds – generally targeting public-private partnership (PPP) and Private Finance Initiative (PFI) opportunities – launched on the London Stock Exchange in 2006, their performance has been impressive on the whole. Performance figures compiled by JP Morgan Cazenove for four listed UK infrastructure funds show three-year net asset value (NAV) total returns ranging from just over 19 percent to 31 percent.
Unsurprisingly, perhaps, when JLIF and its peers – such as HICL and INPP – have sought to raise fresh capital, they have generally achieved or exceeded their targets. JLIF has grown from £270 million (€330 million; $448 million) at launch in 2010 to around £900 million today. Nonetheless, a mere handful of such funds exist and therefore – although they have been successful in their own right – the quantum of capital raised is moderate.
Charlesworth says one of the problems (aside from the lack of recognition alluded to earlier) is that listed infrastructure is not an easy recipient of allocations – it often gets identified as fixed income by equities investors and as equities by fixed income investors. For many institutions – which would hardly move the needle by investing in the space – wrestling with this allocation conundrum is simply more hassle than it’s worth.
Furthermore, while a strong pipeline of new UK social infrastructure assets had for many years provided healthy deal flow, recent years have been more challenging as the government has switched focus to economic infrastructure. “Since then , very little has been brought forward and the lack of supply of new opportunities has forced up prices for mature assets,” Giles Frost, chief executive of Amber Infrastructure Group (investment adviser to INPP), told us.
If this suggests a bleak future for this category of fund offering, it’s worth bearing in mind that good managers will generally find ways to adapt. For some, this means openness to new (but related) investment opportunities. Earlier this week, JLIF said it was seeking to broaden its investment mandate to include assets that are “not government-backed PPP assets but have substantially the same risk profile and characteristics as PPP projects”.
Also showing its ability to adapt, INPP has been a prolific and successful bidder for offshore transmission (OFTO) assets, which “resemble social infrastructure assets like schools,” Frost claims, “because they are availability-based, so…as long as they are available for use, you get paid regardless of the volume of electricity transmitted”.
But a bigger factor even than the ability of existing funds to evolve is the emergence of renewable energy infrastructure. This is an investment theme that even the most blinkered of trustees can’t fail to have noticed, and recent developments suggest they are not only sitting up and paying attention – but also digging deep into their pockets.
Last year saw the first UK listings of renewable energy infrastructure funds – four of them in total – with TRIG, Bluefield, Foresight Solar and Greencoat UK raising an aggregate £840 million. In the last week alone, two more firms – Ingenious Clean Energy and NextEnergy Solar – have announced plans to add more than £300 million to that total between them.
For UK listed infrastructure, this trend represents a major shot in the arm. Reports of its demise have been greatly exaggerated.