Despite the reduction in the number of new PFI projects due to austerity-driven cutbacks implemented by the UK coalition government, a new research note from Oriel Securities exploring the prospects of four listed funds with PFI exposure recommends upgrading three of the funds – 3i Infrastructure, International Public Partnerships and HSBC Infrastructure Company – from “hold” to “add”. Oriel is initiating its coverage of GCP Infrastructure with a “hold” recommendation.
The research note acknowledges that the future of UK PFI is a “key concern” and that there is “considerable uncertainty over the speed of new project approvals and financials”, but it points out that the listed funds in question have large existing portfolios with the majority of investments providing cash flows for at least the next 20 years.
Furthermore, Oriel says it expects increased investment overseas. International Public Partnerships already has half its portfolio outside the UK and 3i Infrastructure has only 18 percent of its portfolio exposed to UK PFI.
Oriel also notes that infrastructure yields look increasingly attractive on a relative value basis. “Given the continued low cash deposits and falls in UK gilt yields over the summer, we think the infrastructure funds are looking increasingly attractive on a yield relative basis,” it says.
The UK PFI sector was dealt a blow by the coalition government’s decision to axe more than 700 school refurbishment projects under the £55 billion (€66 billion; $83 billion) Building Schools for the Future programme earlier this year. However, the Oriel paper says it is “inevitable and sensible” that the government will seek to get better value for money from future projects and anticipates government and local authorities continuing to use PPP/PFI “in a big way” given the lack of alternative funding options.
The note anticipates changes in the approach to PFI funding and possible re-branding and change of name. It says it expects greater clarity on the future of PFI soon, possibly arising from the UK government’s Comprehensive Spending Review on October 20.