‘Negative political environment’ could wipe out £40m in HICL’s Affinity Water

The valuation in the UK water asset has also been affected by the upcoming regulatory review, which HICL says ‘represents significant challenges’.

London-listed infrastructure manager HICL could see between £30 million ($36.2 million; €32.3 million) and £40 million wiped from its valuation of UK-based Affinity Water at the end of next month due to political and regulatory factors.

This, the firm said in its interim report this week, was due to a combination of the ongoing Ofwat pricing review for the industry and the “prevailing negative political environment on valuations of private sector investments in UK regulated assets”, driven by calls for nationalisation by the opposition-led Labour Party.

HICL maintained that Affinity Water continues to engage with regulator Ofwat over its proposed business plan for the next regulatory period (April 2020 to March 2025), which it stated in the report, addressed many of the concerns expressed by Ofwat, although it said “elements of the feedback represent significant challenges for the company and constructive negotiations continue”.

The fund manager bought Affinity Water in May 2017 alongside Allianz Capital Partners and DIF for £687 million, with an enterprise value of about £1.5 billion from Morgan Stanley Infrastructure and Infracapital. HICL and DIF declined to comment further on the report this week, while Allianz was not immediately available for comment.

Affinity Water represents 7 percent of the overall HICL portfolio, of which 8 percent is comprised of regulated assets. DIF’s investment came through both its DIF Infrastructure IV and DIF Infrastructure V funds.

It is understood the £30-£40 million range has not been narrowed down at this stage as there remains significant uncertainty around the UK’s political situation from now until the end of September when it is due to report the final figure, as well as the ongoing discussions with Ofwat.

Last year, ratings agency Moody’s shifted its outlook on Affinity Water to negative following proposals from Ofwat. The regulator is set to finalise its proposals for the next regulatory period, which will see returns cut as it battles with political pressure to reduce bills for customers.