Banking on tough times

Stephen Ellis, managing director of London-based fund manager Gravis Capital Partners (GCP), is optimistic as he hits the road ahead of the official listing on July 9 of the UK’s first quoted infrastructure fund focused primarily on subordinated debt.

“I think that investors are hungry for yield, stability and security and we think we have a rational investment proposal that in the current climate is very enticing,” he says.

By targeting projects that form part of the UK’s private finance initiative (PFI), GCP will invest in “long-dated, secure, quasi-UK government contracts [that] have net yields currently priced at significant margins above UK government debt,” GCP said in a statement.

Specifically, GCP is aiming for an eight percent annual yield on its new fund. That target is a relatively “fat yield”, says Ellis, considering the low-risk nature of GCP’s primary targeted investments – completed PFI projects with no demand risk, stable government cash flows and partial inflation protection.

GCP is aiming to capitalise on the demand for alternate sources of funding created by a weakened bank market.

“Credit is tight which has pushed margins up to levels that would have been unthinkable three years ago,” Ellis says. “Banks are also not chasing deals as they used to and are taking a much more selective approach to PFI,” he adds.

And that’s where GCP comes in, helping to plug the debt gap by enticing developers to recycle part of the equity they have committed to projects that are already operational by offering subordinated debt loans.

This allows GCP to capitalise on some 630 PFI contracts already signed and frees them, at least in the medium term, from having to rely on new deal flow.

Having identified about £65 million (€79 million; $95 million) in PFI opportunities, GCP decided to try and raise £50 million for its new listed fund. It will act as a feeder to the retail infrastructure fund GCP launched last summer and which has already invested in £24 million of PFI debt.