“Capital protection, a decent return with little risk, solid yield, liability matching…” Giles Frost, chief executive of infrastructure sponsor and manager Amber Infrastructure Group, is reeling off the characteristics that would in all probability make UK listed infrastructure an investor favourite – characteristics that investors sometimes mistakenly believe apply to the asset class as a whole.
And, indeed, investor commitments to UK listed infrastructure funds have been forthcoming in meaningful amounts. Established in 2006, Amber’s UK listed fund International Public Partnerships (INPP) – which targets public-private partnership (PPP) and Private Finance Initiative (PFI) opportunities in the UK and abroad, mainly in the social infrastructure space – has grown to a market capitalisation of around £1 billion (€1.2 billion; $1.6 billion) since then.
INPP is not the only manager operating in the space to have enticed investors to open their chequebooks. HICL also launched on the London Stock Exchange in 2006 and is now capitalised at around £1.5 billion. John Laing Infrastructure Fund (JLIF) has gone from £270 million on its initial public offering (IPO) in 2010 to around £900 million today. Most UK listed infrastructure funds – which also include 3i Infrastructure, Bilfinger Berger Global Infrastructure and Gravis Capital Partners – report that their capital raisings and tap issues tend to be oversubscribed.
And yet, only a handful of such funds exist – and, while fundraising totals may be impressive, professionals operating in the space will tell you that the headline numbers do not tell of the spadework that goes into educating investors and getting them to part with their cash.
Leaning forward in his chair in a London restaurant, JLIF fund manager Andrew Charlesworth speaks with some passion about the subject. “You’d think pensions would invest in this, but as a whole they don’t,” he says. “They say infrastructure is illiquid and very expensive – and they don’t usually know about listed infrastructure! UK pension trustees just don’t know about us for some reason.”
He adds: “We’ve done roadshows where we’ve tried to engage the major UK pension funds but we’ve not unlocked access to them – and we’re certainly not alone in that. We go through the story with them and they say ‘fabulous but I only invest in equity and you’re fixed income’ and then someone else in the same organisation says, ‘this is great but you’re equity and I don’t invest in equity’.”
David Marshall, a fellow fund manager at JLIF who is seated alongside Charlesworth, points out that the firm has not been without success in attracting pensions. A year after it launched, for example, it attracted a commitment from Sweden’s Third National Pension Fund (AP3). “We’ve had most success with local authorities where they’re self-managed,” he says. “AP3 had a small office and team but managed billions. The conversation with them was an easy one – they said ‘we don’t care what it is as long as it’s a good investment’.”
Marshall confides to being somewhat bemused when the National Association of Pension Funds established the Pensions Infrastructure Platform (PIP) as a low-cost option for infrastructure investors (it was revealed in December that Dalmore Capital was in discussions about becoming the equity manager of PIP). In Marshall’s view, the low-cost option already existed in the form of listed infrastructure. JLIF, for example, charges a maximum management fee of 1.1 percent, reducing as the assets under management grow.
Charlesworth says that, although funds like JLIF are on an upward trajectory, “if we’re going to be taken seriously [by the investment community] we will need to see game change. We need to surpass £1 billion to get on the radars of certain investors”.
It’s possible that such a game change may be underway. Frost says he perceives “a shift against investment in unlisted, blind pools. Some have had difficulty deploying capital, as a result of which there is a risk of some strategic creep – and investors are locked in for 10 years. With listed infrastructure funds, you can look on a screen and know what price you can sell for. You can do that today or you can do it in 10 years. There is a lot more flexibility.”
Asked about the lack of PPP supply at the current time, Frost says: “Long term, what we do promises to continue to be positive. Most governments talk about building more infrastructure in the future. Shorter term, it’s been a bit more disappointing. There was massive volume of new schools and hospitals in the UK prior to 2010 – at times there were too many opportunities to bid for. Since then though, very little has been brought forward and the lack of supply of new opportunities has forced up prices for mature assets.”
FROM SOCIAL TO ENERGY
Because of the drying up of the social infrastructure pipeline, Frost thinks attention will shift from social infrastructure projects to those energy-related opportunities which offer the same kind of investment characteristics. INPP has invested some £300 million in offshore transmission (OFTO) deals, an area of the market where, through the Transmission Capital Partners bid vehicle it is, in Frost’s words, “one of a small number of bidders”.
“OFTOs resemble social infrastructure assets like schools because they are availability-based, so you have responsibility for operation and maintenance but – as long as they are available for use – you get paid regardless of the volume of electricity transmitted.”
The shift to energy indicated by Frost was evidenced by four new listings of renewable energy infrastructure-focused funds in the UK last year: Greencoat UK Wind (which raised £260 million in March); The Renewables Infrastructure Group, known as TRIG (£300 million, July); Bluefield (£130 million, also July); and a Foresight Group solar fund (£150 million, October).
TRIG involves a partnership between long-established infrastructure fund manager InfraRed Capital Partners – which also manages listed UK infrastructure fund HICL – and RES, a renewable energy developer. While InfraRed is the investment manager, RES is the operational manager.
Asked about the rationale for the business, Richard Crawford, a partner and member of the environmental infrastructure team at InfraRed, says: “The strategy is to offer reliable, long-term stable dividends which have a linkage to inflation, and we believe we can do that through investing in renewable energy infrastructure assets.” He acknowledges that the opportunity is in part about taking the HICL model and applying it to renewable energy.
Jaz Baines, director of risk & investment at RES, says his firm had been thinking about launching a fund of its own – noting the appetite from various fund managers for the renewable energy assets it had developed. “We asked ourselves ‘is this something we could do? But we didn’t have the regulatory expertise and track record to manage a listed fund. When we realised InfraRed was thinking about doing the same thing, we concluded that our skills would complement each other.”
BARRIERS TO ENTRY
TRIG launched with a seed portfolio of 18 assets (14 onshore wind and four solar PV assets) before acquiring a further two solar assets in December in a £21 million deal. Being able to provide such a large portfolio of assets up-front is likely to prove a barrier to entry to other would-be market participants.
Crawford notes that only a handful of players have emerged in the wider listed UK infrastructure space since 2006 – whereas four renewable energy-focused funds have listed in the last year alone. He also says that TRIG will be looking to raise further capital and has the benefit of a ‘right of first offer’ from RES which may be worth up to around £200 million enterprise value of projects per year, as well as opportunities from other parties.
Even for the successful pioneers of UK listed infrastructure, getting investor attention can be challenging. But given the spotlight on renewable energy, it’s hard to ignore – as a result of which, this part of the market may gather considerable momentum in the years ahead.