We talk to the manager of a listed infrastructure fund about the asset class, its potential and a few challenges that arise. Major fund firms are buying into the infrastructure space, suggesting it is a hot area.
Earlier this year BlackRock, the world’s
largest asset manager ($10.5 trillion in AuM), bought
an infrastructure business, and other wealth managers took
the same path. It is hard to ignore how infrastructure is getting
plenty of airplay.
And in the UK, now in the midst of a general election campaign,
the state of public infrastructure – potholes in roads, net zero
and what it means for power generation, crowded airports – is a
more concrete, urgent issue for the general public than
abstractions such as GDP.
At Amber
Infrastructure, a business founded in 2006, as its name
implies, this is a business that lives and breathes the doings of
the asset class. Amber is the investment advisor to the UK-listed
fund, International Public Partnerships (INPP). (It was
originally called Babcock & Brown Public Partnerships.) In total,
Amber has about 170 employees; many of them are managing existing
assets. There is a finance team and another team that looks for
fresh opportunities.
In a full-year results update at the end of March, Amber
Infrastructure said it logged a full-year dividend increase of 5
per cent to 8.13 pence per share. It made a further increase
to the annual dividend growth target of 3 per cent for 2024, to
8.37 pence
“Investors are attracted to it [infrastructure] because of its
long-term, defensive and resilient nature,” Chris Morgan, senior
investment director, told this publication in a recent call. He
joined Amber 12 years ago.
The term “infrastructure” now captures a greater range of assets
than used to be the case whilst INPP continues to focus on
investments at the lower end of the infrastructure risk spectrum,
he said.
“We see infrastructure as being the physical assets, systems and
structures that are needed for daily life: Schools, energy
distributors, police HQs, rail assets… and over recent years this
has come to include a range of digital infrastructure assets
(telephone networks, broadband, data centres, etc),” Morgan said.
New hot trend
A notion of how things are changing came earlier in January 2024
when BlackRock announced that it had acquired Global
Infrastructure Partners (GIP). Acquiring GIP has created a
business with a combined $150 billion of assets under management.
In December last year, Middle East alternative investment firm
Investcorp bought a 50 per cent stake in the $4.8 billion
infrastructure business of US firm Corsair Capital, to give
another example. For years, Australia”s Macquarie has been a big
player in the space. Vontobel, the Swiss wealth
manager, has
also pushed into the area.
Getting into the sector seems increasingly urgent – and obvious
in investment terms. As consultants McKinsey & Co said in an
August 2022 note: “There are deeper, more gradual ways in which
the asset class is changing – and investors need to change with
it. Revolutions in energy, mobility, and digitisation are
introducing new dynamics to existing infrastructure investments
that previously appeared almost impervious to change. At the same
time, economic and social transformations are introducing new
types of investments that represent opportunity for investors.”
For investors, one element they like is that infrastructure – of
the sort that INPP holds – comes with a form of government
backing.
“Historically, governments have under-invested in infrastructure
but there has been a growing realisation as to the importance of
investing in infrastructure, particularly to facilitate the
transition to net zero and improve existing, outdated
infrastructure,” Morgan said.
Political risks?
INPP has been through a number of political cycles, Morgan said,
when asked about policies such as the UK Labour Party’s pledge to
nationalise the rail network. “The chance of governments reneging
on [infrastructure] contracts are low,” he said, adding: “There
are compensation clauses in the unlikely event contracts are
terminated.”
As far as UK public finances are concerned, governments have
“limited firepower” in how much they can spend on infrastructure,
which means that private capital remains an important source,
Morgan said. “The vast majority of our assets are in the UK and
continental Europe,” Morgan said, although there are some in the
US and Australia, among others.
Tunnels and cables
Giving examples of specific investments, Morgan referred to the
Thames Tideway Tunnel (aka the “super sewer”), designed to draw
away overflows and stop the pollution of the Thames. There are
more than 22 construction sites across London and the project has
been in the works since 2016.
“The asset will be fully operational next year,” he
said.
“Tideway is one of the top investments in INPP’s portfolio by
fair value. INPP owns part of the company that is building the
project, which generates predictable revenues that are captured
by Amber. These revenues are regulated by the water regulator,
Ofwat,” Morgan said.
Amber also invests in sectors such as the electricity
transmission cables which connect wind farms to the national
grid. “Electricity transmission is about 20 per cent of our
portfolio,” he said.
“These assets are not exposed to the price of electricity. It is
an availability-based revenue stream,” Morgan said. Ofgem [the UK
regulator] grants a contract for a certain number of years, such
as 20 to 25 years.
A point to consider is the Offshore Transmission Owners (OFTO)
model in terms of energy.
Offshore transmission owners acquire the transmission
infrastructure that connects windfarms with the national grid as
part of a public procurement process run by Ofgem, another
regulator. When acquired, the OFTO is granted an initial revenue
period of typically about 20 years, during which it generates
availability-based revenues (i.e., it is paid provided the
infrastructure is made available for use). Morgan said OFTOs have
a consistent, predictable revenue model because the assets have
no exposure to electricity price fluctuation or changes in the
level of electricity production.
There are challenges. Shares in Amber Infrastructure’s INPP trade
at a discount to net asset value. INPP’s board, together with the
Amber management team, is running various initiatives to address
this, such as a £30 million ($38.3 million) share buy-back
programme and realisations from the existing portfolio. It has
made a full repayment of its corporate debt facility. Dividend
targets have been raised for 2023 and 2024.
WealthBriefing concluded by asking Morgan how the INPP
fund handled rising interest rates.
“The high level of inflation linkage within our underlying
contracts has provided a hedge to the impact of rising interest
rates on valuations,” Morgan said.
Interest rates on the debt used in INPP’s portfolio tend to
be either fixed or the asset benefits from regulatory revenue
adjustments that mitigate the impact of changes in debt
rates. Rising rates have affected share prices across the sector,
Morgan added.