Infrastructure investment trusts have been a bright spot during an otherwise challenging 2022.
These funds buy infrastructure assets – such as hospitals and schools – and benefit from predictable and inflation-proofed rental income over long periods of time.
These characteristics have proved invaluable at a time when prices have soared, stock markets have fallen and bonds have come under pressure.
The £3.3bn HICL Infrastructure trust offers investors a yield of 4.8pc and has delivered a healthy share price return of 9pc over the past year, which compares with 2.6pc from rivals.
Edward Hunt, of InfraRed Capital Partners, the manager of HICL, discusses whether infrastructure assets can keep rising, the “valuable lesson” he learnt from the collapse of Carillion in 2018, and whether he expects the trust’s 6pc premium to change in the near future.
How do you invest?
HICL provides access to the essential infrastructure that we see around us in our daily lives.
It is a diversified portfolio of privately owned core infrastructure investments that offers investors a stable income, a strong predictable return, cash flows that will last for around 30 years, and shares that should rise in line with inflation and don’t always fall when the wider stock market does.
How do you help shareholders protect themselves from inflation?
Not all infrastructure assets are created equal when it comes to inflation. On a basic level, inflation protection means our revenues rise by inflation every year and more than our costs do. A simple example is a toll road: as inflation goes up, you are allowed to increase your tolls.
With public-private partnerships or private finance initiative projects, which represent around 60pc of our portfolio, inflation linkage is typically set out in the contract. For example, our rents from the public sector increase by the retail prices index in most cases. These payments are not linked to the extent to which the public sector uses the asset; you get paid for making the facility available.
There’s also inflation linkage with the “regulated assets” we own. For example, we have a stake in Affinity Water, where the revenues set by Ofwat, the regulator, also rise by inflation.
How do you avoid overpaying for investments?
The market is competitive. By definition, infrastructure assets are few and far between and that is why we like it. Demand has outweighed supply almost from day one.
First, we stay away from very large, high-profile auctions. Second, we take opportunities to buy more of the investments we already own. These are generally quite attractive, as they are off-market and the risk-reward trade-off can be very enticing.
Also, there are areas where we are different from our peers so face less competition. For example, in “greenfield” projects, which are pre-construction or in the process of being built.
What has been your best investment?
The A63 toll road in France has been the best. It is a key strategic route from south-west France into Spain and proved extremely resilient during Covid. Freight traffic continued to be strong and after the first lockdown it bounced back very quickly. The A63 continues to provide resilient cash flows and strong inflation protection.
And your worst?
It is likely to be one of our UK health PFI assets, where we learnt a valuable lesson from the collapse of Carillion.
Over the late 2010s we acquired a number of assets from Carillion and allowed the company to become our largest counterparty. When it went into insolvency in early 2018, that created problems across 10 of the assets in our portfolio where Carillion provided facilities management services. We had to step in and sort it out, and in one or two cases finish construction. This took years.
Ultimately, I think the Government and councils would say it was a success. They didn’t contribute any money, which is how the PPP/PFI programme should work. We also didn’t contribute extra funds to the projects at the time.
Why should investors pay a premium for your shares?
Most infrastructure trusts trade at a premium. I think this is because they have performed well and delivered for shareholders. Also, putting together a portfolio of infrastructure investments is almost impossible for the average investor, so it is difficult to replicate. We are not the most expensive trust and we continue to offer a strong yield and track record of delivering returns.