Building a better future
Infrastructure trust managers assess why perceptions of the sector could change
Infrastructure investment trusts have dealt with a number of challenges from higher interest rates to cost disclosure problems over the past three years. But could prospects for the sector be about to change?
“We believe the infrastructure investment trust sector can provide meaningful real returns by investing in growth areas like the transition to net zero and the digital revolution.”
Colette Ord, Director – Head of Real Estate, Infrastructure and Renewable Funds Research at Deutsche Numis, said: “We believe the infrastructure investment trust sector can provide meaningful real returns by investing in growth areas like the transition to net zero and the digital revolution. Combined with the prospect for narrowing discounts, this means there is potential for outsized share price returns. Infrastructure investment companies currently offer some of the highest dividend yields in the wider investment trust sector, which remains a key attraction. The earnings visibility from contractual cashflows, combined with stable balance sheets, should support their long-standing role in portfolios as an alternative income diversifier with low volatility of returns over time.”
On 28 January, the AIC hosted an infrastructure webinar which featured Philip Kent, Lead Adviser of GCP Infrastructure Investments, Jean-Hugues de Lamaze, Partner at Redwheel-Ecofin and Portfolio Manager of Ecofin Global Utilities and Infrastructure and Benn Mikula, CEO and Managing Partner of Cordiant Capital, which manages Cordiant Digital Infrastructure.
For comments from other infrastructure investment trust managers, read our press release.
After a challenging time for infrastructure, what’s the outlook for your trust in 2025?
Benn Mikula, CEO and Managing Partner of Cordiant Capital, which manages Cordiant Digital Infrastructure, said: “On the one hand, the outlook for the digital infrastructure sector in general, and our middle-market ‘Buy, Build and Grow’ strategy in particular, remains robustly positive. On the other hand, we operate in a market where the FCA’s regulatory framework – manifested in their approach to fee calculations, one that amounts to the double counting of fees – continues to artificially suppress investment trusts’ share prices.
“The situation cannot be overstated: while we’re building real value within the digital infrastructure sector, the London Stock Exchange finds itself hamstrung by regulatory frameworks seemingly designed by those with limited understanding of the actual market dynamics faced today. The message to regulators should be crystal clear: either modernise these constraints or watch London’s competitive position erode.
“The message to regulators should be crystal clear: either modernise these constraints or watch London’s competitive position erode. ”
“This issue isn’t just about the challenges facing infrastructure – it’s about whether or not London wants to remain relevant as a global financial centre. The current regulatory straitjacket suggests we haven’t quite made up our minds.”
Philip Kent, Lead Adviser of GCP Infrastructure Investments, said: “The biggest challenge for our sector has been the macro environment, and we’re optimistic that it will turn in our favour in 2025. We’re expecting more interest rate cuts in the UK, which will make the income characteristics of infrastructure more attractive versus traditional income assets.
“On top of that, we’ve seen the new government introduce some interesting targets for 2030. Remember, that’s just five years away now, so a lot of investment in infrastructure has got to happen and at a rapid pace. 2025 needs to be the year when policy aligns with ambition in both core renewables and new sectors such as those decarbonising heat, agriculture, industry and transport – all sectors that Gravis is focused on. The UK needs to get building quickly if the government wants to get anywhere near reaching its targets. It promises to be a very exciting year for infrastructure.”
Jean-Hugues de Lamaze, Partner at Redwheel-Ecofin and Portfolio Manager of Ecofin Global Utilities and Infrastructure, said: “We believe that the fundamental outlook for power demand and power prices remains positive, especially in the US. The long-term thesis of electricity demand growth has only started to become apparent on the back of data centre growth, especially in the US, and electric vehicle adoption, especially in China and Europe. This trend has much further to run given the large need for investments in power generation and grid infrastructure.
“The delay in getting a supply response to the growing demand for electricity, together with the increasing intermittency of new power generation sources, is likely to put upward pressure on power prices going forward. We also believe that a potential reduction in tax incentives in the US could lead to higher power prices as it may limit new capacity additions.
“Transportation infrastructure and environmental services generally underperformed utilities last year. These businesses have limited competition and good pricing power, operational performance is strong, and they are useful contributors to portfolio diversification.”
Why should investors consider your trust right now? Will interest rate cuts help?
Philip Kent, Lead Adviser of GCP Infrastructure Investments, said: “GCP Infrastructure is a well-diversified, operational portfolio, which has been built up over almost 15 years – a milestone it will celebrate in a couple of months. During that time, it’s paid a stable, sustainable dividend – a dividend you can access today at a 10% yield on the share price. That’s an unprecedented level in the life of the company and, coupled with the discount, makes it an extremely interesting entry point for new investors. If we get more interest rate cuts the attractiveness only increases further.”
“GCP Infrastructure is a well-diversified, operational portfolio, which has been built up over almost 15 years – a milestone it will celebrate in a couple of months.”
Jean-Hugues de Lamaze, Partner at Redwheel-Ecofin and Portfolio Manager of Ecofin Global Utilities and Infrastructure, said: “As utilities groups gradually phase out fuel-intensive power sources, they are gaining exposure to faster growth and more contracted businesses. This leads to a significant de-risking of business models which the market has yet to take into consideration. Relative valuations are actually at historic lows. Record cash inflows into private equity infrastructure funds should prove supportive as there is currently a significant valuation gap between private and listed valuations in the infrastructure universe. We expect M&A activity in the space.
“Our share price discount to NAV also represents an opportunity for investors to access the best of the universe at a cheap valuation.”
“Our share price discount to NAV also represents an opportunity for investors to access the best of the universe at a cheap valuation. A reversal in bond yield trends could bring flows into the long-duration infrastructure asset class from generalist investors, thereby fuelling further support for listed valuations.”
What are the biggest risks to your portfolio?
Benn Mikula, CEO and Managing Partner of Cordiant Capital, which manages Cordiant Digital Infrastructure, said: “The trust sector faces immense pressure from regulations that have impaired retail and institutional investment flows. This manifests itself in a gap between our share price and NAV, though we view this as a temporary market inefficiency rather than a reflection of underlying asset quality. We understand there is no ‘silver bullet’ to resolve this discount, but continued strong operational performance, value-creating capital expenditure, acquisition price discipline, significant alignment of interests and continuing the buyback programme are designed to address this disparity.”
