April 23, 2018 / 11:24 AM / a year ago

Investors build up exposure to beaten-down UK infrastructure

LONDON (Reuters) - Leading shareholders in British listed infrastructure funds are doubling down on their investments, betting the political worries that sent valuations to decade-lows are overdone.

The funds, which mainly invest in building and maintaining UK assets like schools and hospitals, have boomed in recent years as successive governments supported private finance initiatives (PFI) aimed at executing projects more efficiently.

They have been a popular choice for investors since the financial crisis, because of their stable dividend income during a period of low yields elsewhere in financial markets.

The four largest listed funds, or investment trusts – HICL Infrastructure (HICL.L), International Public Partnerships (INPP.L), John Laing Infrastructure JLIF.L and BBGI (BBGIB.L) – issued a record 1.1 billion pounds ($1.54 billion) of new shares in 2017 to keep up with the demand.

But an increase in political risk in the UK has soured sentiment in recent months. Share prices slid in September after the opposition Labour party suggested nationalizing PFI contracts, in what would be a radical departure from existing government policy.

They fell further in January after building contractor Carillion (CLLN.L) – which had partnerships with a number of the trusts – collapsed, adding to fears the projects might be brought back into the public sector.

As a result, the sector is now trading below the value of its net assets for the first time in nearly a decade, according to Reuters data.

“The nature of current sentiment is that it’s hard to dispel,” said Giles Frost, chief executive of Amber Infrastructure Group, the investment manager advising INPP.

“It’s our job to restore confidence, it’s our job to persuade all our stakeholders of the value we bring as a long-term private investor, and we’re knuckling down and doing that.”

(GRAPHIC: Infrastructure trusts have fallen sharply while share issuance has spiked - reut.rs/2K0PG7b)


A number of the largest investors in the sector have added to their positions, saying valuations more than compensate for the increased risk of nationalization, though they expect a more muted market with little fundraising in the near future.

James de Bunsen, fund manager at Janus Henderson Investors, a top-20 investor in HICL, has doubled his exposure to infrastructure since the beginning of the year despite the increased political uncertainty.

“I think it’s hugely overblown,” he said. “It’s a risk so you can’t completely rule it out, but in my mind you’ve got to have an election first and that’s not slated till 2022.”

Labour would first have to win power and then would probably need to win a vote in Parliament to force through nationalization, said Colin Dryburgh, a fund manager at Kames Capital, a top 20 shareholder in BBGI, HICL and International Public Partnerships.

“You don’t just need a left-leaning government, you need MPs that are onside,” he said.

With the trusts now trading at a discount, some investors are calling for disposals of non-core assets to realize value for shareholders.

“In a number of meetings with the companies I invest in, it is the question I am asking,” said Mike Pinggera, fund manager at Sanlam Four and a top-30 shareholder in HICL. “Is this an opportunity to tidy the portfolio up?” He, too, has added to his holdings.

Diversifying the trusts’ portfolios could also end up being a necessity because of the tough PFI market, said Solomon Nevins, a fund manager at Architas, which owns stakes in John Laing Infrastructure and International Public Partnerships.

“Already we have seen a massive decrease in traditional PFIs being written,” he said. “Some of the funds have been broadening their investment scope and doing more investments overseas. You are going to see in time the proportion of UK schools and hospitals in portfolios shrink.”

The majority of BBVI’s assets are now outside the UK, with the firm’s investments dominated by Canadian projects, according to broker Canaccord Genuity.

Conditions in the UK PFI market were likely to be difficult for the foreseeable future, according to an executive at one of the trusts.

“There is not much political support for it at the moment,” he said. “It is not the flavor of the month today and I can’t see that changing in the short term or in the medium term. But I don’t think there is an alternative, either.”

(This story corrects name of firm to Sanlam Four and name of manager to Pinggera in 18th paragraph.)

Reporting by Alasdair Pal and Simon Jessop; editing by Sujata Rao, Larry King

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