Reviewing the planned IPOs of Cordiant Digital Infrastructure and Digital 9 Infrastructure.
For an industry that was once considered a bit of a dinosaur, the investment company sector has undergone a remarkable transformation over the past decade. A realisation that, if you want to invest in assets that aren’t easy to sell in a hurry, the best way to do it is via an investment company, has led to an explosion in the number and variety of funds. Potentially, this week we saw the launch of a whole new subsector – digital infrastructure.
There are already a number of listed funds investing in UK infrastructure – from roads, to schools and prisons. There is also a fast-growing number of renewable energy infrastructure funds. Digital infrastructure is in the same vein as these – an asset class that throws off long-term fairly predictable and attractive levels of income that should not be much affected by short-term gyrations in economies and stock markets.
Access to a new asset class
Digital infrastructure funds invest in assets such as mobile communications towers, subsea fibre-optic cables, terrestrial fibre-optic networks and data centres. This is an established and sizeable asset class in its own right, but until now it was not available within the investment company sector. Now we have two planned fund launches.
First to announce was Cordiant Digital Infrastructure. It has published a prospectus and is looking for £300m of investment. It plans to list on the stock exchange’s Specialist Funds Segment, which makes it harder for some ordinary investors to access.
The fund will borrow money with the aim of enhancing returns – the target is for a ratio of debt to gross assets (including debt) between 20% and 35%. Once the IPO proceeds and the borrowed money are invested, the target is that the fund will generate NAV returns of about 9% a year.
The dividend target is much less ambitious, however. Here the company is talking about paying a 1p in its first full financial year, 2-3p in the second year and at least 4p by the fifth financial year. Dividend yields in the infrastructure and renewable energy infrastructure sectors are distorted because these funds’ share prices often trade on premiums to asset value. However, after adjusting for this, Cordiant’s projected dividend yield looks on the low side to us.
Subscription shares
A distinguishing feature of Cordiant’s IPO plans is a proposed issue of subscription shares – one subscription share for every eight ordinary shares acquired at IPO. These give holders the right to buy ordinary shares at prices that ratchet up over time. In the first year, one subscription share gives the right to buy one share at 100p. That 100p headline exercise price grows by 9% a year until it is 153.86p for the period between 1 March 2025 and 28 February 2026. From the headline price, the dividends accrued up to that date are knocked off. So, say that the trust paid a dividend of 1p in its first year and 2.5p in its second year, the exercise price at the start of year three would be 118.81p -1p -2.5p = 115.31p.
Andrew McHattie, who is something on an expert on subscription shares and warrants, discussed these on our news show.
Digital 9
The other proposed launch is of Digital 9 Infrastructure. If all goes to plan, Cordiant’s IPO will be done and dusted by 16 February. Digital 9 says that it will publish its prospectus in March.
Digital 9 is looking for £400m, will be managed by Triple Point Investment Management (already known in the investment company sector for its social housing and energy efficiency funds), and its return objectives are higher than Cordiant’s.
Digital 9 is targeting total returns of 10% a year and aims to pay an annual dividend of 6% of the IPO price in its first financial year and grow that thereafter.
It looks as though Digital 9 thinks it can start throwing off cash much faster than Cordiant. Cordiant says it has a pipeline of opportunities worth €1.5bn. Some of these are existing assets but some are development opportunities. Digital 9 says up to £160m will be invested more or less on day one in Aqua Comms, which owns 20,000km of subsea trans-Atlantic fibre. It also has access to a $3bn pipeline of other investments, of which $1bn will be available within 12 months.
The scale of the opportunity is considerable. It may be that both funds end up launching successfully. If they do, we will look to bring you more detailed information on them as soon as we can.