The boards of both GCP Infrastructure Investments (GCP Infrastructure) and GCP Asset Backed Income (GABI) have agreed terms for a merger of the two funds. Under the proposals, the merger will take effect via a solvent winding-up of GABI and the transfer of its assets to GCP Infrastructure in exchange for the issue of new ordinary shares in GCP Infrastructure to GABI shareholders. The number of GCP Infrastructure shares issued to GABI shareholders will be determined on a formula asset value (FAV) basis. The FAVs shall be calculated based on the net asset value of each company on an agreed calculation date, less each party’s transaction costs. The scheme, if completed, is expected to conclude before the end of 2023. Circulars in relation to the proposals and convening the necessary general meetings are expected to be published in due course.
A further combination with RM Infrastructure Income is on the cards
GCP Infrastructure’s board has also announced that it is in separate discussions with the board of RM Infrastructure Income (RMII) with the intention of agreeing a potential merger of the enlarged GCP Infrastructure with RMII. It is expected that, if it takes place, this will be effected by way of a scheme of reconstruction of RMII and the associated transfer of a material proportion of its assets to GCP Infrastructure in exchange for the issue of new shares in GCP Infrastructure. A further update will be provided when appropriate.
Benefits for all
Both GCP Infrastructure and GABI’s boards believe that, if completed, the merger will bring benefits to both their existing and any new shareholders in the company. It is also being proposed that, following the completion of the scheme, there will be an increased return of capital to shareholders and the enlarged GCP infrastructure will reduce its leverage. GCP Infra’s investment policy will be amended to maximise access to attractive investment opportunities, with a focus on sustainable assets.
GCP Infrastructure’s liquidity commitments
GCP infrastructure’s board says that it remains conscious of the trust’s discount to NAV and considers that the benefits of leverage are reduced given the current all-in cost of the trust’s revolving credit arrangements, which have been impacted by increases to SONIA, the base lending cost. GCP Infrastructure has therefore been focused on using available cash proceeds to both:
- reduce leverage, with the c. £50m net proceeds of the recent biomass refinance expected to reduce the company’s outstanding debt to c. £100m; and
- prioritise the buy-back of shares over new investments: in the quarter ending 30 June 2023 the company made new investments totalling only £1.4m and spent £4.2m in buying back shares during the quarter.
Under the terms of the proposed merger with GABI, following the implementation of the scheme (if approved) the trust will commit to utilising the £200m of cash available to the enlarged portfolio (including without limitation from portfolio repayments and realisations) in the two-year period following completion of the GABI Scheme as follows:
- £100m to further reduce the company’s leverage to a target drawn balance (after a drawdown in respect of the GABI Scheme as detailed below) of c. £50m; and
- £100m to distribute to shareholders by way of share buy backs, special dividends or otherwise. This commitment is in addition to the remaining commitments under the £15m buy-back programme announced by the company on 14 March 2023.
If the merger is approved, GCP Infrastructure intends to draw on its revolving credit arrangements to fund the repayment in full of the outstanding balance under the GABI revolving credit facility, which currently has £40m outstanding. GABI has agreed not to draw further on its revolving credit arrangements prior to completion of the scheme or, if a further draw down is contemplated, that it must seek the prior consent of GCP Infrastructure. GCP Infrastructure has agreed to prioritise the use of its cash resources, in the first instance and as part of the liquidity commitments, to repay the additional debt drawn by GCP Infrastructure in respect of the GABI debt amount. The GABI scheme would support the ability of GCP Infrastructure to offer the liquidity commitments due to the shorter duration of GABI’s investment portfolio. Across GCP Infrastructure and GABI, around £140m of loan repayments are forecast to be received in the first six months of 2024.
Investment policy amendments
As part of the scheme, GCP Infrastructure’s board will propose certain amendments to the trust’s investment policy and objectives which will be subject to customary approvals. The purpose of the proposed Investment policy change is to adapt the company’s investment approach in recognition of the evolution that has occurred in the infrastructure landscape over the 13 years since IPO and to maximise the pool of attractive investment opportunities available to the company moving forward with a focus on sustainable assets. The relevant section of the proposed revised investment policy of the company will be changed as follows:
“To invest at least 75% of its total assets in infrastructure and real assets that:
(a) benefit from public-sector backed, contracted, or predictable cash flows;
(b) have no construction risks;
(c) that have a high standard of sustainability by reference to: (i) meeting a credible minimum standard for environmental and/or social sustainability; or (ii) align with a specified environmental and/or social sustainability theme; and
(d) are located in the UK.”
It will be proposed that the investment objectives of the company will be amended to: (i) pay shareholders a regular and sustainable dividend; (ii) invest in a diversified portfolio of debt and/or similar assets secured against sustainable infrastructure and real assets; and (iii) preserve the capital value of its investments over the long-term.
Strategic rationale for the proposals
GCP Infrastructure’s board believes that the merger and investment policy proposals, will bring multiple benefits to both the existing and any new shareholders in the company. The scheme will consolidate two listed infrastructure and real asset debt vehicles to form a sizeable investment company that offers all shareholders of the enlarged GCP Infrastructure the following benefits in its view:
- The Liquidity Commitments: as described above, which will utilise at least £200m of the company’s cash resources to both: (i) reduce the leverage in the enlarged vehicle over the medium-term to c. £50m; and (ii) return c. £100m of capital to shareholders.
- Access to a shorter duration: GABI has a shorter average weighted average loan life than GCP Infra, at 5 years compared to GCP Infrastructure’s 10 years (as at 30 June 2023). As a result, allowing for the liquidity commitments, the enlarged GCP Infrastructure will be more agile and able to re-invest in accordance with the revised investment policy and at the prevailing market rates (which are higher now than at any point during the life of GCP Infra), at the same risk level, more quickly than it could prior to the proposals.
- Enhanced secondary market liquidity: the board recognises the importance of scale from the perspective of liquidity for shareholders. Based on the market capitalisations of both GCP and GABI as at close on 10 August 2023, the enlarged market capitalisation would be £907m. In the three months to 31 July 2023, average daily value of shares traded in GCP Infrastructure and GABI (excluding on-market buybacks) were c. £1.29m and c. £0.46m, respectively.
- Realigned mandate: the proposed investment policy change, including the introduction of an explicit sustainability objective, is expected to provide a wider universe of potential investment opportunities with attractive risk-adjusted returns.
- Shareholder register: the proposals will allow several shareholders to consolidate their holdings across the two companies while also creating a more diversified shareholder base through a combination of the two share registers.
- Lower costs: certain annual fixed costs are duplicated across GCP Infrastructure and GABI and so the GABI scheme will remove such costs and the company’s fixed costs will be spread over a larger asset base, resulting in a lower ongoing expense ratio. The cost savings are projected to be c. £0.8m per annum following implementation of the GABI Scheme.
The board expects that the RM Scheme, should it progress, will have similar benefits to those of the GABI scheme.
Costs of the proposals and Gravis contribution
Each company shall bear its own costs incurred in relation to proposals. Gravis is the investment adviser to both and has agreed to pay, or otherwise make, a contribution towards the costs of the proposals to GCP Infrastructure and GABI of £1m. This is to be apportioned between GCP Infrastructure and GABI by reference to each company’s total transaction costs. The expected costs to GCP Infrastructure of the GABI scheme (post the Gravis Contribution) are around £1.4m.
Further, the investment advisory fee payable to Gravis by the company on an ongoing basis shall be revised from the current investment advisory fee of 0.9% per annum on net assets (excluding cash) to:
- in respect of net assets (excluding cash) up to £1.3 billion, a fee of 0.9% per annum of such net assets; and
- in respect of net assets (excluding cash) above £1.3 billion, a fee of 0.8% per annum of such net assets.
Continuation vote to be introduced
Infrastructure debt investments are long-term investments (with the weighted average outstanding term of GCP Infrastructure loans being 10 years as at 30 June 2023). Reflecting the long-term nature of the portfolio, and the need to incentivise the investment adviser over the long-term in alignment with the portfolio, GCP Infrastructure does not currently have a commitment to hold a continuation vote. However, as part of the proposals, the board will commit to providing shareholders with a continuation vote at the company’s AGM in 2028 and every four years thereafter.
The Gravis team
The portfolio managers of the enlarged GCP Infrastructure will continue to be Philip Kent, Ed Simpson and Max Gilbert, and the management of the company will continue to be supported by the wider Gravis business, including the chief investment officer of Gravis’ private market investment funds.
The board notes that Gravis is already responsible for managing the GABI assets and so the combination under the GABI Scheme will rely on existing personnel knowledgeable about the GABI portfolio and its underlying assets.
Comments from Andrew Didham, chairman of GCP Infrastructure
“There has been considerable consolidation amongst investors in investment companies like GCP Infrastructure. With this comes the need for consolidation amongst investment companies, to provide their investors with entities of greater scale, more liquidity and lower ongoing costs. GCP Infrastructure is well placed to drive this consolidation, and the Board believes that the GABI Scheme and, if progressed, the RM Scheme, will deliver improved liquidity in the Company’s shares, a lower ongoing charges ratio and a wider pool of potential investors. We expect the enlarged Company will be well placed to continue to deliver attractive, long-term risk adjusted returns to shareholders.”
Comments from Alex Ohlsson, chairman of GABI
“The Board is pleased to announce the agreement of the heads of terms with GCP Infrastructure. Recognising the challenges currently facing the UK credit and alternative asset sector, the Board considers that GABI shareholders will be well served as part of a larger, FTSE 250 company that offers a considerable liquidity commitment, reduced leverage in the short to medium-term, and a sizeable and diverse portfolio of infrastructure and real asset debt investments.”
[QD comment: If it proceeds, this proposed merger should result in a larger, more liquid and efficient fund, which should be to the benefit of both GABI and existing GCP Infrastructure shareholders. A similar logic will also apply if the enlarged fund is then able to proceed with a merger with RM Infrastructure Income. Both funds are trading on very big discounts to NAV. GABI’s had its problems. The loss of its management team was unhelpful and, as we highlighted in April (in our coverage of GABI’s annual results – click here to read), there were four loans in the portfolio that experienced challenges during the last financial year. However, these accounted for around 4% of total portfolio value at the last financial year end and should be reflected in the FAVs that will be calculated when the two funds combine.]