By James Carthew, for Trustnet, 31 October 2024:
You could argue that investing in infrastructure is boring. Long-term contracts, predictable cash flows, must-have assets, availability rather than demand-linked revenues, inflation-linked income and counterparties with strong credit ratings ought to make for ‘sleep at night’ investments.
For many years, the ratings on listed infrastructure funds reflected these characteristics. That all changed in 2022 as interest rates started to rise. Money was diverted into cash deposits and bonds. Selling pressure allowed discounts to open up, that left some investors disillusioned, which compounded the problem.
Today, even though rates are coming back down again, every London-listed infrastructure fund is trading on a discount. However, the security of income from these funds was not really in doubt. Trusts kept hiking dividends and now they all trade on attractive dividend yields.
While all of these funds look too cheap to my eyes, one rating appears particularly anomalous – that of GCP Infrastructure, a £700m market cap investment company. Managed by Phil Kent and Max Gilbert, supported by an experienced team at Gravis, the company invests across a range of different infrastructure sectors, although its focus has shifted more towards renewable energy infrastructure over the last few years, which gives it strong environmental, social and governance (ESG) credentials.
The main difference between GCP Infrastructure and the bulk of its peers is that it structures its investments as loans. That means they are protected by a ‘cushion’ of equity that takes the first hit if anything goes wrong. However, that margin of safety is not reflected in its rating.
Barring Digital 9 Infrastructure (which took a number of wrong turns and is now in wind up mode), GCP Infrastructure’s shares trade on the widest discount (currently almost 30%) and the highest yield (9.2%) within its infrastructure subsector.
My belief is that the company was particularly badly affected by selling pressure related to the cost disclosure problems that have plagued the investment company sector but, fortunately, are now being addressed.
In an effort to remedy its discount, the board of GCP Infrastructure launched a capital recycling programme in 2023. The ambition was to release £150m (roughly 15% of the portfolio) to rebalance sector exposures, apply funds towards a material reduction in the revolving credit facility and support the return of at least £50m in capital to shareholders before the end of 2024.
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