Riding The Infrastructure Train Is Positive Journey For UK Advisor (2024)

Alt Investments

Earlier this year BlackRock, the world’s largest asset manager ($10.5 trillion in AuM), bought an infrastructure business, and other wealth managers took the same path. It is hard to ignore how infrastructure is getting plenty of airplay.

And in the UK, now in the midst of a general election campaign, the state of public infrastructure – potholes in roads, Net Zero and what it means for power generation, and crowded airports – is a more concrete, urgent issue for the general public than abstractions such as GDP.

At Amber Infrastructure, a business founded in 2006, as its name implies, this is a business that lives and breathes the doings of the asset class. Amber is the investment advisor to the UK-listed fund, International Public Partnerships (INPP). (It was originally called Babco*ck & Brown Public Partnerships.) In total, Amber has about 170 employees; many of them are managing existing assets. There is a finance team and another team that looks for fresh opportunities.

In a full-year results update at the end of March, Amber Infrastructure said it logged a full-year dividend increase of 5 per cent to 8.13 pence per share.It made a further increase to the annual dividend growth target of 3 per cent for 2024, to 8.37 pence

“Investors are attracted to it [infrastructure] because of its long-term, defensive and resilient nature,” Chris Morgan, senior investment director, told this publication in a recent call. He joined Amber 12 years ago.

The term “infrastructure” now captures a greater range of assets than used to be the case whilst INPP continues to focus on investments at the lower end of the infrastructure risk spectrum, he said.

“We see infrastructure as being the physical assets, systems and structures that are needed for daily life: Schools, energy distributors, police HQs, rail assets… and over recent years this has come to include a range of digital infrastructure assets (telephone networks, broadband, data centres, etc),” Morgan said.

New hot trend
A notion of how things are changing came earlier in January 2024 when BlackRock announced that it had acquired Global Infrastructure Partners (GIP). Acquiring GIP has created a business with a combined $150 billion of assets under management. In December last year, Middle East alternative investment firm Investcorp bought a 50 per cent stake in the $4.8 billion infrastructure business of US firm Corsair Capital, to give another example. For years, Australia's Macquarie has been a big player in the space. Vontobel, the Swiss wealth manager,has also pushed into the area.

Getting into the sector seems increasingly urgent – and obvious in investment terms. As consultants McKinsey & Co said in an August 2022 note: “There are deeper, more gradual ways in which the asset class is changing – and investors need to change with it. Revolutions in energy, mobility, and digitisation are introducing new dynamics to existing infrastructure investments that previously appeared almost impervious to change. At the same time, economic and social transformations are introducing new types of investments that represent opportunity for investors.”

“Historically, governments have under-invested in infrastructure but there has been a growing realisation as to the importance of investing in infrastructure, particularly to facilitate the transition to net zero and improve existing, outdated infrastructure,” Morgan said.

Political risks?
INPP has been through a number of political cycles, Morgan said, when asked about policies such as the UK Labour Party’s pledge to nationalise the rail network. “The chance of governments reneging on [infrastructure] contracts are low,” he said, adding: “There are compensation clauses in the unlikely event contracts are terminated.”

As far as UK public finances are concerned, governments have “limited firepower” in how much they can spend on infrastructure, which means that private capital remains an important source, Morgan said. “The vast majority of our assets are in the UK and continental Europe,” Morgan said, although there are some in the US and Australia, among others.

Tunnels and cables
Giving examples of specific investments, Morgan referred to the Thames Tideway Tunnel (aka the “super sewer”), designed to draw away overflows and stop the pollution of the Thames. There are more than 22 construction sites across London and the project has been in the works since 2016.

“The asset will be fully operational next year,” he said.

“Tideway is one of the top investments in INPP’s portfolio by fair value. INPP owns part of the company that is building the project, which generates predictable revenues that are captured by Amber. These revenues are regulated by the water regulator, Ofwat,” Morgan said.

Amber also invests in sectors such as the electricity transmission cables which connect wind farms to the national grid. “Electricity transmission is about 20 per cent of our portfolio,” he said.

“These assets are not exposed to the price of electricity. It is an availability-based revenue stream,” Morgan said. Ofgem [the UK regulator] grants a contract for a certain number of years, such as 20 to 25 years.

A point to consider is the Offshore Transmission Owners (OFTO) model in terms of energy.

Offshore transmission owners acquire the transmission infrastructure that connects windfarms with the national grid as part of a public procurement process run by Ofgem, another regulator. When acquired, the OFTO is granted an initial revenue period of typically about 20 years, during which it generates availability-based revenues (i.e., it is paid provided the infrastructure is made available for use). Morgan said OFTOs have a consistent, predictable revenue model because the assets have no exposure to electricity price fluctuation or changes in the level of electricity production.

There are challenges. Shares in Amber Infrastructure’s INPP trade at a discount to net asset value. INPP’s board, together with the Amber management team, is running various initiatives to address this, such as a £30 million ($38.3 million) share buy-back programme and realisations from the existing portfolio. It has made a full repayment of its corporate debt facility. Dividend targets have been raised for 2023 and 2024.

WealthBriefing concluded by asking Morgan how the INPP fund handled rising interest rates.

“The high level of inflation linkage within our underlying contracts has provided a hedge to the impact of rising interest rates on valuations,” Morgan said.

Interest rates on the debt used in INPP’s portfolio tendto be either fixed or the asset benefits from regulatory revenue adjustments that mitigatethe impact of changes in debt rates. Rising rates have affected share prices across the sector, Morgan added.