10 November 2020

Philip Kent is lead adviser at Gravis to GCP Infrastructure Investments Limited, a FTSE 250 closed-ended fund investing in UK infrastructure with long-term, public sector-backed revenues and a market capitalisation of just over £1 billion. Around 60 percent of the GCP portfolio is in renewables, a further 25 percent in PFI, and the remainder in social housing.

Kent says Covid has done little to put investors off the fund: “Infrastructure as an asset class is always attractive because it is non-correlated with equity markets and is income heavy at a time when there are particularly low interest rates. Covid has largely supported that rationale among investors; we look at these assets over a 20 or 30-year time horizon and, in that context, the impact of the pandemic has not been material for overall valuations.”

He points out the difference between assets that rely on cashflows based on the availability of assets – such as schools and hospitals – versus those that are reliant on usage, such as ports, airports and leisure centres. GCP’s PFI portfolio is fortunately not heavily weighted towards the latter, which has felt the Covid impact more starkly.

“We have been looking at opportunities for new deals over the last six months,” says Kent. “There remains a lot of competition. We are in a world where, on the supply side, government policies that support new infrastructure projects are probably at a two-decade low. There are certainly far fewer projects being developed on the primary side, so the focus has shifted to the secondary side.”

He adds: “At the same time, there has been a big growth in the amount of capital chasing those opportunities, as infrastructure has matured as an asset class and investors have become much more comfortable with it. There is more capital being raised every year and competition for the few deals that are out there is fierce. Covid has not, therefore, had a material impact on dealflow.”

“The March budget was quite aggressive on infrastructure, but the government seems to be increasingly of the view that the private sector has less of a role in that and the government raising debt itself is preferable,” says Kent. “Coming out of the pandemic, the government balance sheet and its willingness to issue more debt to fund large capital requirements may have changed. That potentially supports a greater role for private sector investors, and there is a ready pool of those willing to invest if the policy and support mechanisms are there.”

Investors are eagerly awaiting some big policy decisions, Kent observes, including the National Infrastructure Strategy, the Energy White Paper, the Infrastructure Finance Review, and new nuclear policy. “There has to be a wholesale shift in the way we generate our energy, the way our heating works, the way we travel, and in emissions from agriculture” he says. “Those big policy decisions need to be made, but the government focus at the moment is absolutely understandably elsewhere.”

The principle requirement at this stage is for policy clarity, particularly given the number of government departments touched by these infrastructure decisions. Kent says: “PFI/PPP was highly successful at deploying large amounts of private sector capital. Whilst these mechanisms had their failings, a lot was learned through their various iterations over time, and derivatives of them are still used in many geographies, including Wales and Scotland, to successfully procure new infrastructure. Some form of government support is required if private sector funding is to support the types of infrastructure PFI promoted, such as schools, leisure and healthcare facilities. The government has mentioned the RAB (Regulated Asset Base) model, which is potentially workable for large infrastructure projects like a £4 billion sewer but not for community healthcare.”

He adds: “Even if the government’s conclusion is that it is going to fund this itself, that’s helpful for us as investors as it allows us to get on with other things. We need clarity on how we should be setting ourselves up, where we are focusing, what kind of partnerships we should be entering into and how we should be identifying investment opportunities.”

In particular, Gravis would like to know how government intervention might support areas like the decarbonisation of heat and electric vehicle charging, where policy is needed to attract private money.

The issue is not unique to the UK, says Kent: “We are a UK-focused fund and we do evaluate whether it is worth us going back to our shareholders to widen that. Our conclusion at the moment is that the key dynamics – a diminishing pool of projects and a growing pool of capital chasing them – hold true in all Western European market, the US and Australia. We don’t currently see an enhanced opportunity from going elsewhere.”

Gravis has historically focused on taking senior and subordinated debt positions in projects. The current portfolio of 47 holdings covers anaerobic digestion, biomass, soar, PFI, supported living and wind, with PFI assets including healthcare facilities, primary and secondary schools, accommodation for adults with learning difficulties, leisure centres, policing facilities and court buildings.

The priority now is capturing opportunities for growth, Kent says: “That is both from the perspective of putting the money we get back from our existing portfolio to work, but also going out and taking new opportunities, whether raising more money or doing deals in new sectors. We try to get into sectors before our peers and before those sectors become mainstream. There are a couple of interesting areas we are looking at – that would be a positive for us.”

With competition intensifying and policy uncertainty top of the list of concerns, some clearer direction from government would be most welcome.

If you would like to find out more or have any questions, please contact Victoria Allsopp, director in our Infrastructure team.

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Perspectives on Infrastructure: Investment opportunities in the UK

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