Ben Loomes, managing partner and co-head of infrastructure at 3i Investments, the vehicle’s investment adviser, notes roughly 77 per cent of the portfolio is invested in core infrastructure across the regulated utilities, transportation and energy sectors.
The manager explains these are “operational businesses that generate long-term yield and capital growth”. In addition, he notes the listed fund also invests in “primary public-private partnership projects; these are concession-based greenfield projects and key sectors are transport, education and healthcare”.
Mr Loomes says the team of roughly 25 investment professionals aims to maintain a balanced and diversified portfolio, with the vehicle holding 21 investments at the end of its financial year on March 31 2015. “In terms of returns, we clearly want to deliver a mixture of income yield and capital growth, and in terms of total return we have a target of 8-10 per cent to be achieved in the medium term,” he points out. “We also have a progressive annual dividend per share policy and we look to grow this each year.”
The process has remained unchanged since launch, with the team carefully analysing new investments against a broad set of criteria, including the set financial return targets. The manager notes: “In particular, we look for investments where we have genuine influence and board representation, and that have strong market positions and a good management teams.”
He adds one area of recent evolution is an increased interest in economic infrastructure opportunities “slightly higher up the risk-return spectrum, in the lower double-digit returns range”. He says these holdings are asset intensive and have strategic or defensible market positions that create long-term stable cashflows, but they may also have a “greater element of return upside or downside, perhaps linked to commodities or operational aspects of the business”.
Examples of recent investments in this area include a £77m venture in two oil storage terminals, and a £109m deal to buy a 50 per cent share of Danish company ESVAGT, which provides emergency rescue and response vessels and related services to the offshore oil and gas industry.
Mr Loomes adds: “As part of any assessment of new investments we take into account macroeconomic factors, such as inflation. About 60 per cent of our portfolio has revenues directly linked to inflation, including Anglian Water Group in the UK. We also look at currency exposure given that we are a sterling-based fund, and our European portfolio is largely hedged for the purpose of reducing currency exposure.”
Since launch in April 2007 the trust has delivered a total return of 173.4 per cent, compared with the 45.7 per cent average return of the Association of Investment Companies IT Infrastructure sector, data from FE Analytics shows. In the five years to August 21 2015, the trust delivered 107.9 per cent against the sector average of 52 per cent.
Mr Loomes notes the overall portfolio has performed well, with the year ending March 31 2015 delivering “our strongest return ever at close to 25 per cent, largely driven by the European core portfolio performing well, and we also sold one of our largest assets, Eversholt, at a significant uplift”. However, areas that performed less well include the 7 per cent allocation to Indian infrastructure, which is in the process of being realised.
“That has been quite a challenging area, particularly given the depreciation of the rupee against sterling,” he notes. “We’ve been in realisation mode of these investments in the past few years and we’re not putting new investment to work in India at this point.”
Looking ahead, Mr Loomes remains optimistic on the prospects for the infrastructure sector given the expected continuation of the low interest rate environment. “We would expect a number of energy companies across Europe and globally to be looking at their balance sheets and potentially [eyeing] asset-disposal programmes, given where the oil price is at present,” he adds.
EXPERT VIEW
Richard Philbin, chief investment officer, Harwood Multi-Manager
This trust – with a market cap of £1.4bn and a 15 per cent premium to net asset value of £1.2bn – has been managed by Ben Loomes and Phil White for the past 18 months, investing globally in infrastructure projects. The company is on target to pay a 7.25p dividend (4.5 per cent) and has plans to grow this, but currency volatility and a poor dividend from one of the assets, Anglian Water, has had a negative impact recently. With a stated 10 per cent total return objective, the trust is regularly in the press announcing deals.
