The Hardman & Co Monthly: August 2023
Feature article: UK interest rates and “risk-free” gilts at their peak? Infrastructure stocks struggleExecutive summary
Infrastructure/Renewable Energy Funds
► The share price performances of the nine Infrastructure Investment Companies (IICs) and of the 22 Renewable Energy Infrastructure Funds (REIFs) have been dire over the past year. Undoubtedly, the sharp rise in interest rates has presented the sector with serious challenges, especially since the yield on “risk-free” 10-year gilts has risen appreciably. Furthermore, the ongoing war in Ukraine and high inflation rates, from which many IICs and REIFs are partially ‒ if not wholly ‒ protected, continue to unsettle the sector.
► Not only are rising interest rates seriously eroding investor sentiment, as the appeal of “risk-free” gilt-edged stocks is significantly raised, but they also directly affect NAVs. In recent months, several NAV reductions have taken place. Moreover, the average IIC is currently trading at a 22% discount (on an unweighted basis) to its NAV; the comparable discount (also on an unweighted basis) for the REIFs is 21%. Not surprisingly, there are now several share buyback schemes under way.
► In recent months, spot energy prices have fallen markedly, after the massive surge, in early 2022, when the war in Ukraine began. However, this scenario has had less effect on long-term energy price projections, which are key to REIF valuations. Along with higher interest rates and the consequential impact on discount rates, the growth of many REIFs’ NAVs has stalled.
► All constituents of the 31-strong IIC/REIF sector have seen their share prices fall over the past year – some very substantially. Three subsectors have been particularly badly affected: many smaller energy stocks; the two US-based renewable energy stocks (US Solar has now aborted its efforts to sell its business, due to the non-conducive market backdrop); and the telecoms stocks, most notably Digital 9 Infrastructure.
► Prior to COVID-19, when both inflation and interest rates were low, real dividend growth was commonplace, while cuts in nominal growth were very rare. In recent years, though, few IICs/REIFs have been able to replicate this trend; although Greencoat UK Wind remains committed to its dividend growth, matching changes in RPI.
► On the downside, leading IIC, HICL, has flagged a six-year flat dividend – until 2024/25 ‒ of 8.25p per share. Within the REIF sector, Ecofin US Renewables has announced a probable halving ‒ for 2Q’23 only ‒ of its quarterly dividend, which was previously $1.40 per share, following the impact of a tornado in Texas on nearby electricity transmission infrastructure. As for ThomasLloyd Energy Impact, its shares have remained suspended since 24 April 2023, following material accounting issues.
► The average prospective dividend yield (on an unweighted basis) for the IICs is currently 6.7%; the comparable figure (also on an unweighted basis) for REIFs is 6.9%. These much higher yields reflect the sharp decline in recent months of the share prices of many sector constituents.
► Discounting the suspended ThomasLloyd Energy Impact, only 3i Infrastructure, Bluefield Solar, Greencoat UK Wind and Sequoia Economic Infrastructure have been able to keep their percentage share price falls over the past year within single figures. By contrast, over the same period, Digital 9 Infrastructure’s shares are down by 45%, while both Ecofin and HydrogenOne Capital Growth have seen falls of ca.40%.
Friday Night is a development stage company engaged in the business of acquiring and exploring mineral properties with a view to developing mineable deposits of precious and base metals.
1Life Healthcare operates a membership-based primary care platform. The company develops a healthcare membership model based on direct consumer enrollment, as well as employer sponsorship. The company also provides medical services in-office and virtually. As of September 30, 2019, the company had approximately 397,000 members in 9 markets in the United States; 6,000 enterprise clients; and health network partnerships. The company serves consumers, employers, providers, and health networks under the One Medical brand name.
Advanced Oncotherapy is focused on providing radiotherapy systems for cancer treatment through the use of a proton therapy technology. Co. operates in two business segments: proton therapy and healthcare related properties. The healthcare related property U.K. segment relates to Co.'s property in Folkestone, which is being marketed for sale.
Apax Global Alpha is a closed-ended investment company that invests in a diversified portfolio of private equity funds and derived investments in debt and equities. As of Dec 21 2017, Co. targeted an annualized Total Net Asset Value Return across economic cycles of 12-15%, net of fees and expenses. Co.'s investment activities are managed by Apax Guernsey Managers Limited (the Investment Manager) under a discretionary investment management agreement. The Investment Manager obtains investment advice from Apax Partners LLP (Apax Partners). Apax Partners advises on investments globally in companies across four sectors: Tech & Telco, Services, Healthcare and Consumer.
Arbuthnot Banking Group is primarily involved in banking and financial services. Co. is organized into three main operating segments: Retail banking (associate), which incorporates household cash management, personal lending and banking and insurance services; U.K. Private banking, which incorporates private banking, commercial banking and wealth management; and Group Centre, which is comprised in Co.'s Group Centre management. As of Dec 31 2016, Co.'s total assets were £1.27 billion.
Bilfinger Berger Global Infrastructure SICAV is a closed-ended, diversified investment company. Co.'s primary investment objective is to invest in a diversified portfolio of operational (or near operational) Public Private Partnership / Private Finance Initiative infrastructure assets or similar assets.
Bluefield Solar Income Fund is a closed-ended investment company. Co. invests in a portfolio of solar energy assets, each located within the U.K., with a focus on utility scale assets and portfolios on greenfield, industrial and/or commercial sites.
City of London Investment Group is the holding company for a number of subsidiaries. The principal operating subsidiary is City of London Investment Management Company Limited, which acts as an investment manager on 38 accounts with a total of £3.58 billion under management as at June 30 2017. Co. is an asset management group with an institutional client focus specializing in Emerging Market closed-end fund investments. Co.'s range also include Developed, Frontier and Global Tactical Asset Allocation closed-end fund strategies.
GCP Infrastructure Investments is a closed-ended investment company. Co. is focused primarily on investments in U.K. infrastructure debt. Co. invests in a partially inflation-protected portfolio of loans and assets, primarily in the renewable energy, social housing and private finance initiative sectors. Gravis Capital Management Limited is the appointed investment adviser and alternative investment fund manager to Co. The investment adviser has advised on debt structures in a variety of infrastructure sectors, including a variety of renewable energy sectors, healthcare, education, court buildings, specialized offices, registered social landlord accommodation and transport.
Greencoat UK Wind is an investment trust company that engaged in the renewable infrastructure fund, with an objective to provide investors with an annual dividend that increases in line with Retail Price Index inflation. Co. invests in unlevered operating the U.K. wind farms predominantly with a capacity of over 10MW, which sell the power produced and associated green benefits to creditworthy the U.K. offtakers under route-to market power purchase agreements. Co.'s investment portfolio is managed by Greencoat Capital LLP, which acts as its Investment Manager. As of Dec 31 2017, the net asset value of Co.'s total investments was £1.41 billion.
H&T Group is a holding company. Through its subsidiary, Harvey & Thompson Limited, Co. is engaged in pawnbroking, gold purchasing, retail of jewellery, cheque cashing, unsecured lending and other related services.
ICG Enterprise Trust is an investment trust. Co. is a private equity investment company focused on buyouts in developed markets. Co. invests in private equity funds and also directly in private companies. As of Jan 31 2017, Co.'s total investment portfolio amounted to £594.3 million.
John Laing Environmental Assets Group is a closed ended investment company. Co. is an environmental infrastructure investment fund which aims to provide shareholders with a sustainable dividend, paid quarterly, that increases in line with inflation, and to preserve the capital value of its portfolio on a real basis over the long term through the reinvestment of cash flows not required for the payment of dividends. Co. invests in a portfolio of environmental infrastructure projects that have the benefit of long term, predictable, wholly or partially inflation-linked cash flows supported by long-term contracts or stable regulatory frameworks.
NextEnergy Solar Fund is a closed-ended investment company. Co.'s investment objectives are to provide investors with a dividend that increases in line with Retail Price Index over the long term. Co. invests in solar Photovoltaic plants located in the U.K. Co. is managed by NextEnergy Capital IM Limited. As of Mar 31 2017, Co. had total investments at fair value of £415.9 million.
Pantheon International is an investment trust company. Co. invests in a diversified portfolio of private equity assets managed by third party managers across the world. Co. manages its portfolio by creating primary and secondary investments in private equity funds as well as co-investing directly in companies alongside private equity managers. Co. is engaged in the single segment of business, being an investment business. As of May 31 2017, the market value of Co.'s investment portfolio was £1,224,000,000.
Renewables Infrastructure Group is a closed-ended investment company, investing in and managing a portfolio of investments in renewable energy infrastructure project companies. Through its subsidiaries, The Renewables Infrastructure Group (UK) Limited, and The Renewables Infrastructure Group (UK) Investments Limited, Co. invests in operational renewable energy generation projects, primarily in onshore wind and solar PV segments, across the U.K. and Northern Europe. InfraRed Capital Partners Limited is Co.'s Investment Manager.
Sequoia Economic Infrastructure Income Fund is a closed-ended investment company. Co. invests in a diversified portfolio of senior and subordinated economic infrastructure debt investments through its subsidiary Sequoia IDF Asset Holdings S.A. Co.'s investment objective is to provide investors with regular, sustained, long term distributions and capital appreciation from a diversified portfolio of senior and subordinated economic infrastructure debt investments. Co. is managed by International Fund Management Limited.
Shield Therapeutics is a specialty pharmaceutical company focused on the development and commercialization of late stage, hospital-focused pharmaceuticals which address areas of high unmet medical need. Co.'s key products are Feraccru®, commercially available for the treatment of Iron Deficiency Anaemia, and PT20, for the treatment of systemic phosphate accumulation (otherwise known as hyperphosphatemia). Co. has an additional pipeline of three prescription pharmaceutical assets (PT20, PT30 and PT40) with commercial synergies.
US Solar Fund plc is a United Kingdom-based closed-ended investment company. The Company's investment objective is to provide investors with dividends, by investing in a diversified portfolio of Solar Power Assets in North America and other Organization for Economic Co-operation and Development (OECD) countries in the Americas. New Energy Solar Manager Pty Limited is the investment manager of the Company.
Volta Finance is a closed-ended investment company with the objective of investing, among other asset types, in the following main asset classes: Collateralized Loan Obligation, Synthetic Corporate Credit, Cash Corporate Credit and ABS. Co. has appointed AXA Investment Managers Paris S.A., as its Alternative Investment Fund Manager to manage the investments of Co.
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