Infrastructure is looking rock-solid

Investors’ willingness to back infrastructure projects is rising, according to the latest fundraising data, as the potential for consistent returns based on realistic valuations becomes clear.

This week, HSBC Infrastructure Company (HICL), the London-listed investment fund, announced that it is raising more capital to buy more assets. It is just one of a number of funds that has been increasing its capital base in recent years. Preqin, the research house, calculates that, in the past three years, nearly £110bn has been raised for infrastructure funds: 34 per cent for European projects, 48 per cent for the US and 18 per cent for projects in emerging markets such as India.

Industry insiders say that the outlook is positive because valuations are more attractive following the credit crisis. Equally important is the ability of infrastructure assets to offer steady returns. HICL, 3i Infrastructure and International Public Partnerships – the three main listed funds in the UK – all offer prospective dividend yields above 5 per cent and these yields are forecast to be sustained.

HICL will on Thursday announce how much capital it is raising. Analysts believe that the figure will not be more than £100m. HICL says that it is using the capital to pay down debt and invest in new assets. But it is also taking advantage of the buoyant mood, says James Brown, an analyst at Wins Investment Trusts. HICL’s shares are trading at a premium to its net asset valuation (NAV) per share, which means that it can issue shares without diluting existing investors’ interests. This is not the case with the other two UK-listed companies.

“They’re raising money because they can,” says Brown. “It’s a case of investors wanting yield and a secure income stream.”

HICL is focused on “public private partnership” (PPP) assets, which the company operates or manages itself. These are public service building projects mainly in the UK.

But the larger end of the infrastructure market – where assets are worth billions of pounds – is also thriving. These assets include toll roads, electricity transmission lines and oil and gas pipelines. Typically, governments employ infrastructure funds to take on the construction risk, and then provide them with fixed payments for 30 years once the project starts.

“Governments are looking at big infrastructure projects to get them out of the crisis,” says Andrew Lincoln, a senior executive with Intelligent Engineering.

Arcus Infrastructure Partners, which was formed after its management purchased Babcock & Brown’s European Infrastructure Fund, now owns stakes in toll roads, ports and rail.

Nicola Palmer, a senior executive at Arcus, admits that raising funds is getting harder – bank financing for funds is neither as generous, nor as long-term, for big assets. But she is adamant that bankers’ attitudes are changing and that they are keen to lend to the sector because of its consistent returns.