HICL Infrastructure Company is the oldest and largest infrastructure trust in the UK. It was set up in 2006 and now boasts nearly £3bn in assets. Its annualised return since launch has been 9.4%, handily ahead of the 7-8% target set at its IPO.
This fund is never going to set the world on fire in performance terms, but it’s certainly left the UK market for dust. That’s more a reflection on the large amount of crud in the FTSE of course — it’s returned somewhere in the region of 6% a year since HICL started up.
Like all alternative funds, much of the return has been paid out as dividends. The 8.05p per share paid out last year represents a historical yield of 5.1%. Dividend targets of 8.25p and 8.45p have been set out for the years ended March 2020 and March 2021.
HICL has produced capital gains as well. Its net asset value has climbed from an initial 100p to 157.5p as of 31 March 2019.
The idea with infrastructure investment is that it’s not particularly tied to the economic cycle and should have strong, non-volatile cash flows.
So, it’s one of a few funds I’ve bought in the last couple of years with the hope of adding a little stability to my portfolio (I’ve also bought some renewable energy trusts such as Bluefield Solar and Gresham Energy Storage).
- Founded: 2006
- Manager: Harry Seekings at InfraRed Capital Partners
- Ticker: HICL
- 10-year net asset return: +156%
- Current price: 156.6p
- Indicated spread: 156.4p-156.8p (0.3%)
- Exchange market size: 10,000
- Results released: May, Nov
- Market cap: £2.8bn
- Discount to net assets: 0.6%
- Costs: 1.08% OCF and 1.4% KID
- Gearing: zero (although HICL’s individual investments have debts as they are typically held in special purpose vehicles)
- Historical dividend and yield: 8.05p and 5.1%
- Dividends paid: Mar, Jun, Sep, Dec
- Style: Diversified infrastructure, predominantly in the UK
- Links: Website and AIC page
This trust started life as HSBC Infrastructure Company Limited, which was shortened to HICL when its management team did a buy-out in 2011.
That buy-out led to the formation of InfraRed Capital Partners, which manages about £10bn in total, including the £2.8bn HICL and the £1.8bn Renewables Infrastructure Group (TRIG).
£250m was raised when HICL floated. As the charts below show, the pace of acquisitions (and accompanying share issues) quickened once InfraRed struck out on its own.
For most of its life the company was registered in Guernsey, but earlier this year it switched to the UK. From the company’s latest results:
This is an important milestone in HICL’s evolution, aligning HICL’s corporate domicile and tax residency with the location of the majority of both its shareholders and its investments, putting HICL on a stronger footing with regards to future cross border taxation changes and foregoing the high degree of scrutiny to which offshore funds are increasingly subject.
This looks like a sensible move although, as an external investor, it’s difficult to gauge how important it really is.
HICL has 118 infrastructure investments in total, but the ten largest account for 47% by value. As the table shows, HICL often invests alongside other parties:
There are many ways you can analyse HICL’s portfolio.
77% of HICL’s assets are in the UK, 15% are in the EU and 8% in North America. HICL also targets Australia/New Zealand but has no investments there at the moment having sold a stake in a desalination project last year.
Sector-wise, transport and health are the two largest industries served, at around 30% each. Education comes in third at 16%. Other sectors served are accommodation, utilities, and fire, law and order.
71% of HICL’s assets are PPP projects (public-private partnership). Demand-based assets (like the A63 toll road) account for 21% of the portfolio and regulated assets (just the stake in Affinity Water) the final 8%.
PPP projects should, according to the company, be lower risk due to “the contractual nature of revenues and costs and limited residual risks”. However, it adds that “if a PPP project is under construction, has financially weak counterparties, or has not been structured to pass down appropriately key delivery risks to subcontractors, its risk profile can be incrementally higher”.
We saw that with the Carillion debacle. It managed 10 projects for HICL, accounting for 14% of its net asset value. HICL took a hit of around 2% of net assets (£50m) when Carillion went under, although it expects to be able to write back a significant proportion of that over time.
Counterparty risk (where HICL depends on a third party to perform some aspect of an investment’s operation) is an ongoing issue. HICL now seems to be better prepared with appropriate contingency plans. Its eight largest counterparties manage between 3% and 12% of its assets apiece, so they are all smaller than Carillion was in that respect.
The political question
This is where things get tricky to call and I wouldn’t blame anyone for deciding they want to steer clear of this whole sector as a result.
HICL traded at a (very) healthy premium to its net asset value for many years, peaking at just over 30% in 2016. Then the Labour Party began to make serious noises about nationalisation and PPP projects and HICL’s premium steadily shrank.
The Carillion fiasco added fuel to the fire and HICL dropped to a 10% discount in early 2018, which is pretty much unheard of for an alternative asset fund.
It’s regained its poise a little since, helped by last summer’s takeover of the John Laing Infrastructure Fund, which was at a premium of 20% to its net assets.
Last month, the HICL share price had another wobble, though, as it became clearer that Labour would pay less than market value for assets like Affinity Water should it nationalise them.
Bye bye PPP?
Here’s what HICL has to say about the prospect of its PPP projects being cancelled:
Compensation on termination
Typically, public sector counterparties are entitled to voluntarily terminate a PPP contract and, if this occurs, project companies have a corresponding right to receive compensation. For the majority of HICL’s investments in UK PPP projects, this compensation is contractually based on market value which would, in HICL’s opinion, be equal to the prevailing value of the asset in the portfolio.
Heads of terms were agreed in the first half of the year with respect to the compensation due to HICL for a school PPP project which was voluntarily terminated by the local authority client during the financial year ended 31 March 2016. This continues to take time to resolve due to the commercial nature of the negotiations and the number of parties involved. Compensation is expected to be received in line with market value.
As at 31 March 2019, the Investment Adviser estimated that the difference between HICL’s valuation of its investments in PPP projects and demand-based assets, and the compensation contractually payable in the hypothetical event of voluntary terminations across HICL’s portfolio represents approximately 3% of total portfolio value (31 March 2018: 4%). This reduced exposure is a direct consequence of transactions undertaken in the year to optimise the portfolio composition.
A 3% haircut sounds ok to me, although there is always a risk that a Labour government changes the rules and pays back far less.
Another risk is a hefty rise in the rate of corporation tax. HICL has benefitted from the fall from 30% to 18% since it was launched and it reckons an increase of five percentage points in the corporation tax rate would knock 6p off its net asset value.
HICL’s move into demand-based assets has been in response to heightened political risk. It makes the overall portfolio more economically sensitive, though, so it’s a case of swings and roundabouts. Combined with the May 2017 investment in Affinity Water, it has helped the average asset life increase from 25 to 30 years.
Not a lot to say here. The management fee tapers down from 1.1% on assets up to £750m down to 0.65% on assets over £3bn. That translates to an ongoing charge of 1.08%.
Portfolio transaction costs of 0.32% are the difference between the ongoing charge and the 1.4% stated in its Key Information Document.
Of course, I’d like to see a more aggressive taper of the management fee as it seems to be on the expensive side when compared to equity-only funds. But specialist funds like this, where more hands-on management is required, do tend to be pricier.
I like the way HICL has set out dividend targets for the next two years. Growth of 5% over two years from 8.05p to 8.45p may not seem overly generous to some, but HICL’s dividend progression has always been fairly sedate.
Its first full-year dividend was 6.1p, so that works out at a growth rate of 2.3% a year since launch. Apparently, the expectation at launch was that 7p a year would be paid by 2016, but that target was met three years earlier in 2013.
Here’s another pretty chart, this time showing how dividends have progressed and what HICL has yielded down the years.
This review is shorter than a lot of my other holdings, as it’s still a pretty small position for me given the political risks it faces. If you want to, you can certainly get deep into the weeds with HICL looking at its recent prospectus and annual results presentation.
As it’s hovering around net asset value, I might build up my holding a little more, especially if the political position here in the UK becomes a little clearer (extremely wishful thinking, I know).
I may even add another infrastructure trust at some point, probably one with less exposure to the UK, once I feel a bit more familiar with the sector. 3i Infrastructure, for example, does have a better performance record, but trades at a chunky premium and has a more concentrated portfolio.
Note that I may own some of the investments mentioned in this article. You can see my current holdings on my portfolio page. Nothing in this article should be regarded as a buy or sell recommendation as this site is not authorised to give financial advice and I'm just a person writing a blog. Always do your own research!
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