Recently, Gravis hosted an update regarding the GCP Infrastructure Investments Q4 NAV announcement. In this Q&A, taken from a recent webinar presentation, Phil Kent and Ed Simpson, provide details on the portfolio and strategic update.
A video with highlights from the discussion can be viewed below:
Q&A
Which assets do you like and intend to retain? What type of assets would you like to lend to in the future?
We have never been a natural seller of assets and I think it does pain us. First and foremost, to dispose of or recycle out of any asset I think, and Ed will go on to describe later, there has been a focus probably over the last three years on optimising the existing portfolio and recycling capital out of assets that we already have versus new investment activity.
The assets that I think we would like to retain are probably those where we see investment opportunities from a lending perspective, where we see that those assets will have a fundamental role on a long-term basis to contribute into decarbonisation or whatever social purpose that infrastructure is fulfilling. I think that is most notable in some of the renewable asset classes, where we see potential for life extensions, optimisation, tapping into additional revenue streams. That for us provide opportunities to lend more capital into existing assets that we know well, and working with borrowers with whom we have existing relationships. Thus, I think maintaining those as assets in the existing portfolio is a focus. In terms of the types of assets that we would want to lend to moving forward, I think the rate environment has presented us with probably two ways of looking at future opportunities. Either we continue to lend to more established assets and we’re doing so in a more senior or less risky part of the capital structure, and we’re achieving broadly the same level of returns that the Fund has always historically been able to achieve; or we’re continuing to do what the Fund has done well over the last five to seven years, going into new asset classes and demanding probably a 300 to 500 basis point higher return, given the change that we’ve seen in the market. We can adjust risk, or we can adjust return. I think, in reality, we’d be focused on a mix of both. We’re seeing some established operational assets where people are looking to dispose of portfolios or re-leverage those portfolios, given the existing debt tenors ending, or desires to move off balance sheets or recycle capital. Similarly, we’re seeing government support schemes that are evolving in areas like hydrogen and carbon capture and storage, and the next hydrogen CfD round is due to embark next month. I think there’s a number of areas that we’re looking at closely, that we don’t see as being congested or suffering from lots of competition that would probably put us off targeting those asset classes, and where we have good knowledge from our existing asset base and can play well into understanding and lending into those new asset classes.
Do you have a target for exposure to electricity prices following the repositioning of the portfolio?
To the extent that the Fund continues to invest in assets that benefit from electricity price income, as a lender, I think we still need to be, and I wouldn’t say we’re not exposed to it. I think we expect the volatility on a quarter-to-quarter basis to be reduced because we have more of an equity buffer compared with the situation now in respect to some assets, where we have an equity-like exposure, and therefore any change to cashflow creates volatility. I wouldn’t want to sit here and say that we are not going to invest in assets that benefit from revenues from the sale of electricity. I think that on looking at what this country needs to do on a decarbonisation journey, I think decarbonising our electricity system is a key thing that will require significant investment in infrastructure, and I think this Fund is well-placed to benefit from that. I think the focus is very much on reducing the NAV volatility quarter-to-quarter. I think by taking out the assets that we have in Northern Ireland, where the market is more volatile, as Ed said there’s a higher load factor, so those assets are simply producing more energy and therefore, they are more sensitive. The price and market dynamics over there also means that volatility is higher, and we’re less able to hedge in that market as we are and indeed do in the GB. I think reducing the quarter-to-quarter volatility is a focus. Does that mean that the Fund doesn’t invest in assets that benefit from electricity price income? No. I don’t think we can quote a percentage target. I think we’ve always set out to achieve a mixed diversification of assets across a range of sectors and targeting the most attractive at any point in time on a risk-adjusted basis. The focus is reducing quarter-to-quarter NAV volatility by reducing the more equity-like exposures. I think we’ll still be invested in assets that have electricity prices, but with more of an equity buffer to manage the risk of those.
What was the inflation rate in the OBR forecast you used, and will you incorporate their next forecast with the March budget in your March NAV?
We use the November OBR medium-term inflation forecast, and we do update our forecast with the OBR data when they are updated. This chart shows the difference between the last couple of forecasts and shows that the short-term inflation expectations are significantly increased. That’s why we’ve benefitted from the short-term inflation increases.
As Ed said, I think the general trend here is one that’s also higher, but also a softer landing, as we pointed out, in terms of the trend to lower long-term rates, so that’s been reflected. The long-term assumption of RPI at two and a half percent and CPI at 2% beyond the tenor of this curve, has remained unchanged during the period.
When returning capital to shareholders, would it just be via share buybacks?
To date, I think it has been moving forward to the extent that the Fund has significant proceeds from disposals, then we would absolutely consider, and the Board Meeting last week in Jersey, where this was the topic of discussion, how best we would be getting that capital back to shareholders, and what’s the most efficient way of doing that. I realise there’s lots of different dynamics here, so perhaps I’m drawing unfair conclusions, but the evidence is that share buybacks have not had, in this Fund or indeed the sector more broadly, material impact on reducing discount. Perhaps there are other ways of getting capital back to shareholders that might have more of an impact, but we will explore all options, whether that’s special dividends, tenders, I think probably are more tax efficient for underlying investors. There are a number of different factors we’d have to consider, but we’re considering all options.
Have you made an adjustment for Renewable Energy Guarantee of Origin (REGOs) pricing within the power price movements?
We have always included REGOs as a potential revenue stream. I think the fact is that historically, it has been pretty de minimis because the value of those was not there. We have noted the more recent higher values that REGOs have traded at, and I think, where possible, we have reflected that in the underlying models. I think it is dependent on what the PPA says about REGOs, and I think given a number of assets in our portfolio are relatively old assets, perhaps relative to the renewable sector, perhaps more broadly, REGOs, given the value really accrues to the PPA off taker than necessarily the asset owner. It does depend on what the original terms under the PPA were, and the extent to what we think is a fair level, and that’s embedded in the valuations and the debt coverage ratios that we calculate.
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