The Bull & Bear Case for UK Listed Infrastructure

5 minute read

William Argent

Director, Infrastructure Securities

The Bull Case

1. Attractive and growing income yield

Cash flows from infrastructure projects and assets often benefit from an element of indexation, which provides scope for dividend distributions from infrastructure companies to grow over time – it’s not static like fixed income. Despite the macroeconomic headwinds, our fund grew its income distribution by 9% in the calendar year 2023, and we are optimistic it can deliver growth again this year.

2. Depressed share price ratings

Historically, on average, the listed infrastructure sector has traded at a modest premium to Net Asset Value. Therefore, the recent de-rating to a significant discount provides opportunity, particularly because recent asset disposals have corroborated NAVs. Interest rates look to have peaked and, although there may not be imminent cuts, further pressure on discount rates seems to be diminishing. A rerating up to NAV alone would be significant in a return context.

Source: Stifel

3. Defensive characteristics, resilient cash flows

The contracted nature of cash flows provides good visibility over income streams and means income is resilient. Because cash flows are largely uncorrelated to the economic cycle, UK infrastructure can be a relative safe haven and the sector should come back into focus if the UK economy slows further. This could also be another driver of a rerating.

4. Inflationary pressures abating & potential peak in interest rate cycle

Easing inflationary pressures have allowed the Bank of England to pause interest rates, and the market expects a cutting cycle to begin in 2024.

5. Corporate activity​

Depressed ratings in the sector may drive corporate activity including mergers and acquisitions that could result in value recovery for shareholders. Private equity investors have already made approaches to acquire listed infrastructure companies. In addition, the secondary market for infrastructure projects and assets remains active, which may be helpful for infrastructure companies that are seeking to make disposals in order to reduce gearing.

The Bear Case

1. Bond proxies in a high bond yield environment

2. Higher reference yields lead to higher discount rates and reduce the present value of assets

We experienced a shift in reference yields in 2023. Infrastructure assets are exposed to long duration cash flows and the sector is a yield-focused investment class. Being seen as bond proxies in a high bond yield environment has been a headwind and we saw a derating of infrastructure to reflect the higher yields available on traditional fixed income.

The other impact of higher long-dated reference yields is their influence on the discount rates used in asset valuations. The necessary increase in discount rates over the past year was offset partially by inflationary trends - a lot of infrastructure project cash flows have an element of indexation - but the sector de-rated on fear and uncertainty as to where reference yields and discount rates would go.

3. Higher interest rates increase debt costs

Infrastructure companies are exposed to varying degrees of leverage, so interest rates are a key consideration. Project level debt is typically fixed rate and amortised over the life of a project. However, companies may also have floating rate debt exposure via Revolving Credit Facilities, for example, and servicing this debt has become materially more expensive.

4. Concentration risk within infrastructure company portfolios

Some listed infrastructure companies have concentrated portfolios, which implies a greater degree of project-or asset-specific risk. This risk can be mitigated by diversifying into more companies within a portfolio.

5. Wasting assets, can’t grow portfolios

Infrastructure assets such as Private Finance Initiatives (PFI) concessions and renewable energy projects have finite lifetimes. If portfolios cannot be replenished because they can’t raise equity in this environment, the duration of infrastructure company portfolios will decline.

The chart below shows that 330 PFI projects are coming to an end over the next decade.

Source: Governmental document/Infrastructure & Projects Authority “Preparing for the expiry of Private Finance Initiative contracts”

Important Information

This document has been prepared by Gravis Advisory Limited (“the Investment Adviser”) and is for information purposes only. It is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. Any recipients outside the UK should inform themselves of and observe any applicable legal or regulatory requirements in their jurisdiction. This document should not be considered as a recommendation, invitation or inducement that any investor should subscribe for, dispose of or purchase any securities or enter into any other transaction with the VT Gravis Funds ICVC, or any other Fund affiliated with the Investment Adviser.  The merits and suitability of any investment action in relation to securities should be considered carefully and involve, among other things, an assessment of the legal, tax, accounting, regulatory, financial, credit and other related aspects of such securities.  Although high standards have been used in the preparation of the information, analysis, views and projections presented, no responsibility or liability whatsoever can be accepted by the Investment Adviser for any errors, omissions, misstatements, loss or damage resultant from any use of, reliance on, or reference to the contents. The views and opinions contained herein may not necessarily represent views expressed or reflected in other Gravis communications, strategies or funds and are subject to change. 

The VT Gravis Funds ICVC is a UCITS scheme and an umbrella company for the purposes of the OEIC Regulations. Past performance is no guarantee of future performance.

Gravis Advisory Limited (Registered Number: 09910124) is an Appointed Representative of Valu-Trac Investment Management Ltd, which is authorised and regulated by the Financial Conduct Authority.  Gravis Advisory Limited’s principal place of business is: 24 Savile Row, London, W1S 2ES. 


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