Infrastructure investment trusts have dealt with a number of challenges from higher interest rates to cost disclosure problems over the past three years. But could prospects for the sector be about to change?

Colette Ord, Director – Head of Real Estate, Infrastructure and Renewable Funds Research at Deutsche Numis, said: “We believe the infrastructure investment trust sector can provide meaningful real returns by investing in growth areas like the transition to net zero and the digital revolution. Combined with the prospect for narrowing discounts, this means there is potential for outsized share price returns. Infrastructure investment companies currently offer some of the highest dividend yields in the wider investment trust sector, which remains a key attraction. The earnings visibility from contractual cashflows, combined with stable balance sheets, should support their long-standing role in portfolios as an alternative income diversifier with low volatility of returns over time.”

The Association of Investment Companies (AIC) hosted an infrastructure webinar which featured Philip Kent, Lead Adviser of GCP Infrastructure Investments, Jean-Hugues de Lamaze, Partner at Redwheel-Ecofin and Portfolio Manager of Ecofin Global Utilities and Infrastructure and Benn Mikula, CEO and Managing Partner of Cordiant Capital, which manages Cordiant Digital Infrastructure.

Benn Mikula, CEO and Managing Partner of Cordiant Capital, which manages Cordiant Digital Infrastructure, said: “On the one hand, the outlook for the digital infrastructure sector in general, and our middle-market ‘Buy, Build and Grow’ strategy in particular, remains robustly positive. On the other hand, we operate in a market where the FCA’s regulatory framework – manifested in their approach to fee calculations, one that amounts to the double counting of fees – continues to artificially suppress investment trusts’ share prices.

“The situation cannot be overstated: while we’re building real value within the digital infrastructure sector, the London Stock Exchange finds itself hamstrung by regulatory frameworks seemingly designed by those with limited understanding of the actual market dynamics faced today. The message to regulators should be crystal clear: either modernise these constraints or watch London’s competitive position erode.

“This issue isn’t just about the challenges facing infrastructure – it’s about whether or not London wants to remain relevant as a global financial centre. The current regulatory straitjacket suggests we haven’t quite made up our minds.”

Philip Kent, Lead Adviser of GCP Infrastructure Investments, said: “The biggest challenge for our sector has been the macro environment, and we’re optimistic that it will turn in our favour in 2025. We’re expecting more interest rate cuts in the UK, which will make the income characteristics of infrastructure more attractive versus traditional income assets.

“On top of that, we’ve seen the new government introduce some interesting targets for 2030. Remember, that’s just five years away now, so a lot of investment in infrastructure has got to happen and at a rapid pace. 2025 needs to be the year when policy aligns with ambition in both core renewables and new sectors such as those decarbonising heat, agriculture, industry and transport – all sectors that Gravis is focused on. The UK needs to get building quickly if the government wants to get anywhere near reaching its targets. It promises to be a very exciting year for infrastructure.”

Jean-Hugues de Lamaze, Partner at Redwheel-Ecofin and Portfolio Manager of Ecofin Global Utilities and Infrastructure, said: “We believe that the fundamental outlook for power demand and power prices remains positive, especially in the US. The long-term thesis of electricity demand growth has only started to become apparent on the back of data centre growth, especially in the US, and electric vehicle adoption, especially in China and Europe. This trend has much further to run given the large need for investments in power generation and grid infrastructure.

“The delay in getting a supply response to the growing demand for electricity, together with the increasing intermittency of new power generation sources, is likely to put upward pressure on power prices going forward. We also believe that a potential reduction in tax incentives in the US could lead to higher power prices as it may limit new capacity additions.

“Transportation infrastructure and environmental services generally underperformed utilities last year. These businesses have limited competition and good pricing power, operational performance is strong, and they are useful contributors to portfolio diversification.”

Steven Cook, Head of Portfolio Management at SIMCo, which manages Sequoia Economic Infrastructure Income (SEQI), said: “There is currently a significant requirement for infrastructure developments, particularly in our core geographies of the US, UK and Europe. However, there is a shortfall between the capital that traditional lenders can provide and the requirements of many infrastructure projects. SEQI fills this real and persistent funding gap. Our strong net cash position gives us the ability to invest in our attractive pipeline of opportunities, and we may modestly increase fund leverage to take advantage of the opportunity, while maintaining the credit quality of the portfolio. We do this by continuing our selective approach and focus on loans to defensive sectors that provide essential services, operate within regulated frameworks or have high barriers to entry.”

James Armstrong, Managing Partner of Bluefield Partners, which advises Bluefield Solar Income Fund (BSIF), said: “The outlook remains challenging with inflation fears rising again and the uncertainty of the Trump presidency looming over shares sensitive to bond yields and interest rates. The renewables sector is massively oversold if viewed through the lens of cashflow quality – in the case of BSIF largely long-dated, regulated and index-linked – and proven business models – 11 years’ track record of sector-leading covered dividends. Therefore, it signals a more fundamental problem with the investment company sector which has seen wide discounts persist for over two years.”

Michael Bonte-Friedheim, CEO and Founder of NextEnergy Group, which manages NextEnergy Solar Fund, said: “2024 has been a tough year for renewable infrastructure investment companies. We have seen record discounts open up across the peer group, which in our opinion remain unjustified and driven by external macroeconomic factors. NextEnergy Solar Fund has taken proactive action to help narrow its discount, ranging from actioning an ongoing share buyback programme to strategically introducing a capital recycling programme, which has repeatedly proved the NAV to be robust.

“We remain highly optimistic going into 2025 given the multiple tailwinds supporting the global solar market including the UK government's positive position and ambitious goals on renewable deployment.”

David Bird, Fund Manager of Octopus Renewables Infrastructure Trust (ORIT), said: “Interest rate cuts will likely have a positive impact as they should help to reduce gilt yields; elevated yields put pressure on companies such as ORIT across the renewables space. But even without this, ORIT’s portfolio benefits from significant diversification in technologies and geographies, with a mix of pan-European solar, onshore and offshore wind assets. This gives us a real differentiator versus peers, with the cross-jurisdiction diversification helping negate periods of lower generation in one region, for example, among other benefits.

“Furthermore, since launching our capital recycling programme in 2023, ORIT has generated £161 million through three accretive investment exits, all of which have been realised at an uplift to carrying value. So while the shares trade at a discount to the value of the assets, these transactions provide validation of the underlying value, and this may be seen as an attractive entry point for those looking to invest in this asset class and make a positive impact with their capital too.”

Tom Williams, Partner and Head of Energy and Infrastructure at Downing and Investment Manager of Downing Renewables Infrastructure Trust (DORE), said: “We agree that the anticipated interest rate reductions will make DORE and its peers increasingly attractive for public market investors. In terms of DORE specifically, investors should consider the trust on its track record and its unique positioning, ranging from the dispatchable Nordic hydropower portfolio with power price capture ratios above the system price, to its portfolio of grid assets. DORE’s active asset management strategy which involves modernising and optimising acquired assets to increase energy production, in turn increases their value and creates real, tangible value for shareholders.

“The optimisation work on the hydropower portfolio has resulted in a significant uplift to the capture price ratio and the recent sale of the Gabriel wind farm resulted in a total return of 54%. It is a mix of assets that makes DORE highly differentiated and uniquely positioned in the market.”

Philip Kent, Lead Adviser of GCP Infrastructure Investments, said: “GCP Infrastructure is a well-diversified, operational portfolio, which has been built up over almost 15 years – a milestone it will celebrate in a couple of months. During that time, it’s paid a stable, sustainable dividend – a dividend you can access today at a 10% yield on the share price. That’s an unprecedented level in the life of the company and, coupled with the discount, makes it an extremely interesting entry point for new investors. If we get more interest rate cuts the attractiveness only increases further.”

Michael Bonte-Friedheim, CEO and Founder of NextEnergy Group, which manages NextEnergy Solar Fund, said: “NextEnergy Solar Fund is already an attractive opportunity for investors and currently offers one of the largest dividend yields in the FTSE 350, about 13%. NextEnergy Solar Fund is also trading at a 34% discount which presents investors with the opportunity to capture the capital appreciation when the discount narrows alongside the quarterly income from the cash-covered dividend.

“NextEnergy Solar Fund continues to pull all the levers at its disposal but increasing gilt yields driven by the macroeconomic landscape have had a material impact across the sector. Further interest rate cuts will be helpful for investor sentiment given the historic correlation to the UK gilt market.

“The UK government has mandated the delivery of 50GW by 2030 in its Clean Power 2030 plan. This is a threefold increase from current levels, driving the demand and necessity for strong operating portfolios such as NESF, which investors can leverage.”

Jean-Hugues de Lamaze, Partner at Redwheel-Ecofin and Portfolio Manager of Ecofin Global Utilities and Infrastructure, said: “As utilities groups gradually phase out fuel-intensive power sources, they are gaining exposure to faster growth and more contracted businesses. This leads to a significant de-risking of business models which the market has yet to take into consideration. Relative valuations are actually at historic lows. Record cash inflows into private equity infrastructure funds should prove supportive as there is currently a significant valuation gap between private and listed valuations in the infrastructure universe. We expect M&A activity in the space.

“Our share price discount to NAV also represents an opportunity for investors to access the best of the universe at a cheap valuation. A reversal in bond yield trends could bring flows into the long-duration infrastructure asset class from generalist investors, thereby fuelling further support for listed valuations.”

James Armstrong, Managing Partner of Bluefield Partners, which advises Bluefield Solar Income Fund, said: “We operate a highly diversified, proven UK-based solar and wind portfolio that is one of the lowest risk in our sector. Operationally, it has produced very consistent generation over a decade. The biggest risk has been power prices; however this is largely hedged using a fixing strategy that focuses on the short end of the power curve. This maximises potential revenue whilst creating visibility and certainty for our shareholders.”

David Bird, Fund Manager of Octopus Renewables Infrastructure Trust (ORIT), said: “ORIT has deliberately focused on a de-risked approach to building its portfolio through diversification. We focus on multiple geographies with assets across Europe and the UK, thereby reducing market, regulatory and political risk. Additionally, we invest across a number of technologies and through the entire lifecycle of renewable infrastructure assets from development to construction and operational. Around half of ORIT’s forecast revenue over the ten-year period to September 2034 is inflation-linked, and we have a high level of contracted or fixed revenue in the near term which gives us good visibility of future cash flow to support our progressive dividend policy for investors.”

Steven Cook, Head of Portfolio Management at SIMCo, which manages Sequoia Economic Infrastructure Income (SEQI), said: “Any investment carries risk and for SEQI the risk is that a borrower may experience financial difficulties on occasion. The diversification of the portfolio limits the impact any problem loan may have on the overall NAV. In these circumstances, infrastructure lenders on average enjoy a higher level of recovery compared to other forms of corporate credit and SEQI’s overall loss rate over the life of the fund of about 0.5% confirms this, demonstrating our willingness and ability to take action to recover value.”

Benn Mikula, CEO and Managing Partner of Cordiant Capital, which manages Cordiant Digital Infrastructure, said: “The trust sector faces immense pressure from regulations that have impaired retail and institutional investment flows. This manifests itself in a gap between our share price and NAV, though we view this as a temporary market inefficiency rather than a reflection of underlying asset quality. We understand there is no ‘silver bullet’ to resolve this discount, but continued strong operational performance, value-creating capital expenditure, acquisition price discipline, significant alignment of interests and continuing the buyback programme are designed to address this disparity.”

Tom Williams, Partner and Head of Energy and Infrastructure at Downing and Investment Manager of Downing Renewables Infrastructure Trust (DORE), said: “A risk to DORE’s portfolio performance is power price risk. However, to mitigate this, the team has worked hard to minimise exposure to merchant power pricing. As at the last quarter to September 2024, 72% of the ongoing portfolio’s revenue was fixed for a rolling 12-month period. DORE’s portfolio is also well placed to mitigate exposure to merchant power prices in the long term – our solar assets benefit from contractual subsidies, we undertake rolling hedging for our hydropower portfolio and our grid assets have fixed revenue contracts, which are inflation-linked.”

This press release first appeared on the AIC website.