Establishing the UK post Brexit, Covid-19, Russia’s invasion of Ukraine, and recent geopolitical tension has propelled the urgency to update and secure UK infrastructure. It is now at a critical juncture. We need unprecedented investment to replace aging buildings, modernise networks, and tackle the urgent challenges of climate change. If we are going to meet the decarbonisation goals by 2030 and 2050, we need a 5-fold increase in investment in our infrastructure. It’s a massive, once-in-a-century opportunity to transform our economy and move toward a sustainable future. For investors, that means major opportunities in infrastructure assets.

The energy transition and net zero are at the top of the Labour government’s agenda, second only to economic growth. At the recent International Investment Summit, Prime Minister Keir Starmer emphasised a commitment to reform the planning system and secured £63 billion in funding to boost projects in renewable energy, technology, and infrastructure. He’s also pushing to eliminate regulatory barriers that have held projects back, calling it a plan to cut the “anti-growth” red tape. Labour also aims to make the UK a “clean energy superpower.” By investing in renewable energy sources like hydrogen and offshore wind, we’re moving toward a future where all UK energy is generated renewably.

The UK has a well-established framework to encourage the build-out of renewable energy through the Contract for Difference Auction. This model has been successfully adopted in other economies, and its effectiveness has already led the Labour government to increase the budget at the recent auction as one of its first actions. In the Autumn Budget 2024, Chancellor Reeves then reiterated the government’s commitment to infrastructure and made a number of announcements. There was £5 billion for new housing, £1.4 billion for schools, and £1.2 billion for prison services. There was also a strong focus on clean energy, with £8 billion allocated to carbon capture and green hydrogen initiatives. Other key projects include developing the Sizewell C nuclear plant, investing in EV charging infrastructure, and expanding broadband access. Additionally, the government is reforming policies to fast-track projects that will enhance connectivity and energy capacity.

While the intentions and implied direction of travel are laudable, we think they fall short of what’s needed. They simply don’t meet the massive scale needed for the UK’s climate and energy goals. For example, £125m for GB Energy is small when compared with the c. £65bn needed to deliver on the 140 GW of installed renewable capacity (up from c. 57 GW) committed to as part of Labour’s manifesto. To achieve net-zero emissions by 2050, we’ll need roughly £50 billion in investment every year*. We need the support mechanisms in place quickly, so that we can accelerate investment and make promises become reality.

The private sector is set to play a huge role. Labour referred to mobilising £3 in private capital for every £1 of public sector capital from the National Wealth Fund, that now incorporates the UK Infrastructure Bank. This collaboration is essential, as public funding alone won’t meet the country’s goals. Once enabling factors like regulatory reform and revenue support models are in place, private investors will have the stability and confidence needed to fuel this infrastructure transformation.

Yes, there’s a 10-year infrastructure strategy and a 2030 Clean Power Action Plan expected in spring 2025, and reforms to the National Planning Policy Framework. These plans will outline how the government intends to support projects over the next decade, providing much-needed clarity that can help drive further private investment. By laying out the long-term vision, the government aims to keep investors confident and committed. With strong government backing and private sector interest, 2025 could be the start of a transformative period in infrastructure investment.

The outlook is very encouraging. Infrastructure and net-zero targets are two of the government’s seven key pillars, supporting the nation’s broader ‘Growth Mission’. With clear government commitment and a wave of private investment anticipated, the UK has a real shot at leading the world in clean energy and infrastructure. We just need clarity and a plan to get started.

A combination of reliable and predictable income for the long term, whilst waiting for a recovery in share prices. At today’s low valuations you can lock in a 9.5%+ income from GCP Infrastructure Investments Ltd which is trading at a 30% discount to its NAV**. If you would prefer a one-stop-shop exposure to the UK infrastructure sector without specific risk, the VT Gravis UK Infrastructure Income Fund has a forward yield of over 6.5% after fees (fees are taken from income), with a portfolio weighted average discount to NAV of 18% and 24.5% on a straight line basis ***.

Typically, UK infrastructure listed companies benefit from contracted or regulated income streams as they own critical assets which offer predictable income for the long term. So, when interest rates and gilts started rising, the market essentially rerated their share prices and rebased the dividend yields of these companies which are attractive vs history and compared to other income paying asset classes.

We believe the following actions in 2025 should help trigger a recovery in share price ratings:

• Further interest rate cuts: the UK base rate has already been cut from 5.25% to 4.75% in 2024. The market is currently pricing in four further quarter-point cuts in 2025****.
• Improving regulatory environment: HM Treasury and the FCA have, between them, proposed to change the reporting requirements for Investment Companies. They have applied forbearance with immediate effect and will be consulting on the new Consumer Composite Investments regime (CCI) later this year. This means Investment Companies are no longer required to mislead investors into thinking they are paying management and operational fees directly from their investments.
• Increased demand from institutional investors: The UK Government has put infrastructure spend - particularly renewables - at the top of its agenda and the Chancellor’s recent Mansion House speech announced her desire to consolidate local government pension schemes and the Defined Contribution pension market into mega funds to unlock investment in critical infrastructure. Currently, UK Pension schemes have a low allocation to infrastructure at 4% vs 16% in Canada and 12% in Australia. The VT Gravis UK Infrastructure Income Fund (UKIIF) has exposure to critical core infrastructure assets with good operational history. The emergence of mega pools of institutional capital in the UK may drive demand in the assets UKIIF has exposure to which may drive the valuations and subsequently share prices of our companies. This could be a strong tailwind - particularly when considering that at current valuations some of our companies in our universe potentially offer double digit IRRs on operational assets with little or no construction risk.
• M&A: Merger & acquisitions and increased deal activity will rationalise the current valuations these companies trade on.
• Increased global demand for private investor capital: The fourth industrial revolution (digital infrastructure) and the need for energy security (renewables) are not exclusive to the UK. The demand for power is real. Microsoft, for example, has signed a $10 billion agreement that will give it access to over 10.5 GW of new renewable energy capacity, to be developed by Brookfield Asset Management and its renewable energy subsidiary Brookfield Renewable Partners. These drivers are irreversible, Trump-proof, and, in our view, will lead public markets to ascribe higher share price valuations in time. AI stocks may be the latest fashion, but they can’t function without power and the critical infrastructure to support the rollout and adoption of the technology. And, don’t forget, the assets have performed and continued to pay reliable and predictable income over the last couple of years, despite the headwinds they have faced.

*Source: BloombergNEF

**Source: Gravis, 19 November 2024

***Source: Valu-Trac Investment Management, 31 October 2024

****Source: Reuters, 19 November 2024

Important information

This document has been issued by Gravis Advisory Limited and Gravis Capital Management Limited, which are authorised and regulated by the Financial Conduct Authority. The registered office address is 24 Savile Row, London, United Kingdom, W1S 2ES. Both companies are registered in England and Wales under registration numbers 09910124 and 10471852, respectively.

This document should not be considered as a recommendation, invitation or inducement that any investor should subscribe for, dispose of or purchase any such securities or enter into any other transaction in the GCP Infrastructure Investments Ltd (the “Company”), VT Gravis UK Infrastructure Income Fund, or any other fund affiliated with Gravis.  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.​ Prospective investors are recommended to seek professional advice before making a decision to invest.

VT Gravis UK Infrastructure Income Fund is a sub-fund of VT Gravis Funds ICVC, which is a UK UCITS scheme and an umbrella company for the purposes of the OEIC Regulations. Valu-Trac Investment Management Limited is the Authorised Corporate Director of VT Gravis Funds ICVC and Gravis Advisory Limited is the investment manager of the Fund.

Any decision to invest in a Fund must be based solely on the information contained in the Prospectus, the latest Key Investor Information Document and the latest annual or interim report and financial statements.

Your capital is at risk, and you may not get back the full amount invested. Past performance is not a reliable indicator of future results. Prospective investors should consider the risks connected to an investment in a Fund, which include (but are not limited to) counterparty risk, inflation and interest rate risk and volatility. Please see the Risk Factors section in the Prospectus for further information.

This document has been prepared using all reasonable skill, care and diligence. It contains information and analysis that is believed to be accurate at the time of publication but is subject to change without notice.

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