The Association of Investment Companies (AIC) has spoken to the managers of GCP Infrastructure Investments and International Public Partnerships about the government’s £130 billion commitment to UK infrastructure. They discuss the opportunities for infrastructure investment companies, the impact on private investment and inflation.
Giles Frost, Director of International Public Partnerships, said: “The £130 billion government commitment to UK infrastructure should do much to refocus private investors’ minds on the opportunity the infrastructure asset class affords. There is very significant appetite amongst investors to provide capital to support new infrastructure projects which offer the potential for investors to receive predictable returns over the long term. The announcements provided some further clarity: for instance the Budget showed that UK government stimulus appears likely to be more precisely targeted to individual sub-asset classes and regions than historically has been the case.”
Stimulating private investment
Philip Kent, Fund Manager of GCP Infrastructure Investments, said: “The commitment to the regulated asset base (RAB) model for new nuclear presents an opportunity for private sector investment. Given the specific characteristics of nuclear, the design of this mechanism and any associated government support packages will be key to attracting private sector investment.
“More generally the transition to net zero, which the Budget was light on in terms of new spending but has been clearly pointed to elsewhere, is forecast to require £50 billion to £60 billion of investment per year by 2030. The Budget outlines forecast spending on net zero of £30 billion in total over the period 2021 to 2025, highlighting the gap and potential for future investment opportunities.
“Perhaps of equal significance to the infrastructure sector are the Budget and Office of Budget Responsibility inflation forecasts, predicting CPI at 4% and RPI at 5% for 2022. Infrastructure projects provide inflation-linked cash flows and therefore are attractive for investors seeking protection in a higher inflationary environment.”
Giles Frost, Director of International Public Partnerships, said: “Of particular interest is the announcement that the regulated asset base (RAB) model will be extended to new nuclear power stations. This is likely to stimulate interest in this sector. We are pleased with this announcement as we have long been advocates of the expansion of this model. One of our most successful investments has been the Thames Tideway Tunnel which was the first standalone infrastructure project developed in the UK under the RAB model, and the possibility of a wider application of the RAB model to other infrastructure opportunities is an exciting development.”
Opportunities for infrastructure investment companies
Philip Kent, Fund Manager of GCP Infrastructure Investments, said: “GCP Infrastructure targets debt investments in UK infrastructure that benefit from public-sector backed cash flows. Support mechanisms such as the RAB, Green Gas Support Scheme, Contract for Difference and Industrial and Hydrogen Revenue Support scheme could all present opportunities for new investments or the enhancement of the existing portfolio. Higher inflation is also likely to benefit net cash flows from underlying projects in the portfolio.
“The infrastructure investment associated with the wider transition to net zero presents a significant opportunity for the fund. GCP targets a diversified portfolio of infrastructure asset classes and is therefore well placed to invest early in emerging sectors that will be critical to this transition, as well as having a track record and substantial expertise in existing sectors.”
Giles Frost, Director of International Public Partnerships, said: “We have a lot of confidence in the future. We already assess many more opportunities than we can acquire. While we lack granular detail on what individual investment projects may stem from the large allocation of capital announced by the Chancellor we see a range of possibilities. We are already investors in fibre to the home, the rail sector, energy distribution and transmission, and in social infrastructure. We expect new opportunities in all these areas as well as in areas more directly focused on climate improvement and energy transition. We partner with over 40 local authorities as well as central government, the devolved administrations and regulators and we hope to work actively with such partners to develop new initiatives in these areas.”