With so many companies cancelling, cutting or postponing dividends, income-seeking investors are becoming increasingly dependent on the “alternative income” section of the market. Some of these funds, such as the student accommodation ones, have proved economically sensitive, but many are relatively unaffected so their share prices have recovered strongly. GCP Infrastructure Investments stands out as one that hasn’t.
Slow and steady
GCP was one of the earliest alternative income companies to list, launching in 2010. It differentiated itself from the other mainstream infrastructure funds by investing in debt rather than equity. The justification for this was that debt carries lower risk than equity, balanced by lower returns. The other funds were investing in infrastructure projects with highly predictable secure returns rising in line with inflation. This encouraged them to load the projects up with debt to increase the returns of the residual equity, but that equity was vulnerable to a political, regulatory or contractual disaster.
By investing in the debt, albeit the riskier debt rather than the secured bank loans with first call on the cash flow, GCP was better protected. However, disasters didn’t happen and the other funds proved adept at squeezing extra returns – generally about 1% a year – from their portfolios, while sometimes being able to sell out for a large profit. GCP, as exemplified by the tortoise in the corner of its website, plodded along more slowly.
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In the last three years, though, GCP’s total return of 22% is close to its main rivals. Much of that return comes from the most generous dividends in the sector; the net asset value is only 9.8% above the original flotation price of 100p, but with the premium to net asset value down to 3% the shares yield 6.7%.
Since 2010, the company has grown through share issuance to its present market value and asset base close to £1bn. It invested £140m in the year to 30 September, but new investments tailed off sharply thereafter as the manager “does not currently see a material pipeline of secondary market opportunities”. Ian Reeves, the chairman, thinks that “though the need for new infrastructure in the UK remains as significant now as at the time of the initial public offering, governmental support for private sector involvement has significantly reduced and in its current form is unlikely to attract the private-sector investment necessary”. He saw signs that this would change, an optimism that will surely be reinforced by the precariousness of government finances when the Covid-19 lockdown ends.
Attractive given the risks
GCP still invests only in UK debt, but 40% of the portfolio is now described as senior (ie, lower risk) and only 12% of assets are in construction. There are 49 loans in all, with 64% of assets invested in alternative energy, well diversified between wind, solar, biomass and anaerobic digestion assets, while 22% is in private finance initiative (PFI) projects and 14% in supported living (ie, social housing). The average life of loans in the portfolio is 14 years and the average yield 8.1%. With an expense ratio of 1.3%, including the management fee of 0.9% of assets, this would leave GCP short of income to pay the dividend were it not for other income of £11.3m last year – mainly fees from the early payment of loans.
The obvious risk is inflation, but 44% of the portfolio has at least some protection. Investments in debt also imply little scope for increased income, so the dividend hasn’t been raised for several years. But that average loan yield of 8.1% implies a far higher level of risk than is apparent from the quality of the investments, making this an attractive long-term holding for the income section of any portfolio.
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