Higher interest rates overshadow IIC/REIF prospects

Hardman & Co Research’s focus is on the nine quoted infrastructure investment companies (IICs) and on the 22 renewable energy infrastructure funds (REIFs), most of which saw their share prices fall during 2022, while the FTSE 100 rose by just 0.9%. In our Quoted UK Infrastructure and Renewable Energy – Prospects for 2023 publication, we have addressed the three key issues of recent months: higher inflation, extremely volatile power prices and rising interest rates.

• The stocks analysed are all members of the Association of Investment Companies (AIC). As a 31-strong group, their combined market capitalisation is currently £30.0bn. Aside from the planned IPO of AT85 Global Mid-Market Infrastructure, which is now due to take place by early June 2023, no IIC/REIF IPOs have been undertaken since 2021.
• Within the 31-member grouping, the most valuable IICs are HICL Infrastructure and 3i Infrastructure – currently capitalised at £3.2bn and £2.9bn, respectively. The equivalents in the REIF sector are Greencoat UK Wind and TRIG, which are capitalised at £3.6bn and £3.1bn, respectively.
• Although many established funds have high inflation linkage, the inflation issue remains a real concern for many investors. In fact, IICs and REIFs, to varying extents, derive material benefits from higher inflation, providing – in an admittedly unlikely scenario – that this is not accompanied, in time, by higher interest rates.
• However, as expected, it has been the sharp rise in interest rates of late that has had distinctly negative NAV implications for the sector through higher fund discount rates; not surprisingly, share price ratings have fallen as a result. Plus, while many REIFs involved in renewable generation have the benefit of rising energy prices as an offset, this feature does not generally apply to IICs (GCP Infrastructure excepted).