Fund of the fortnight: John Laing Infrastructure
This is a London-listed investment company that invests in mature, operational infrastructure assets mostly sourced from the parent John Laing Group.
Recent acquisitions have taken the portfolio to 38 fully operational PFI-backed projects and it has now acquired 11 investments from sources outside the John Laing Group with a combined value of approximately £95m. This shows the fund is not just reliant on the parent group for new projects.
The portfolio comprises fully operational, availability based infrastructure assets which typically have 20-30 years to run. Income is guaranteed by governments and revenue rises in proportion to inflation.
The team’s close links with the John Laing group means it has a ready source of projects which it already knows well and on which it pays no acquisition fee.
Project values and revenue from them have proved resilient and should have little correlation with equity markets. Annual dividends of at least 6p are fully covered by earnings.
Infrastructure projects are the basic physical assets that support a country or community and may include transportation, utilities, communications and social assets such as housing, health and education services.
We favour funds of physical infrastructure assets (schools, hospitals, prisons etc) that are:
• fully operational (ie no construction risk)
• have long project life (typically 25-30 years)
• availability based projects (not usage based)
• future revenues backed by government
• set up under legal framework of Private Finance Initiative (PFI) or Public Private Partnership (PPP) so that governments cannot renege on future payments (the UK conducted a review of the PFI regime in December 2011 and concluded that they cannot wriggle out of existing PFI deals). PFI/PPP is now global, with many developed economies adopting their own legal framework (eg UK, Canada, Western Europe and Australia)
• We prefer closed ended funds which suit the illiquid nature of the investments
Cash-flows of such projects start by being negative during the construction stage, followed by 25-30 years of inflows. Each project typically has a large proportion financed by bank loans (up to 90%) as banks are happy to lend against assets where the ultimate guarantor is the government. Once the loan is paid off, a few years before the end of the life of project, all remaining income flows through to the equity investors. (See chart below for cash flows of a typical project.)
At the end of its life the project is handed back to the government. Because PFI regime is comparatively new – the first PFI project started in 1992 under John Major’s Conservative government – there has not yet been a PFI project which has gone to completion so it is possible that leases will be extended to the operator once the initial period expires.
We like the asset backing and stable revenues from these projects which are essentially government backed cash flows. Companies value this future cash flow using a discount rate of around 8.5% which is the same as saying that they expect the current value of their investments to grow at 8.5% pa. This is a come-rain-or-shine growth rate. After costs this is equivalent to a total return to shareholders of around 7.5% pa. There is some inflation protection since underlying contracts within projects have income which on average rises by about 0.6x the rate of inflation.
Simon Moore is research team leader at Bestinvest