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David Kimberley
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Updated 29 Dec 2022
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Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by BBGI Global Infrastructure. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

To paraphrase perhaps the most famous investor alive in the world today, one should not invest in a business that one doesn’t understand.

While the complexities of investing directly in infrastructure, and the large sums of cash required to do so, put this option out of reach for most investors, it makes a great deal of sense that funds which underpin the delivery and provision of roads, schools and hospitals should appeal to investors, especially during a period of great upheaval for broader equity markets.

The need for these types of critical social infrastructure assets are, after all, fairly inelastic in a functioning society – even in recessionary environments – and indeed during periods like this governments often turn to infrastructure investing as a means to spend and stimulate struggling economies.

Infrastructure is an asset class which can provide a high level of security to investors and trusts investing in ‘availability-style’ infrastructure assets are an attractive and defensive variant within this theme.

'Availability-style’ infrastructure assets are typically a type of public-private -partnership (PPP), where private investment is used to develop and manage public social infrastructure assets, like roads, hospitals or schools. Once a project is complete and meets a set of pre-defined standards (meaning the infrastructure is ‘available’ for use), the investors in the assets keep receiving what are known as ‘availability payments’ as long as the asset remains available for use. These contractual payments vary in duration, but it’s common for them to last for between 25–35 years and to have high quality inflation linkage. Perhaps the most appealing facet of investment in these infrastructure assets is the fact that payments are government backed.

Availability-style infrastructure assets contrast with demand-based infrastructure assets, where the investor takes on the risk of how much the infrastructure will be used and thus how much revenue it generates. For example, an investor may fund public transport systems or toll roads that end up being used more or less than anticipated, and so will generate more or less cash for investors than originally expected. This problem can become especially acute when an asset experiences a big shock to demand, such as during the pandemic lockdowns or during a recession.

This is a big part of the reason the team at BBGI Global Infrastructure (BBGI) only invest in availability-style critical social infrastructure assets with high-quality inflation linkage. The trust, which is internally managed and led by co-CEOs Duncan Ball and Frank Schramm, has been operating for over a decade and invests in these types of high quality availability-style infrastructure assets that are backed by government contracts in highly rated investment grade countries.

The portfolio, valued at £1.1bn, is currently diversified globally and across 56 critical social infrastructure investments, with exposure to several different asset classes. Approximately half of the portfolio is in transportation, with the remainder in infrastructure assets in healthcare, correctional facilities, education, clean energy and affordable housing.

These projects are also diversified across several different AAA/AA-rated economies and the counterparties are either government entities or backed by them. Canada and the UK are currently the two jurisdictions that BBGI has the largest exposure to, with 36% and 33% of the total value of the portfolio, respectively. The rest is spread across the US, Australia and Continental Europe.

Having exposure to these assets would likely appeal to the more safety-conscious investor under most circumstances. However, as we seem very likely to be heading into a recession, investing in assets that can produce a regular stream of revenue, backed by government contracts, can start to look a lot more attractive and secure.

Compounding this is the fact that the contracts which BBGI has with its counterparties have revenues with high-quality inflation-linkage. This means income from the trust’s investments are protected in real terms even in inflationary environments. Moreover, the income streams won’t be subject to any changes in demand that may result from the economic impact of inflation or a recession.

This is not to say that availability-style assets are risk-free. Failing to keep infrastructure projects available for use, for example, means availability-style payments are not guaranteed. These risks can largely be mitigated through facilities management and insurance agreements. It is also worth noting that BBGI continues to have a high level of asset availability of 99.9%.

Another risk is interest rate hikes which, like government bonds, are putting pressure on valuations across the board. A couple of factors are helping mitigate the impact of interest rate rises for BBGI now and moving forward. One is that BBGI has only a marginal exposure to refinancing risk as the projects themselves are typically either financed on a long term basis with the debt term closely matching the concession term.

Also the individual portfolio companies tend to have substantial cash holdings, which generate an increased income as banks increase the rates of interest they pay. BBGI at a corporate level has mostly remained ungeared over the past decade, but periodically draws upon its £230 million revolving credit facility (maturing in 2026) to acquire assets, which it then repays through equity issuance, avoiding the issue of cash drag. Lastly, the high quality inflation linkage across BBGI’s revenues also works as a partial hedge against rising inflation.

Taking all these factors into account, BBGI’s holdings could be capable of riding out a recession well. The trust is in a position to continue delivering attractive income, even if interest rates rise, inflation continues and  the general economy remains soft. Whether or not this will actually happen in practice remains to be seen. But as we enter a period of economic uncertainty, it seems fair to suggest that highly-rated governments will honour their contractual obligations and make availability payments to the suppliers of critical infrastructure  like BBGI, even as other business and  funds may end up struggling.

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