3i Infrastructure 29 June 2022
Disclosure – Independent Investment Research
This is independent research issued by Kepler Partners LLP. The analyst who has prepared this research is not aware of Kepler Partners LLP having a relationship with the company covered in this research report and/or a conflict of interest which is likely to impair the objectivity of the research and this report should accordingly be viewed as independent.
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3i Infrastructure (3IN) targets NAV total returns of between 8-10% per annum from investment in privately owned ‘economic infrastructure’ companies in Europe. As we discuss in the Portfolio section, the team look for unique companies with very specific attributes, which will lend them a strong element of predictability, but also that they are capable of outperformance and upside.
It is worth noting that 3IN invests in operating companies, and as such, the portfolio is closer to a private equity portfolio than a core infrastructure trust which might invest in PPP contracts and toll roads, which tend to have fixed lives and a higher proportion of returns being delivered from income. As such, as we discuss in the Performance section, these are potentially higher risk investments than core infrastructure and are represented by a much higher discount rate, and 3IN has outperformed historically in NAV terms.
With assets c. £2.9bn, the portfolio is relatively concentrated with 17 underlying investments as at 31/03/2022. However, the managers aim to maintain diversification by ensuring companies have exposure to different drivers but also different megatrends.
Since IPO, 3IN has so far increased the dividend every year it has been in existence. Over the ten years from IPO to 2018, the dividend has grown by 4.2% per annum. Since then, the rate of increase has been higher in percentage terms. The board’s dividend target for the year ending 31 March 2023 is 11.15p per share, representing a prospective share price yield at the time of writing of 3.2%.
3IN invests in companies in economic infrastructure sectors with a private equity total return approach. This means that it may generate income or capital returns (through value growth and realised capital profits) from its investments. When compared to ‘core’ infrastructure peers, 3IN’s managers aim to offer more of a balance of income and capital.
3IN has delivered strong NAV total returns in absolute and relative terms since launch in 2007, with returns of 13.1% per annum to 31 March 2022. This is well ahead of listed equity markets. At nearly 11%, the valuation discount rate is significantly higher than core infrastructure peers such as HICL and INPP. Whilst this reflects the higher operational risks 3IN’s portfolio presents, it also suggests there is a much larger buffer than core infrastructure trusts should interest rates rise significantly. The managers state that they are “not yet seeing any upward pressure on discount rates”. This discount rate provides a good context as to why 3IN has performed significantly ahead of Morningstar’s Infrastructure peer group in NAV terms.
The average premium to NAV over five years has been c. 15%. We would attribute the premium rating relative to peers to the strong historic performance of the trust in NAV terms, as well as the higher valuation discount rate when compared to core infrastructure peers, which implies higher total returns (and concomitant higher risks) going forward.
- 3i are a strong name in European private equity, providing good access to investments
- Interesting portfolio of unique companies, with a high valuation discount rate
- Attractive dividend and track record of capital growth
- Concentrated portfolio means NAV is exposed to specific company risk
- Premium to NAV may give way suddenly to a discount
- Underlying companies are relatively highly geared by traditional metrics