Sequoia Economic Infrastructure Income 05 June 2024

Infrastructure is essential to an economy and society, and from an investment point of view has many stable qualities. Sequoia Economic Infrastructure Income Fund (SEQI) offers investors a way to generate an exceptionally high yield by lending against infrastructure projects and assets. Unlike some more specialised peers, the trust owns a highly diversified portfolio of loans invested across multiple sectors, from new economy areas like digitalisation and the energy transition to the more long-standing asset types such as railways and ports.

SEQI invests in private debt, which means it typically acts on its own or with a small group of other specialised lenders to supply funding to projects which for a variety of reasons don’t easily fit within a public bond structure. This requires a high degree of expertise when it comes to origination and risk assessment, and this along with the illiquidity of the loans means that highly attractive yields can be earned. SEQI yields 8.8% on an annualised basis at the time of writing, which partly reflects the Discount. However, the portfolio itself yields around 10% in cash terms (i.e. the yield earned on the current market value).

This high yield is generated from a portfolio with a high degree of defensiveness (see Portfolio). For a start, Gearing is not a part of the model, while investments are generally held to maturity. The extra yield comes from a portfolio typically invested in BB/B credit quality investments, at the top end of the high-yield market. Head of portfolio management Steve Cook and team are defensive in sector and security selection, with very little exposure to construction risk, and highly flexible in their ability to allocate across a broad variety of industries. The publication of monthly external NAV valuations brings a high degree of transparency.

The shares trade on a discount of 15.7% at the time of writing (at the tighter end of the discount range for listed infrastructure and credit trusts, reflecting the largest buyback programme in the alternatives space since July 2022, which continues (see Discount)).

Many of the themes supporting the cash flows to SEQI are some of the most well-established secular growth themes in the world economy: digitalisation, the expansion and “greening” of the power grid, and building out renewable energy, for example. Additionally, there is widespread recognition across the US and Europe that its core infrastructure is in desperate need of renewal. There has been a huge wave of investment in the equity of infrastructure as a result, with global assets at over $1trn. This is creating an attractive opportunity for debt investors: currently the yield-to-maturity of SEQI’s portfolio, which can be thought of as the portfolio’s internal rate of return (IRR) is around 10%, unlevered. This means that the trust offers a way to generate an equity-like return by investing in debt in some highly attractive growth themes, but with much more stability and defensiveness than is available in equities.

This is an asset class that has historically been the preserve of banks and institutional investors, but SEQI makes it available to the mass market. The team is highly experienced, bringing with them a wealth of knowledge from their time originating and managing these investments for investment banks before launching the fund in 2015 (see Management). We think that the trust could be a good 'one-stop shop' for investors seeking to get the diversifying and defensive qualities of infrastructure into their portfolios.