Sequoia Econ Infra - Final Results
26/06/2024 07:00
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RNS Number : 8741T Sequoia Economic Infra Inc Fd Ld 26 June 2024
26 June 2024
SEQUOIA ECONOMIC INFRASTRUCTURE INCOME FUND LIMITED
(the "Company")
Final Results for the year ended 31 March 2024
The Directors of SEQI, the specialist investor in economic infrastructure
debt, are pleased to announce the Company's results for the year ended 31
March 2024.
KEY Highlights
Resilient portfolio generating substantial cash, demonstrating prudent
management of investments
· NAV total return of 8.1% for the year (2023: -0.9%), in excess of
target return of 7-8%.
· Total dividends of 6.875p per ordinary share, in line with
November 2022, increase of target by 10% effective February 2023.
· Dividend represents an 8.5% yield on the share price at the
beginning of the financial year.
· 58% fixed rate investments (2023: 42%) to take advantage of
expected interest rate decreases.
· Continued proactive approach to capital allocation; repayment in
full of Revolving Credit Facility to reduce net debt to zero and returning
£88 million to shareholders.
Portfolio performance supported by prioritisation of credit quality over yield
throughout FY24
· Well diversified portfolio of 55 investments across 8 sectors, 30
sub-sectors and 10 mature jurisdictions.
· 97% of investments in private debt (2023: 98%) with no single
investment accounting for more than 4.0% of NAV at time of investment.
· 50.8% of the portfolio in defensive sectors including
digitalisation, accommodation, utilities and renewables.
· 59% of portfolio allocated to senior secured debt and 41% in
subordinated debt.
· Reduction of construction risk in the portfolio to 7.4% (2023:
14.2%).
Strong pipeline of investment opportunities, allows highly selective
investment policy and focus on maintaining diversification and credit quality
· Short weighted average life of 3.9 years (2023: 3.5 years),
creating reinvestment opportunities.
· Investment policy revised to sharpen focus on maintaining the
credit quality of the portfolio whilst targeting a gross portfolio yield of
9-10%.
· Diverse array of attractive potential investments currently under
consideration.
· Commitment to maintaining very selective approach to new
investments, favouring highly defensive sectors with significant barriers to
entry that provide essential services and that are expected to benefit from an
improving economic backdrop and higher rate cycle.
Proactive management of share price discount to NAV driven by key strategic
initiatives
· Total share price return of 9.6% including dividends (2023:
-16.1%) and improvement of share price to 81.10p (2023: 80.40p), resulting in
modest decrease of the share price discount to NAV to 13.5% (2023: 13.8%).
· Significant share buyback programme with 109.3 million shares
repurchased over the financial year.
· Commitment to active dialogue with shareholders reflected in
capital markets seminar event and shareholder meetings throughout the year.
· Delivery against plan to expand universe of investors and
increase proportion of retail shareholders evidenced by recent appointment of
Kepler Partners.
· Directors and Investment Adviser team members participated in
share purchases during the period, reflecting shared conviction in the
investment case and value provided by current share price.
Continued progress along ESG metrics and initiatives
· Portfolio ESG score improved for the fourth consecutive year to
62.77 (2023: 62.29), which was independently assured by KPMG.
· Assurance extended this year to also cover negative screening and
thematic investing - 70% of the portfolio falls within the positive themes.
· Increased engagement with borrowers, including record 93%
response rate to annual ESG questionnaire and seven deals that have
ESG-related covenants embedded in the loan agreement.
· First year reporting Company and Fund emissions data, along with
other quantitative sustainability metrics.
James Stewart, Chair, commented
"I am pleased to announce another resilient year of performance, despite
ongoing challenges in the macroeconomic backdrop. Whilst I remain mindful of
the continuing economic uncertainty, I am confident that the Company has the
ability to remain agile in the face of changing market conditions, as seen in
the strong track record of resilience SEQI has built in the past nine years.
We have continued to prioritise the credit quality of our portfolio and this
strategy which, combined with ongoing market demand for infrastructure debt,
enables the Investment Adviser to be extremely selective as it considers the
strong pipeline of future opportunities.
We believe that the current yield opportunity presented by the portfolio
should allow the Company to deliver both stable income and improved NAV in the
year ahead. The Board remains focussed on the discount to NAV at which the
Company's shares trade and continues to address this proactively against the
challenging market backdrop."
Randall Sandstrom, Director and CEO/CIO, Sequoia Investment Management
Company, said:
"The infrastructure sector presents numerous exciting opportunities in the
short, medium and longer term, and we anticipate significant developments in
the market over the coming years. It continues to be a defensive asset class
with steadier returns, higher yields and lower loss rates than comparable
corporate bonds.
We remain confident that our investment strategy will enable the portfolio to
remain well positioned to continue to deliver attractive and sustainable
returns into the future, underpinned by our strategic focus on maintaining
credit quality and making selective investments in a diverse range of economic
infrastructure assets with highly defensive characteristics.
Whilst the geopolitical and trade outlook remains somewhat uncertain, global
growth is expected to be steady in 2024 and 2025 and improve in the UK and the
Eurozone. Looking forward, the there are reasons for cautious optimism, as
inflation rates in the US, UK, and Europe have fallen significantly since
2022/23 and are expected to continue to soften throughout 2024 and 2025.
Short-term interest rates are expected to drop in 2H2024, throughout 2025 and
into 2026. Furthermore, market default rates are expected by Moody's to peak
by year end 2024 and drop throughout 2025. We believe these are positive
tailwinds for SEQI and the listed alternative funds market in general."
ANNUAL REPORT
A copy of the annual report has been submitted to the National Storage
Mechanism and will shortly be available at
https://data.fca.org.uk/#/nsm/nationalstoragemechanism. The annual report is
also available on the Company's website at
https://www.seqifund.com/investors/financial-results-reports/ where further
information on SEQI can be found.
INVESTOR PRESENTATION
The Investment Adviser will host a presentation on the annual results for
investors and analysts today at 08:00am BST. There will be the opportunity for
participants to ask questions at the end of the presentation. Those wishing to
attend should register via the following link:
https://stream.brrmedia.co.uk/broadcast/665ef724025b0d99d3b969ef
Copies of the Annual Report and Accounts will shortly be available on the
Company's website www.seqi.fund and on the National Storage Mechanism.
For further information, please contact:
Sequoia Investment Management Company +44 (0) 20 7079 0480
Steve Cook
Dolf Kohnhorst
Randall Sandstrom
Anurag Gupta
Jefferies International Limited (Corporate Broker & Financial Adviser) +44 (0) 20 7029 8000
Gaudi Le Roux
Harry Randall
Teneo (Financial PR) +44 (0) 20 7353 4200
Martin Pengelley
Elizabeth Snow
Faye Calow
Sanne Fund Services (Guernsey) Limited (Company Secretary) +44 (0) 20 3530 3107
Matt Falla
Devon Jenkins
About Sequoia Economic Infrastructure Income Fund Limited
The Company is a closed-ended investment company that seeks to provide
investors with regular, sustained, long-term distributions and capital
appreciation from a diversified portfolio of senior and subordinated economic
infrastructure debt investments. The Company is advised by Sequoia Investment
Management Company Limited (SIMCo).
LEI: 2138006OW12FQHJ6PX91
Chair's statement
It is my pleasure to present to you the Annual Report and Audited Financial
Statements of the Company for the financial year of operations ended 31 March
2024 particularly as this is my first report since taking over as Chair in
January.
The market environment has once again been challenging for all investment
companies, and in particular the alternatives sector, but despite this, the
Company has had a good year. The Board continues to believe strongly in the
investment qualities of the infrastructure sector and infrastructure debt as
an asset class.
The portfolio remains resilient and generates significant levels of cash
despite the continuing economic uncertainty. This reflects the strategy for
the last year to prioritise credit quality over yield, as discussed in more
detail under Portfolio performance below. We continue to benefit from the
diversification of the portfolio and the short duration which allows us to
recycle capital to take advantage of changing market conditions.
This is evidenced by the Company producing a NAV total return and a share
price total return in excess of our targets. After a 10% increase in our
dividend target last year, the Company paid total dividends of 6.875p per
Ordinary Share. This dividend represents an 8.5% yield on the share price at
the beginning of the financial year.
Investor concerns over rising interest rates, high inflation and a sluggish
global economy have weighed on investment companies, and most of the
alternative investment sector on the London Stock Exchange is currently
trading at a significant discount to NAV. We believe that our discount is
predominantly unrelated to the Company's performance, and we are pleased that
during the financial year our discount has consistently been towards the lower
end of the range and been one of the least volatile in the sector.
Nevertheless, the Board continues to take a number of proactive steps to
narrow the discount further, including its share buyback programme, which is
the biggest amongst our peers, and in which we have invested £88.2 million
(2023: £28.8 million) during the year.
NAV and share price performance
Over the financial year, the Company's NAV per Ordinary Share increased from
93.26p to 93.77p, after paying dividends of 6.875p, producing a NAV total
return of 8.1% (2023: -0.9%), compared to our target return of 7-8%.
The modest increase in the NAV is mostly due to strong interest income during
the year (10.37p per Ordinary Share), offset in part by dividends (6.875p per
Ordinary Share), operating costs (1.38p per Ordinary Share) and negative
valuation changes (2.29p per Ordinary Share). Our Investment Adviser, Sequoia
Investment Management Company Limited, discusses these movements in more
detail in its report. The share buyback programme delivered a positive NAV
gain of 0.88p per Ordinary Share over the year.
It is also worth noting that the majority of mark‑to‑market price declines
represent unrealised losses, driven by overall market risk as opposed to
credit issues, and are anticipated to gradually reverse over time, as loans
approach their maturity date - the so-called pull-to-par effect.
We have underperformed the liquid credit markets this year, with leveraged
loans and high yield bonds generating total returns of 12.5% and 11.6%
respectively - this is in large part a result of those markets bouncing back
strongly from a low point. For example, the total return on high yield bonds
was -4.7% in the previous financial year.
The Board believes that the share price is not a reflection of our specific
strategy. This is discussed in the share performance section of the Investment
Adviser's report. However, we are not complacent. Key strategic objectives of
the Board are to reduce the discount, return the share price to a premium to
NAV and ultimately resume our capital raising programme. A number of steps
have been taken to support the share price and address the discount during the
year, including:
· an active buyback programme, with 109.3 million Ordinary Shares
repurchased over the financial year;
· a continuing active dialogue with investors - including a capital
markets seminar, investor meetings (both one-on-one and group meetings) and a
philosophy of open and transparent dissemination of information with
considerable investment in online content on the Fund's website and monthly
investor reporting; and
· an ongoing programme working with the Investment Adviser and our
broker, Jefferies, to expand the universe of investors and particularly the
proportion of retail investors. With this in mind we have recently appointed
Kepler Cheuvreux to support research and marketing to retail investors.
The ongoing share purchases by the Directors of the Company and the directors
of the Investment Adviser reflect our shared conviction in the investment case
and the value provided by the current share price. In total 122,656 Ordinary
Shares were bought by these parties during the year.
The share buybacks were accretive to NAV, but we also believe that they have
helped to reduce the discount and the volatility of the share price in times
of significant capital reallocations away from the alternatives sector.
The Company's share price increased slightly over the year, from 80.40p to
81.10p with a share price total return of 9.6% (2023: -16.1%), once dividends
are taken into account. Over the course of the year, the share price discount1
to NAV fractionally decreased from 13.8% to 13.5%.
Dividend
Our dividend of 6.875p per Ordinary Share remains cash covered at 1.06x. This
is lower than last year and one of the reasons for this is the realisation of
less capitalised interest than the previous year. The Board is confident that
the current level of dividend is sustainable and will remain cash covered even
if, as expected, interest rates in the UK and the other jurisdictions we lend
in fall over the coming year. This sustainability is the result of a number of
factors, including a decision to increase the proportion of fixed rates in the
portfolio and continuing fee income from new investments. We also anticipate
that the Fund will receive in cash a material amount of capitalised interest
that has accrued over previous years.
The Board will continue to review the level of dividend in the context of our
ambition to pay out a sustainable and attractive level of income to our
Shareholders.
Portfolio performance
Given the uncertain economic climate we have continued to take a prudent
approach to portfolio management:
· we have prioritised defensive sectors such as digitalisation,
accommodation, utilities and renewables;
· we have not chased yield at the expense of credit quality;
· we have ensured that the portfolio remains diversified in terms of
sector and geography; and
· we have continued to monitor credits closely and to engage and
strengthen our relationship with borrowers.
As a result, our portfolio has performed well over the course of the year,
with credit characteristics typically stable or improving. The weighted
average credit rating of new loans has improved compared to investments made
in the last financial year and the rating of the overall portfolio has
remained stable.
The overall number of investments reduced from 68 to 55, in line with our
prudent approach, using the capital received from repayments to reduce
leverage, buyback shares and increase the liquidity available to the Company
while investing in new opportunities. The proportion of our portfolio
allocated to senior secured debt (rather than subordinated debt) increased
from 57% to 59%, with the proportion relating to projects still in their
construction phase falling from 14% to 7%. The diversification of the
portfolio ensures that no single investment is worth more than 4.0% of NAV at
the time of investment, albeit in some limited cases this percentage may
increase over the life of the loan through restructurings. The portfolio also
benefits from an improved average equity cushion1 of 38%. The performance is a
reflection of our investment policy, stated a year ago, of taking advantage of
attractive lending terms to improve the average credit quality of the
portfolio whilst maintaining yield. Going forward, and taking into account the
market outlook, we have recently revised this policy slightly such that we
will look to redeploy capital so as to maintain the level of credit quality
across the portfolio whilst targeting a gross portfolio yield of 9-10%.
We have made progress on our three material non‑performing investments. Our
loan to Bulb Energy (1.7% of NAV) has now improved to the point where we
expect to recover all or almost all of the amount we originally lent - we even
have the potential to recover some of the interest that has accrued on this
loan since it defaulted. This is a good example of the high recovery potential
in infrastructure debt and the significant efforts of our Investment Adviser
in maximising the recovery.
Our Investment Adviser is making similar efforts to maximise the recovery from
our loan (1.4% of NAV), backed by a property in Glasgow that has been
repurposed as a hotel (having been originally designed to be student
accommodation). We made the decision to foreclose on our loan and steps are
underway to exit the investment.
In relation to the third non-performing loan (2.2% of NAV), backed by a
property in Washington D.C. that was formerly leased to a school, the
Investment Adviser has been working with the owner of the property and the
other lenders involved to find a long-term solution for the investment. We
will keep investors informed as progress is made on this loan.
After the end of the financial year, we took steps on another loan: we
restructured the balance sheet of the Active Care Group, a UK healthcare
business. By showing decisive financial leadership, we have protected our
investment while preserving 4,000 jobs in the UK and the provision of critical
healthcare services. As part of this restructuring, we agreed to provide
additional senior secured loans to the group and now hold majority equity
ownership. This is not classified as a non‑performing loan.
The Investment Adviser discusses our non‑performing loans in more detail in
the NAV and Fund Performance section of its report.
The Investment Adviser closely monitors each and every loan within the
portfolio, and a review of the portfolio is carried out by the Board
semi-annually, in addition to quarterly Board reviews. At times, loans are
subject to enhanced scrutiny by our Investment Adviser. As at year end,
approximately 12% of our portfolio (including the non-performing loans
mentioned above) was receiving enhanced scrutiny. This compares to 11.6% at
the time of the Interim Financial Statements and 7.9% at the prior year end.
The Board has closely reviewed these positions and is comfortable that their
current marks, which are generated by our Investment Adviser and independently
reviewed by our valuation agent PricewaterhouseCoopers and our Independent
Auditor Grant Thornton, fairly reflect the current value of these positions.
Capital allocation
The nature of the portfolio, and particularly the relatively short duration of
loans, means that fresh capital is naturally generated throughout the year.
This is an important differentiator for us compared to equity funds with
significantly longer duration, where complex asset sales may be required to
reduce leverage or evidence valuations.
How capital is allocated is a key strategic decision for the Board and the
Investment Adviser and often a point of discussion with investors.
Our approach seeks to take into account the full range of views and needs
expressed by our investors. During the financial year, the Company has adopted
a "balanced approach" to capital allocation, reducing net debt to zero by
repaying in full its Revolving Credit Facility and returning £88 million to
Shareholders through its share buyback programme. At the same time, the
Investment Adviser has had a highly selective approach to new investments in
line with the principles set out above.
The Board believes that, with an eye on the future, it is important for the
Company to continue making new investments to maintain an active presence in
the market and keep the Investment Adviser team motivated and support
retention. New investments also help preserve the diversification
of the portfolio.
The outlook for infrastructure debt markets
One of the key attractions of the Company to investors is that it provides an
opportunity to participate in some of the large themes in infrastructure,
notably decarbonisation and digitalisation. These transformations will require
a staggering amount of capital, estimated at tens of trillions of pounds, over
the coming years. This is on top of the capital needed simply to maintain the
current stock of traditional infrastructure, such as transport systems and
utility companies.
Infrastructure remains at the top of government priorities all over the world.
It is abundantly clear that governments cannot provide all the capital needed
and the private sector will have to step in. Central to our investment thesis
is that, while very large amounts of private equity for infrastructure have
been raised, there is a genuine shortage of the commensurate debt financing in
our target sectors and geographies. Currently infrastructure equity funds have
raised an estimated USD 1.2 trillion in equity capital. Typically, such equity
would be geared two or three times, implying a debt funding requirement of
USD 2.4 to USD 3.6 trillion. In fact, globally only USD 160 billion has been
raised to date and this fundamental mismatch between demand and supply augurs
well for the future of the Company.
Environmental, Social and Governance ("ESG")
This year, the Company continued to progress and reflect on its ESG framework
and activities. The Board twice reviewed and updated its ESG Policy during the
year. We describe the updates to the ESG Policy and our work on borrower
engagement in more detail in the sustainability report. We added clarity and
more detail to our negative screening criteria, which are implemented in
tandem with our positive screening themes and both have been subject to
independent assurance for the first time this year. Additionally, we also
updated our ESG scoring methodology to reflect current market views,
specifically with regards to the sustainability of the nuclear sector. In
pursuit of the highest levels of transparency, we publish our full
methodology, as well as our ESG Policy, on the Company's website.
This year, the portfolio's weighted average ESG score ticked up to 62.77(1)
from 62.29 - a fourth year of improvement. Most of this increase is
attributable to the strong focus on engagement with borrowers over the course
of the year. Our Investment Adviser worked more closely with borrowers on
enhancing their ESG credentials, forming action plans and embedding
ESG-related covenants into loan agreements where possible.
Going forward, we believe that it is more important than ever to consider
funding transition programmes, especially in the energy sector. This is
challenging, as the initial pre-transition ESG score will be low, only
improving over time once the investment is made. This may mean that it is not
necessarily a given that our portfolio's average ESG score will improve at
every year-on-year reporting date. However, successful investment in
transition assets and the ability to improve underlying ESG metrics should
improve the Fund's overall ESG score in the medium to long term.
We continue to report as an Article 8 fund under the Sustainable Finance
Disclosure Regulation ("SFDR"). Whilst not having sustainable investment as
its objective, the Company promotes ESG characteristics, the achievement of
which is measured through the three KPIs of our ESG framework: negative
screening, thematic investing (positive screening) and ESG scoring. This year,
the scope of the ESG assurance carried out by KPMG was extended to cover our
negative screening and thematic investing activities.
The Company continues to take steps to minimise its own carbon emissions.
Unavoidable emissions from operations are offset through credits produced by a
UK peatland restoration project verified under the Peatland Code. This carbon
offsetting programme is financed by a voluntary deduction taken from the fees
of the Directors and our Independent Consultants.
Congratulations to our Investment Adviser, who won Best ESG Infrastructure
Investment Strategy (Capital Finance International) last year.
The Company, along with many other participants in the sector, anticipates the
further development of the regulatory and reporting landscape as we navigate
what has been a "moving feast". We look forward to enhanced consistency of
reporting and standardisation in the future in order to assist Shareholders
and potential investors in their decision making with regard to these types of
investments.
1. KPMG has issued independent limited assurance over the selected
data indicated in the reporting criteria and assurance opinion available in
the Sustainability Publications section of our website here:
www.seqi.fund/sustainability/publications/
Board changes
I would like to thank my predecessor, Robert Jennings, who served as the
Company's first Chair from its IPO in 2015 until the end of 2023. Under
Robert's leadership, the Company grew tenfold and became the largest debt fund
listed on the London Stock Exchange. He led the Board with great expertise,
insight and energy through numerous economic challenges and took particular
interest in helping the Investment Adviser develop and implement its
award-winning ESG policies. It was a privilege to serve my first two years on
the Board under his leadership.
We welcomed Margaret Stephens to the Board in January 2024. She brings a
wealth of infrastructure and wider experience from her time as a partner at
KPMG and her active non-executive portfolio.
In June 2024 we also sadly said goodbye to Sandra Platts, the last of the
original Board members. Sandra has made a significant contribution to the
success of the Company over the last nine years and we will miss her wise
counsel and insights. Paul Le Page joined the Board to replace Sandra. Paul is
a Guernsey resident and brings considerable experience of the alternatives
sector as well as wide board experience. The appointment of Paul brings to
completion a very successful Board succession plan, and I am confident that we
have a Board with the skills and experience to navigate the future.
Outlook
After six months in the Chair and over two years on the Board, I would like to
offer some reflections on the current position and the future of the Company.
Investment in infrastructure is a priority for governments around the world
and therefore demand for infrastructure debt in the sectors and geographies
that we lend to will remain high. The Company remains the only listed economic
infrastructure debt vehicle, which is a differentiator and gives us a
competitive advantage.
I am mindful of the continuing economic uncertainty and particularly the pace
and trajectory of the economic recovery. However, I take confidence from the
fact that the Company has a track record of resilience over the last nine
years with its diversified portfolio, strong interest income and disciplined
approach to capital deployment, and that we have the ability to remain agile
in the face of changing market conditions.
Our investment strategy will be to redeploy capital as loans mature so as to
maintain the level of credit quality across the portfolio, whilst targeting a
gross portfolio yield of 9-10%. This strategy, enabled by the continuing
market demand for infrastructure debt, allows the Investment Adviser to be
extremely selective in the investments it chooses to pursue from its
significant pipeline of opportunities.
We will also continue to monitor our share price closely and, where
appropriate, engage in limited share buybacks. The rate at which we buy back
shares will flex depending on various factors, including the level of our
share price discount to NAV.
In August 2024 we will hold our tri-annual Continuation Vote. The Board will
never be complacent about these types of events. However, we believe that the
Company has a bright future, a critical mass, a portfolio that is resilient
and will deliver our target returns, and that we will achieve our objective of
increasing the NAV per Share. Shareholders should rest assured that we will do
everything we can to return the share price to a premium. We always welcome
regular open and transparent dialogue with our Shareholders so that we can
take account of their views when setting strategy.
James Stewart
Chair
25 June 2024
Investment Adviser's report
The Investment Adviser's objectives for the year
Over the course of the financial year, Sequoia Investment Management Company
Limited ("SIMCo" or the "Investment Adviser") has had the following
objectives for the Fund:
Goal Commentary
Gross portfolio return of 8-9% The Company is invested with a portfolio that currently yields in excess of
10% and produced a NAV total return of 8.1% in the financial year, slightly
above the Company's target annual gross return of 8-9% after approximate
annual costs of 1%
Manage the portfolio responsibly through an inflationary and rising interest The Fund has previously positioned its portfolio defensively to minimise the
rate environment effects of the rise in interest rates and is now in a position to lock in
these higher rates, reflected by a decrease in the floating rate proportion of
its portfolio from 58.4% at 31 March 2023 to 42.1% at 31 March 2024 and the
acquisition of an interest rate swap
Follow a sustainable investment strategy The Fund has modestly improved the overall
ESG score of its portfolio from 62.29 to 62.77(1), mainly driven by increased
ESG engagement with the companies that it lends to. There was a net reduction
from acquisitions driven by the need for diversification
Timely and transparent investor reporting The Company's Factsheet (which was awarded the AIC's 2023 Shareholder
Communication Award for Best Factsheet), commentaries and full portfolios have
been provided monthly for full transparency. Investor engagement has continued
over the financial year including a capital markets seminar, smaller bespoke
investor events and a results roadshow as well
Continue to improve the ESG profile of the Company and the portfolio The Fund reviewed and updated its ESG framework, given the continually
evolving nature of ESG, to ensure it remains up to date and best reflects
current thinking and the future direction of travel.
In particular the Fund revisited its scoring of nuclear power and added more
detail to its negative screening criteria. The latest ESG policy can be found
on our website: www.seqi.fund/publications/
Dividend target of 6.875p per Ordinary Share per annum The Company paid four quarterly dividends of 1.71875p per Ordinary Share in
line with its dividend target, amounting to a total of 6.875p
1. KPMG has issued independent limited assurance over the selected
data indicated with a reference number in the 2024 Annual Report. The
reporting criteria and assurance opinion are available in the Sustainability
Publications section of our website:
www.seqi.fund/sustainability/publications/
Economic infrastructure is a diverse and highly cash-generative asset class
Economic infrastructure debt is a form of investment that has gained a
reputation for its resilience and reliability, attracting a broad range of
investors. This asset category possesses several unique qualities that
investors find attractive. One of these is the significant barriers to entry
enjoyed by the borrowers (e.g. high capital expenditure requirements,
regulations, etc.), which discourage new competitors and protect the interests
of current investors. Another is the regular and predictable cash flows that
these investments generate, offering a dependable revenue stream for
investors. This is largely due to the vital nature of the services provided,
which ensures a steady demand. Furthermore, the physical assets that underpin
economic infrastructure debt offer tangible security for the investment.
These attributes have continued generating interest in economic infrastructure
debt among investors looking for a steady income stream and a reliable
long-term investment. The sectors applicable to this type of debt include
transportation, utilities, power, telecommunications and renewables, and some
social infrastructure projects with very similar attributes. These sectors
often operate under long-term concessions or licenses, with revenues linked to
demand, usage or volume.
To manage demand risk, economic infrastructure projects typically have lower
leverage than availability‑based social infrastructure, maintain larger
equity cushions, conservative credit ratios, strong loan covenants, and
provide more substantial asset backing for lenders. This strategy has been
consistent over the financial year, guiding the Fund's investment strategies.
Despite market volatility during this period, the Fund has proactively
positioned its portfolio to defend against potential downturns. This includes
focusing on operational projects, senior debt and non-cyclical industries as
well as decreasing our exposure to construction assets. These measures have
helped mitigate risks from the current inflationary market conditions and
other global uncertainties, such as the ongoing conflict in Ukraine and the
Middle East.
Following the 2008 global financial crisis, most banks were restricted to
financing only the most established sectors at modest gearing levels. However,
a revolution was emerging as developed market governments faced the need to
fund ever-expanding social programmes driven partly by ageing populations and
economic weaknesses post-crisis, as well as the economics of globalisation.
As a result they began to rely on the private sector, not only for traditional
infrastructure, but also for the new mega-sectors of energy transition and
digitalisation. These sectors were not only more commercially driven, though
initially supported by subsidies in the case of renewables, but also naturally
more geographically dispersed.
This shift was creating a more fragmented mid-market for economic
infrastructure, moving away from a world of centralised assets funded by
governments or major corporations, including privatised utilities. This period
also marked the decline of the UK's and Europe's experience with
Public-Private Partnerships ("PPPs") social infrastructure, a segment that
still attracted bank financing at higher loan-to-values but fell out of favour
due to public sentiment.
Given these investment characteristics, it is unsurprising that the private
infrastructure financing markets have been growing rapidly. Private
infrastructure equity funds have grown at a compound annual growth rate of 17%
since December 2012, with their debt counterparts growing even faster at 27%.
While the equity sector gained momentum in 2006-07 due to PPP and traditional
infrastructure, it significantly accelerated in 2015-16, driven by energy
transition and digitalisation. Currently, the industry is approaching a value
of USD 1.2 trillion in assets under management ("AUM"), making it one of the
fastest-growing asset classes and now a mainstream component of any
institutional portfolio. Private infrastructure debt funds experienced
accelerated growth after 2010 with the emergence of the energy transition and
digitalisation sectors. The market has now reached an AUM of around GBP £160
billion, and whilst lagging behind the equity side, there are ample
opportunities to take advantage of.
The data presented here excludes investments outside fund structures, such as
those by governments, corporations and direct investments by institutions.
These additional investments are estimated to make the total market size even
larger.
The market environment during the year
While infrastructure debt funds lagged behind their equity-backed counterparts
in terms of capital invested, the Investment Adviser believes that a multitude
of growth factors will lead to a continuing expansion of the private
infrastructure debt market:
· after the 2008 global financial crisis, constraints have been put
into place on bank lenders in the alternatives space leading to opportunities
for private debt providers;
· private equity investment has a symbiotic relationship with private
debt investment. The need for private equity investment in sectors such as
energy transition, digitalisation and urban revitalisation creates demand for
private debt to support these projects via refinancings, M&A financing and
leveraged growth investments; and
· investors are seeking additional diversification in their
portfolios, which private infrastructure debt offers at an attractive cash
yield, low correlation to other markets and lower risk compared to equity
investments.
While infrastructure debt benefits from inherent revenue stability, the Fund's
valuations have been affected by the volatility observed in the financial
markets over the last year, particularly the rapid decline in government bond
prices in the first half of the financial year and subsequent recovery.
The first half of the financial year saw a continued normalisation of interest
rates, as central banks were reining in inflation by increasing policy rates.
At the end of the financial year, yield curves were inverted, as long-term
government bond yields did not increase to the same extent as
short‑term rates.
The US, UK and Europe have witnessed a decline in their high inflation rates
in the first six months of the year from the highs seen in the previous fiscal
year, with further stabilisation noted in the latter half of the year. The
anticipation of additional interest rate increases from central banks has
diminished, as these rates are believed to have reached their maximum value.
The attention has now shifted towards the viability of a high-interest rate
environment considering the individual economies of each region, and the
timing of any potential rate reductions.
The Fund's private debt portfolio performance is susceptible to changes in
interest rates and credit spreads in liquid markets. On the one hand, declines
in the value of government debt, high yield bonds or leveraged loans have at
times negatively impacted the valuation of the Fund's investment holdings.
However, these fluctuations are generally unrealised mark-to-market changes
that will reverse as our loans near their maturity date. On a positive note,
the Fund has benefitted from challenging market conditions.
Businesses, including infrastructure companies, have struggled to raise new
capital due to weak capital markets globally, bolstering the Fund's pricing
power when negotiating new loans. The Fund has, over the last year, taken
advantage of this by looking to improve the average credit quality of its
lending book, while maintaining its yield. Hence, despite market hurdles, the
Fund's infrastructure debt investments continue to present an attractive
risk-return profile to investors.
Market backdrop
Consumer price index year-on-year
What is happening?
Inflation is past its peak levels in all of the Fund's investment
jurisdictions, as inflation reduces in most developed markets globally.
Why this matters to the Fund
As inflation drops, the likelihood of future interest rate cuts increases,
which makes alternative investments such as infrastructure more attractive
when compared to liquid credit. Furthermore, lower inflation leads to less
cost pressure during the construction of a project, decreasing construction
risk, all else being equal.
Overnight financing rates
What is happening?
Short-term interest rates have plateaued in the second half of the financial
year in the US, UK and Europe.
Why this matters to the Fund
The portfolio's floating rate investments will start to de-risk as their
borrowing costs have peaked and are expected to start decreasing. Once a
downwards trend toward a lower interest rate environment unfolds, this will be
supportive of fixed rate loans and bonds, as it will accelerate their
pull-to-par. Further, as short‑term rates begin to fall, yield curves will
become less inverted or turn positive again, supporting a bid for risk in the
market.
Commodity Index
What is happening?
The Commodity Research Bureau Index has peaked ahead of inflation rates in the
US due to built-up demand during the COVID-19 pandemic.
Why this matters to the Fund
Goods make up a large portion of inflation and as commodity prices cool,
inflation can be expected to soften, lowering the cost of construction and
taking pressure off interest rates, all else being equal.
Portfolio overview
Throughout the fiscal year, our persistent strategic focus has been on the
continuous development and administration of a broad-based portfolio of
private debt investments, in a diverse range of infrastructure sectors and
subsectors, located in regions with low political/regulatory risk. Our main
goal has been to maintain our projected returns while prioritising the
reduction of credit risk. During this period, we have maintained our cautious
investment strategies such as keeping a substantial part of the portfolio in
resilient sectors, prioritising senior debt over mezzanine debt and preserving
or gradually improving the portfolio's credit quality.
The current highlights of our portfolio, which reflect the results of these
efforts, include:
· 50.8% of the portfolio in defensive sectors. These include
digitalisation, accommodation, utilities and renewables, which are viewed as
defensive because they provide essential services, often operate within a
regulated or contractual framework or have high
· barriers to entry.
· Reduction of construction risk in the portfolio from 14.2% to 7.4%,
achieved via repayments of investments in construction and higher scrutiny
being applied to new construction assets at the origination stage of the
investment process.
· 58.6% of the portfolio in senior secured loans and 41.4% in
subordinated debt, a substantially higher proportion of senior secured debt
than we have previously held.
· Improved the credit quality of new loans made over the year,
compared to the portfolio average.
· Maintained credit quality of the portfolio over the last 12 months
without a reduction in targeted yields. Our policy not to invest in CCC
profile loans remains in place.
· Continued low modified duration of 2.2, with 42.1% of the portfolio
in floating rate deals and 57.9% in short-term fixed rate assets, both
including the effects of interest rate swaps, and a current low portfolio
weighted-average life of 3.9 years. Interest rate swaps have been added to the
portfolio as a cost-efficient product increasing visibility of future cash
flows and providing protection against a faster-than-expected fall in
short-term rates.
The Fund's investment portfolio is diversified by borrower, jurisdiction,
sector and subsector, with strict investment limits in place to ensure that
this remains the case. The chart below shows portfolio sectors and subsectors
on 31 March 2024:
Diversification by sector
Digitalisation 26.0%
Data centres 13.0%
Telecom towers 7.2%
Telecom infra services 3.4%
Broadband & fibre 2.4%
Power 20.6%
Base load 8.8%
Other electricity generation 6.0%
Energy efficiency 2.8%
Power services 1.4%
Energy transition 1.0%
Nuclear power 0.6%
Transport - vehicles 8.9%
Specialist shipping 4.9%
Rolling stock 2.3%
Aircraft 1.7%
Accommodation 3.3%
Healthcare 1.8%
Student housing 1.5%
Renewables 10.0%
Solar & wind 5.7%
Landfill gas 4.3%
Utility 11.55
Midstream 5.6%
Utility services 4.0%
Renewable electricity supply 1.9%
Transport - systems 7.3%
Port 3.1%
Ferries 3.0%
Rail 1.1%
Road 0.1%
Other 12.4%
Waste-to-energy 4.1%
Residential infra 3.0%
Private schools 2.4%
Hospitality 1.6%
Social infra 1.2%
Agricultural infra 0.1%
The Fund places a strong focus on investments in areas known for their
stability and low risk, in line with its predefined investment criteria. This
approach leads the Fund to limit its investments to countries that meet
certain standards, such as having an investment-grade classification. The
Fund's investment approach is centred on identifying opportunities that offer
attractive risk-adjusted returns, while carefully steering clear of potential
hurdles, particularly those related to regulatory and legal risks.
Portfolio overview
The Fund adopts a prudent stance in its investment endeavours, particularly
with regard to the risk associated with greenfield construction projects.
Although the Fund may allocate up to 20% of its NAV for lending to such
investments, its actual exposure to assets under construction as of 31 March
2024 stood at 7.4% of its overall portfolio. This is lower than the average
historical construction exposure because of our conservative investment
approach given the slow growth environment and recent supply chain
disruptions.
The Fund exercises careful discretion in project selection, exclusively
investing in those where it perceives that it is adequately compensated for
the moderate construction-related risks it undertakes. Additionally, the Fund
maintains stringent criteria for evaluating the inherent strength of the
borrower's business or project to ensure effective risk mitigation. For
example, the Fund tends to avoid investing in projects that have both
construction and ramp-up or demand risk.
The Fund's strategy is fundamentally centred on private debt, which makes up
the vast majority of its portfolio. This strategic direction is motivated by
the fact that private debt usually provides an "illiquidity premium", that is,
a return that is higher than that of liquid bonds with comparable features.
Given the Fund's primary "buy and hold" investment strategy, securing this
illiquidity premium is considered a wise approach. Research conducted by the
Investment Adviser validates the presence of this extra premium, indicating
that infrastructure private debt instruments typically yield 1-2% more than
similar publicly rated bonds.
Factor NAV effect
Interest income on the Fund's investments 10.37p
Portfolio valuation movements, net of foreign exchange and hedge movements (2.29)p
IFRS adjustment from mid-price at acquisition to bid price (0.19)p
Operating costs (1.38)p
Gains from buying back shares at a discount to NAV 0.88p
Gross increase in NAV 7.39p
Less: Dividends paid during the year (6.88)p
Net increase in NAV after payments of dividends 0.51p
NAV performance
Over the last 12 months, the Company's NAV per share increased from 93.26p per
share to 93.77p per share ex-dividend, driven by the following effects:
The total return on the NAV was equal to 8.1% over the period. This is in
excess of the Company's long-term return expectations of 7-8% p.a. The
portfolio has performed approximately in line with the FTSE All-Share index
and FTSE 250 Index, with a small underperformance of 0.1% and 0.5%
respectively. More substantial underperformance arose relative to high-yield
bonds by 3.5% and leveraged loans by 4.3%. The Company's NAV total return
outperformed 10-year Gilts by 7.9%.
As evident from the table provided on this page, the principal factor that
positively influenced NAV performance was the interest income derived from
investments. This was partially offset by moderate valuation declines in the
Fund's investments, mostly as a result of rising discount rates. It is worth
noting that the majority of mark-to-market price declines represent unrealised
losses, driven by overall market risk as opposed to idiosyncratic risk, and
are anticipated to gradually reverse over time, as loans approach their
maturity date (the "pull-to-par" effect). Less than half of the portfolio's
negative valuation movements are attributable to the Company's non-performing
loans.
The Investment Adviser believes that the portfolio is well positioned to
outperform the liquid credit markets in the long run for the following
reasons:
· private debt has higher yields than liquid credit, for a
like-for-like credit quality;
· debt supported by infrastructure exhibits resilience due to higher
asset backing. This resilience is evident in the Fund's lower loss rates
compared to broader liquid credit, again when considering equivalent credit
quality; and
· a high level of portfolio diversification by sector, subsector and
jurisdiction, thereby minimising the impact of single asset-, sector- and
country-specific political and economic risks. This reduces overall portfolio
risk as assets have low correlations and are exposed to different risks.
Share performance
As at 31 March 2024, the Company had 1,625,484,274 Ordinary Shares in issue
(31 March 2023: 1,734,819,553). The closing share price on that day was 81.1p
per share (31 March 2023: 80.40p per Ordinary Share), implying a market
capitalisation for the Company of approximately £1.3 billion, a decrease of
c.£76.5 million compared to 12 months ago due to the Company's share buyback
programme, which has reduced the number of Ordinary Shares in issue. After the
financial year end, the Company cancelled all 154,046,443 of its Ordinary
Shares held in treasury as at 26 April 2024.
After taking account of quarterly dividends amounting to 6.875p per Ordinary
Share, the share price total return over the period was 9.6%. The observed
0.7p increase in the share price over the year was driven by two factors:
· the increase in NAV as discussed above; and
· a small improvement in the rating of the shares due to a narrower
discount to NAV (13.5% as at 31 March 2024 and 13.8% as at 31 March 2023).
One of the main reasons for the share price discount to NAV is the adverse
market sentiment towards alternative assets, including debt funds in the
listed investment company sector. This is partly due to the residual effects
of inflation and sluggish growth, coupled with a certain degree of scepticism
in the accuracy of some alternative fund valuations in general as well as
capital flows in the market, such as index flows and multi-asset flows. The
Investment Adviser is focused on managing variables within the Fund's control
and hence wants to reassure investors that the Fund's valuations are
independently reviewed and accurately reflect the value of its assets. Unlike
most private equity, infrastructure equity and real estate equity funds, the
Fund's valuations are published monthly.
However, the problem has been exacerbated by capital outflows from those who
are reallocating from liquid alternatives to government bonds and money market
instruments, which have recently offered higher yields on a tax-adjusted
basis. This has led to "forced sellers" driving down share prices across the
sector, although the sector has observed more stability in the second half of
the financial year as policy interest rates in key markets appear to have
reached their peak. The Company is able to take advantage of the prevailing
market conditions due to the short weighted-average maturity of the portfolio.
A considerable amount of capital has been reinvested at the current higher
rates. To further facilitate this strategy, the Investment Adviser has amended
the investment policy to allow for up to 60% of investments to be held as
fixed-rate assets. In addition, an interest rate swap has been put in place
for which the Fund is the receiver of fixed rate payments and pays a floating
rate coupon in exchange to the counterparty.
Both the Investment Adviser and the Company's Directors believe that the
current discount of the share price to NAV is excessive.
We collectively believe that it does not accurately reflect: the potential of
the investment portfolio to deliver attractive risk-adjusted returns during
periods of economic uncertainty; its shorter investment duration; and its
robust NAV approach. With this in mind, the Fund continues to buy back its
Ordinary Shares, which it considers to be undervalued, thereby providing NAV
accretion for existing Shareholders. In the past 12 months alone, the Company
has repurchased 109,335,279 Ordinary Shares. The share buyback programme was
first announced to Shareholders in July 2022, and since then, the Company has
bought back a total of 142,754,724 Ordinary Shares, nearly 9% of its total
outstanding Ordinary Shares as of 31 March 2024. This has resulted in an
increase in NAV per Ordinary Share of 1.06p since the implementation of the
buyback programme.
Dividend cover
The Fund has paid 6.875p in dividends during the last 12 months in accordance
with its target.
The Company's dividend cash cover was 1.06x for the financial year. This is
lower than in the previous year, for the following reasons:
· The Fund has realised less capitalised interest compared to last
year, namely around £13 million in the period compared to £20 million in the
prior year. Receipt of this component is tied to refinancing or repayments and
therefore exhibits high year-on-year volatility;
· The Company has increased its dividend target from last year as the
Board was confident in the level of income produced by the portfolio. Given
that the Company's dividend remains comfortably cash-covered, the portfolio's
floating rate assets have successfully offset the higher dividend payments;
and
· The Company has repaid its Revolving Credit Facility ("RCF")
balance in full whilst building up increased levels of liquidity. As a result,
the income generated by the spread between RCF utilisation cost and yield on
investments funded by such drawings has not been captured in the period.
Fund performance
31 March 2024 30 September 2023 31 March 2023
Net asset value per Ordinary Share 93.77p 92.88p 93.26p
£ million 1,524.3 1,561.5 1,617.9
Cash held (including in the Subsidiaries) £ million 99.4 141.7 68.7
Balance of RCF £ million 0.0 0.0 181.8
Invested portfolio percentage of NAV 90.6% 90.3% 106.5%
Total portfolio including investments in settlement 94.2% 92.2% 109.6%
Portfolio characteristics(1)
31 March 2024 30 September 2023 31 March 2023
Number of investments 55 57 68
Valuation of investments £ million 1,380.7 1,410.2 1,723.5
ESG Score 62.77(2) 62.84 62.29
Single largest investment £ million 60.6 60.2 61.0
percentage of NAV 4.0% 4.3% 3.8%
Average investment size £ million 22.6 23.5 25.3
Sectors by number of invested assets 8 8 8
Sub-sectors 30 27 26
Jurisdictions 10 10 12
Private debt percentage of invested assets 96.9% 97.3% 98.1%
Senior debt 58.6% 53.5% 57.2%
Floating rate 42.1% 54.4% 58.4%
Construction risk 7.4% 11.2% 14.2%
Weighted-average maturity years 4.4 4.2 4.1
Weighted-average life years 3.9 3.6 3.5
Yield-to-maturity 10.0% 10.9% 11.9%
Modified duration 2.2 1.5 1.5
1. Relates to the portfolio of investments held in the Subsidiaries
2. KPMG has issued independent limited assurance over the selected
data indicated in the reporting criteria and assurance opinion available in
the Sustainability Publications section of our website here:
www.seqi.fund/sustainability/publications/
Fund performance
As can be seen in the table above, the Fund has reduced its number of
investments from 68 to 55 within the last 12 months. The Investment Adviser
has selectively decided not to redeploy some of the capital received from
maturing assets, instead using these proceeds to de-lever the Fund, increase
the liquidity available to the Company and buy back shares while they are
trading at a discount. The decrease in investments has been actively managed
so as not to impact the diversification the Fund provides to its investors;
the portfolio remains invested in eight different sectors and has increased
its subsector count to 30 from 26 at the prior year end. Furthermore, some of
the exited positions were construction assets, which has allowed the Company
to de-risk the portfolio even further.
The Company's portfolio of investments has decreased by approximately £342.8
million, attributable primarily to two factors. Firstly, the Company has
concentrated on liquidity management, repaying £181.8 million of its
outstanding RCF and increasing the Fund's cash reserves by £30.7 million.
Secondly, the Company has repurchased £88.2 million worth of shares to return
value to Shareholders and mitigate a widening share discount. The remaining
decrease in size of the portfolio is primarily due to asset valuations, which
are discussed in detail in the NAV performance section above.
Over the past twelve months, the proportion of the Fund's investment in senior
secured debt has increased marginally. Despite multiple repayments and a
reduction in the total amount invested in senior secured positions, the
Investment Adviser has successfully identified and invested in new
opportunities, maintaining the level of senior secured debt above 50% despite
the overall reduction in the portfolio size. Additionally, following a
strategy to lock in currently high long-term rates, there has been a shift
towards a higher percentage of fixed-rate assets.
This shift has been achieved through a preference for fixed-rate assets at
origination and the implementation of a portfolio-level interest rate swap,
which has effectively converted some existing floating-rate investments into
fixed-rate. Consequently, the proportion of floating-rate assets has decreased
by 16.3%, and the portfolio's modified duration has increased to 2.2 from 1.5
in the previous financial year.
Credit performance
Over the past financial year, the credit performance of the entire portfolio
has remained resilient. Given that the portfolio is made up of high-yield debt
instruments, it is to be expected that a small fraction of investments might
face some credit issues over their lifetime. The Company's experience so far
indicates that credit losses have only slightly impacted investment returns,
contributing to an annual loss rate of about 0.53%, a marginal improvement
from the previous year's 0.56%. This fares well when compared to non-financial
corporate debt with a similar credit rating, where the historical annual loss
rate is approximately 1.6%.
We will be proactive where appropriate to protect our investments. For
example, after year end, we restructured the balance sheet of Active Care
Group, a UK healthcare business. As part of this restructuring, we provided
additional funding of £34.8 million as a senior secured loan. In return we
received majority equity ownership of ACG HoldCo, the new holding company. Not
only did this enhance the value of our HoldCo loan, the restructuring saved
4,000 jobs and ensured the continued provision of healthcare for vulnerable
service users.
Lenders are, in general, obligated to maintain confidentiality towards the
companies they lend to. Therefore, the Company's policy is not to publicly
discuss underperforming loans, except when the borrower has entered an
insolvency process (such as administration in the UK, or Chapter 11 in the
US).
Publicly discussing an underperforming business could potentially worsen its
problems, for instance, by making it more difficult to retain employees or
secure new contracts.
US private school
A large building in a prime location in Washington D.C. was used as collateral
for a loan. This building was initially occupied by a private school under a
long-term lease agreement. However, due to the COVID-19 pandemic, the school
experienced a significant challenge in ramping up enrolment, leading to
increased operational costs and eventually, insolvency. In 2022, the loan
terms were revised and extended to support the borrower's post-pandemic
business plan. Unfortunately, the school was not able to bounce back and was
officially evicted from the property on 19 October 2022. The lenders are
currently in the forbearance period and the property owner is actively
marketing the building to potential tenants, mainly from the education sector,
and has received initial responses from several educational institutions in
the Washington D.C. area. Despite this, the global commercial real estate
market continues to struggle due to decreased demand, the rise of remote work,
economic instability and high interest rates. These factors have collectively
led to a decrease in the property's valuation over the year. As of 31 March
2024, this loan represents 2.2% of NAV.
UK energy supply company
The Investment Adviser has continued to make substantial progress on
recovering value from the Fund's loan to Bulb Energy. During the year, as part
of a £25 million partial settlement of claims with the Joint Energy
Administrators of Bulb, the Company received a distribution of £9 million in
cash and expects to receive a further £16 million in cash (conditional on
criteria which the Company expects to be met) in or shortly after September
2024.
The latter amount may be deferred until or shortly after September 2025 (in
certain limited circumstances), in which case the amount will increase from
£16 million to £18.4 million. The Company also received an additional
distribution of £2 million in cash from the Administrators of Simple Energy
(the parent of Bulb) during the year. In total these distributions take the
total recoveries from the defaulted loan to Bulb to £41.0 million in cash and
£11.3 million in shares of Zoa Technologies Ltd ("Zoa").
Further distributions are expected over time from Simple Energy. It is also
possible that there may be further distributions by Bulb over time.
Realisation of value from the Company's majority equity stake in Zoa will be
dependent on Zoa's business performance and any future fundraise. Following
the recent developments and increased visibility on eventual recovery of the
loan, the Investment Adviser believes that the loan no longer requires
enhanced scrutiny. We will continue to provide updates as appropriate to
Shareholders on any material developments relating to the investment.
The combined value of the Fund's shares in Zoa and its loan to Bulb is 1.7% of
NAV as at 31 March 2024.
Glasgow property
During the year, the Company decided to foreclose on a loan backed by a
property in Glasgow that was operating as a hotel (having been originally
designed to be student accommodation.) This decision was made to protect our
position, once it became clear that the property's owners were not in a
position to fund the combined cost of operating losses at the hotel and
interest expense on the loan. The Investment Adviser has been working with the
administrator and property agents on resolving the situation, by a sale of the
property to a new owner, or otherwise. As at 31 March 2024, this loan
represents 1.4% of NAV.
Balance sheet management
During the year, the Fund has cleared all its outstanding loans from the
revolving credit facility. At the start of the year, it had a net debt
position of £113.1 million, which comprised a £181.8 million drawing on the
Company's revolving credit facility and a cash balance (including cash held in
the Subsidiaries) of £68.7 million. By the end of the year, it had an undrawn
revolving credit facility and a cash balance of £99.4 million. The Fund does
not plan to maintain such high cash balances: although having liquidity
provides flexibility, it comes at too high an opportunity cost. The revolving
credit facility remains available to manage the timing mismatch between
repayments and new investment. The Investment Adviser, therefore, continues to
look to originate new loans and currently has a dynamic pipeline of over £250
million of potential investment opportunities.
Considering the current portfolio composition, the Fund is actively generating
deals in sectors that would merit increased exposure such as Transport Systems
and Transport Vehicles as the Investment Adviser looks to increase the
portfolio diversification. More details can be found in the "Strong pipeline
of opportunities" section of the Investment Adviser's Report.
In addition to selectively investing in new infrastructure loans, we are of
course mindful that the Company has an active share buyback programme. We are
perhaps fortunate that infrastructure debt is such a highly cash-generative
investment that we can pursue a balanced approach to buybacks while also
maintaining our investment objectives.
The "pull-to-par" effect (pence)
These NAV estimates are calculated on the basis that interest rates and bond
yields remain constant and do not take into account NAV-accretive mechanisms
other than the pull-to-par; the only variable is the passage of time.
Non-performing loans are excluded from the calculation and recoveries of
underperforming loans are based on internal credit ratings. In monetary terms,
the pull-to-par is expected to be material over the next three years:
Pull to par Pull to par
Period (£m) (pence per share)
1 April 2024 to 31 March 2025 25.1 1.6
1 April 2025 to 31 March 2026 20.1 1.2
1 April 2026 to 31 March 2027 12.2 0.8
1 April 2027 onwards 8.5 0.5
Portfolio valuation
Currently the average single B or higher-rated loan in the portfolio is marked
at a price of about 97 pence on the pound; this mostly reflects the higher
interest rates and credit margins used to value the loan, compared to those
available in the market at the time the loan was made (i.e. effect of
increasing base rates).
Over time, as loans marked down due to the above-mentioned effects approach
their repayment dates, we will see their valuations accrete back up to 100
pence on the pound (assuming no credit losses) - this is the so-called
"pull‑to‑par" effect, the additional value on the NAV per share of which
is shown on the graph to the left.
Origination activities
The Fund's investment strategy is designed to target assets in both the
primary and secondary debt markets, each offering distinct benefits.
Investments in the primary market enable the Fund to earn immediate lending
fees and customise its investments to meet specific needs. On the other hand,
acquiring assets in the secondary market allows for the quick allocation of
capital into mature assets with a proven track record.
Primary market origination
The Fund continues to focus on the primary loan markets, which consistently
offer substantial opportunities. The Investment Adviser actively seeks
bilateral loans and participates in "club" deals, where a small consortium of
lenders work together. In addition, the Fund has been involved in more broadly
syndicated infrastructure loans. Primary market loans are attractive due to
their beneficial economics. As the lender, the Fund enjoys upfront lending
fees and increased flexibility in negotiating terms. As the Fund has expanded,
its primary market investment activity has grown and now represents the vast
majority (87.0%) of the portfolio.
Secondary market origination
While the primary market remains a key focus, the Fund also procures certain
investments from banks or other lenders in the secondary markets. This
strategy allows for the rapid deployment of capital, as primary market
transactions in infrastructure debt can often take time to execute. It also
provides the Fund with more liquid assets, offering flexibility when there's a
need for increased liquidity. Research indicates that infrastructure loans
typically see improvements in credit quality over time. Therefore, in many
instances, secondary loans have enhanced credit quality since their initial
origination.
Strong pipeline of opportunities
While the Investment Adviser's main focus has been on monitoring current
positions, there is also a broad spectrum of potential investments which are
currently being evaluated.
Regarding the current opportunities observed by the Investment Adviser in the
market, it is pertinent to highlight the evolution of infrastructure debt over
the past few decades and the potential future opportunities.
Initially, in the early 2000s, the market was dominated by established
subsectors such as oil and gas infrastructure, privatised utilities, shipping
and roads. However, these subsectors have swiftly adapted to technological
advancements and shifting market dynamics.
This adaptation has led to the emergence of mainstream investment
opportunities in areas such as data centres, offshore wind and liquified
natural gas infrastructure. These newer sectors, combined with the established
ones, now constitute the core of the Fund's investment scope.
Evolution of the market opportunity
Established Mainstream Nascent Speculation
Rail Fibre-to-the-home Drones Robotics
Airports Recycling Security & surveillance AI assisted living
Privatised utilities Batteries Orbital/space AI education
Hydro Bioenergy Maglev trains Fusion energy
Oil & gas Offshore wind Carbon capture and storage Geoengineering
Waste Liquefied natural gas Agri-infrastructure
Roads Co-living Nuclear & renewables decommissioning
Ports EV charging Flood defences
Shipping Bioscience parks Hydrogen
PPP/PFI Interconnections Water efficiency
Nursing homes Data centres Driverless transport
Student living Wave & tidal
Hospitals Geothermal
Sports/leisure Floating wind
Mobile towers
Solar PV
Onshore wind
2000 2020 2030 2040+
Then Now The Future
The Investment Adviser has identified emerging trends in hydrogen
infrastructure, water efficiency and floating wind projects. These trends have
the potential to generate the next wave of investment opportunities, provided
they are viable and align with the Fund's investment objectives. Looking
further ahead, infrastructure credit might play a role in future projects
involving nuclear fusion energy, which remains perpetually on the horizon, and
the burgeoning interest in the application of artificial intelligence in
education and assisted living.
In summary, the infrastructure sector presents numerous exciting
opportunities, and the Investment Adviser anticipates significant developments
in the market over the coming decades.
Our strategy for the coming year will be to target investments that maintain
the average credit quality of the portfolio, whilst hitting a target return of
9-10%. This is a slight amendment on the previous financial year, when we
aimed to improve credit quality, while maintaining portfolio yield: this
change in strategy simply reflects the credit improvements we have already
made and acknowledges that in a falling interest rate environment it is
unrealistic to expect that it will be possible to achieve ever-higher credit
quality without compromising on yield.
We are also mindful, of course, of other important portfolio characteristics,
such as having a diversified portfolio, spread across a range of sectors and
jurisdictions. We are fortunate that we continue to find ourselves able to
decline over 90% of the lending opportunities we encounter. This means we are
able to be highly selective in our approach to asset selection.
Team
Earlier this year, one of the founding directors of the Investment Adviser
retired to pursue other interests. Given the growth of our team over recent
years, there has been a seamless transition and effective handover of
responsibilities. We are also pleased that a number of senior team members
have been promoted to managing director, executive director and senior vice
president roles over the last few years. Additionally, the Investment Adviser
has experienced minimal staff turnover and is actively recruiting for junior
team members. A long-term incentive plan remains in place to retain existing
experienced team members. Consequently, the Investment Adviser continues to
maintain a knowledgeable and skilled team, essential for providing the
necessary investment advice to the Company.
Sequoia Investment Management Company Limited
Investment Adviser
25 June 2024
Case study
Project Octopus
Investment
£45.6m
12.0%
Yield-to-maturity
10
Bolt-on acquisitions
This year, SEQI participated in the term loan and upsized capex facilities of
Project Octopus, having supported the business since 2022. The loan benefits
from senior secured first-ranking position, robust financial covenants and a
margin ratchet to incentivise de-leveraging. Furthermore, the loan has an
ESG-linked ratchet which contemplates a margin reduction subject to strong ESG
performance verified by a third-party ESG rating report.
Project Octopus is a leading engineering services provider focusing on
expansion, reinforcement and maintenance of UK energy and telecom
infrastructure. Their utilities business unit is one of the UK's leading
contractors fully accredited to work in the power, water, gas and telecoms
sectors. Their energy design and engineering capability maintains power
infrastructure including underground cable systems, overhead lines and
substations. The company also deliver a full spectrum of water and wastewater
treatment projects. In telecoms, they support the ongoing development of the
UK's digital infrastructure, providing homes and businesses with enhanced
fibre and broadband capability and connectivity.
The company is backed by an experienced private equity investment firm, which
primarily invests in Europe and has 47 companies in its portfolio, with a
strong track record of investing in the engineering services sector.
Going forward, the company's utilities business unit will continue building
and renewing key parts of the UK's utility infrastructure that will be
suitable for decades to come. Their energy segment will be a pivotal
contractor as the UK undergoes the energy transition to a net zero future.
From deploying EV charging infrastructure to building battery energy storage
plants to undertaking micro-grids, the company will be an essential part of
securing safe and sustainable energy infrastructure for future generations.
As such, the asset benefits from strong industry tailwinds. Rapid adoption of
EVs, renewable generation, and rollout of fibre optic networks has created
strong market fundamentals in power and telecom infrastructure markets, with
PwC forecasting strong market growth until at least 2030. Due to its long-term
contracts with customers, the company has a strong visibility of cash flows
with ~85% of revenue plan between FY2022-FY2026 secured under framework
agreements with blue chip utilities and telecom players in the UK.
Since 2022, the company has also pursued acquisition growth, making several
bolt-on acquisitions to further enhance its capabilities. The company is also
resilient with infrastructure-like characteristics due to inflationary cost
passthrough mechanisms in its customer contracts.
Additionally, the company's strong ESG case is further supplemented by their
continued progress on internal sustainability initiatives. This year, the
company hired a new Safety, Health, Environment and Quality Director and a new
Head of ESG who have been very responsive to engagement with SEQI's Investment
Adviser. During the course of the year, the company also produced and shared a
new Environmental Strategy, which provides a thorough review of their current
environmental profile, discloses monthly scope 1, 2 and 3 emissions, and lays
out the planned initiatives to deliver on in order to reach net zero by 2040.
We look forward to continuing our relationship with the company and monitoring
the developments along their environmental strategy.
LINK TO ESG
Infrastructure with social benefits
Statement of comprehensive income
for the year ended 31 March 2024
Year ended Restated
31 March 2024 Year ended
£ 31 March 2023
£
Revenue
Net/gains on non-derivative financial assets at fair value through profit or 70,975,563 72,944,797
loss
Net gains/(losses) on derivative financial assets at fair value through profit 40,756,355 (96,628,102)
or loss
Investment income 20,023,606 34,760,783
Net foreign exchange gains/(losses) 161,656 (1,513,107)
Total revenue 131,917,180 9,564,371
Expenses
Investment Adviser fees 9,937,332 11,989,220
Investment Manager fees 401,973 369,422
Directors' fees and expenses 367,726 366,699
Administration fees 504,656 440,937
Auditor's fees 210,700 201,990
Legal and professional fees(1) 2,523,484 2,973,313
Valuation fees 733,100 741,000
Custodian fees 231,465 255,108
Listing, regulatory and statutory fees 142,101 143,257
Other expenses 512,949 497,307
Total operating expenses 15,565,486 17,978,253
Loan finance costs 5,926,840 9,534,772
Total expenses 21,492,326 27,513,025
Profit and total comprehensive income/(loss) for the year 110,424,854 (17,948,654)
Basic and diluted earnings/(loss) per Ordinary Share 6.58p (1.02)p
1. Legal and professional fees include an amount of £1,237,263 (2023:
£2,218,093) in respect of fees relating to the Fund's investment in Bulb
Energy.
All items in the above statement are from continuing operations.
Statement of changes in Shareholders' equity
for the year ended 31 March 2024
Year ended 31 March 2024 Share capital Retained losses Total
£ £ £
At 1 April 2023 1,808,622,511 (190,769,209) 1,617,853,302
Ordinary Shares buybacks during the year (88,170,418) - (88,170,418)
Total comprehensive income for the year - 110,424,854 110,424,854
Dividends paid during the year - (115,825,192) (115,825,192)
At 31 March 2024 1,720,452,093 (196,169,547) 1,524,282,546
Year ended 31 March 2023 Share capital Retained losses Total
£ £ £
At 1 April 2022 1,837,390,531 (60,347,699) 1,777,042,832
Ordinary Shares buybacks during the year (28,768,020) - (28,768,020)
Total comprehensive loss for the year - (17,948,654) (17,948,654)
Dividends paid during the year - (112,472,856) (112,472,856)
At 31 March 2023 1,808,622,511 (190,769,209) 1,617,853,302
Statement of financial position
at 31 March 2024
31 March 2024 Restated
£ 31 March 2023
£
Non-current assets
Non-derivative financial assets at fair value through profit or loss 1,493,171,675 1,803,011,023
Current assets
Cash and cash equivalents 7,507,495 7,363,120
Trade and other receivables 602,507 1,605,043
Derivative financial assets at fair value through profit or loss 28,098,804 23,254,199
Total current assets 36,208,806 32,222,362
Total assets 1,529,380,481 1,835,233,385
Current liabilities
Trade and other payables 4,322,344 4,530,899
Derivative financial liabilities at fair value through profit or loss 775,591 31,060,322
Total current liabilities 5,097,935 35,591,221
Non-current liabilities
Loan payable - 181,788,862
Total liabilities 5,097,935 217,380,083
Net assets 1,524,282,546 1,617,853,302
Equity
Share capital 1,720,452,093 1,808,622,511
Retained losses (196,169,547) (190,769,209)
Total equity 1,524,282,546 1,617,853,302
Number of Ordinary Shares 1,625,484,274 1,734,819,553
Net asset value per Ordinary Share 93.77p 93.26p
The Financial Statements were approved and authorised for issue by the Board
of Directors on 25 June 2024 and signed on its behalf by:
Fiona Le Poidevin
Director
Statement of cash flows
for the year ended 31 March 2024
31 March 2024 Restated
£ 31 March 2023
£
Cash flows from operating activities
Profit/(loss) for the year 110,424,854 (17,948,654)
Adjusted for:
Net gains on non-derivative financial assets at fair value through profit or (70,975,563) (72,944,797)
loss
Net (gains)/losses on derivative financial assets at fair value through profit (40,756,355) 96,628,102
or loss
Investment income (20,023,606) (34,760,783)
Net foreign exchange (gains)/losses (161,656) 1,513,107
Loan finance costs 5,926,840 9,534,772
Decrease in trade and other receivables (excluding prepaid finance costs and 52,156 521,871
investment income)
(Decrease)/increase in trade and other payables (excluding accrued finance (546,980) 67,578
costs, investment income and Ordinary Share buybacks)
(16,060,310) (17,388,804)
Cash received on settled forward contracts 31,086,892 16,174,078
Cash paid on settled forward contracts (25,459,874) (124,603,014)
Cash investment income received 131,219,401 122,355,919
Purchases of investments (349,917,050) (302,102,305)
Sales of investments 619,536,166 394,522,483
Net cash inflow from operating activities 390,405,225 88,958,357
Cash flows from financing activities
Proceeds from loan drawdowns 77,384,713 138,712,919
Loan repayments (256,710,836) (80,000,000)
Payment of loan finance costs (4,810,404) (9,058,791)
Ordinary Share buybacks (87,992,882) (27,770,733)
Dividends paid (115,825,192) (112,472,856)
Net cash outflow from financing activities (387,954,601) (90,589,461)
Net increase/(decrease) in cash and cash equivalents 2,450,624 (1,631,104)
Cash and cash equivalents at beginning of year 7,363,120 8,759,040
Effect of foreign exchange rate changes on cash and cash equivalents during (2,306,249) 235,184
the year
Cash and cash equivalents at end of year 7,507,495 7,363,120
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