GCPII launched in July 2010, GCPSL in May last year and GCPSID in December. All are managed by Gravis Capital Partners, a six-strong partnership who are mostly ex-DTZ corporate finance. They also manage an Oeic along the same lines.
GCPII is now a £450 million fund, having just added another £80 million in a C-share and completed a deal to restructure the way it invests.
GCPII invests in the debt portion of the funding structure that supports public/private infrastructure (PPI) and private finance initiative (PFI) infrastructure projects in the UK. The funding of most big projects comprises a mix of debt and equity.
Some other closed-end infrastructure companies hold some debt in their portfolios but mostly they invest in the equity part of the capital structure.
GCPII is the only listed fund that specialises in the debt portion. The debt it holds may be mezzanine level finance, subordinate in the capital structure or more highly rated debt but, as it ranks above the equity, GCPII is cushioned if anything goes wrong.
The cashflows that service its debt are also largely sourced from government and local authorities, making these vehicles less risky than structured corporate debt.
Additionally, their cashflow often has a degree of inflation protection built in. Even with all these safeguards, GCPII’s ethos is to ensure its portfolio is fairly well diversified (maximum 10% in any single project). GCPII has exposure to assets under construction (between 10% and 15% of the portfolio), this adds a little to the risk. GCPII can be geared up to 20% but is not geared at the moment.
GCPII is targeting returns of 8% per annum, quite attractive given the degree of risk control built into the fund, and this accounts for it having traded at a premium since launch. Most of that comes back as dividend; GCPII has just switched to paying quarterly dividends, currently running at 1.9p per quarter.
There is increasing competition for large PFI-style infrastructure assets but GCP has been diversifying its portfolio into smaller projects and says there is still demand for subordinated debt. The portfolio is spread across 32 holdings and PFI assets make up less than 50% of this.
The balance is spread across: rooftop solar (funding the installation of domestic solar panels); biomass (wood fuelled, combined heat and power plants); anaerobic digestion (generating energy from farm waste); onshore wind (generally small wind turbine projects); and commercial solar projects, all of which benefit from predictable government-backed cashflow.
GCP tried financing the installation of small biomass boilers on commercial premises but it turned out demand was not that great, so it has recycled that money into other ventures.
GCPSL is a real estate investment trust that invests in student accommodation. The idea is that it generates a total return of 8-10% per annum and pays out an initial dividend of 5.5%, which grows in line with inflation. It only holds completed buildings (no assets under construction).
The first projects it acquired were Scape East, a 588-bed building opposite Queen Mary University in Mile End, and The Pad, a 116-bed building next to Royal Holloway, both in London. It has committed to buy a 140-bed scheme at the University of Surrey in Guildford that will be finished in Q3 2015, and is acquiring a 280-bed block in Greenwich near to Ravensbourne College.
GCPSL raised £70 million in its initial offering and the issue was well over subscribed. Right now it is in the process of raising a further £40 million to fund the acquisition of Scape Greenwich, and I would expect it to come back to the market looking for more in the future.
Targeting the Gulf
GCPSID was established to invest in infrastructure debt funding associated with projects in the Gulf region of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. The debt will be denominated in US dollars and the target is to produce a return of at least 7% and a 5% dividend yield.
The target was to raise up to $250 million but, unlike the other two funds, the GCPSID issue was undersubscribed, raising $125 million. The prospectus set out a pipeline of $350 million of potential investments power plants in Bahrain, Oman, Saudi Arabia and Abu Dhabi, and a university and a cooling plant in Abu Dhabi.
However, to date, the fund has not made any investments due to complications over its borrowing terms. It will be interesting to see if the premium now dissipates.
James Carthew is a director at Marten & Co