'Core plus' infrastructure investment trusts offer an attractive dual focus, analysts at Peel Hunt said in an initiation note on the sub-sector, with typical infrastructure characteristics of embedded downside protection and stable cashflows "augmented with higher growth potential".
Traditional infrastructure investment offered investors stable cashflows backed by real assets such as roads, bridges, airports and ports.
In 2007 3i Infrastructure PLC (LSE:3IN) floated to offer ‘core-plus’ infrastructure, targeting investment in real assets supporting secular growth in the energy transition and digitalisation, with the latter including towers, data centres and fibre networks.
In 2021 it was joined on the market by three new peers: Cordiant Digital Infrastructure Ltd (LSE:CORD) Digital 9 Infrastructure PLC (LSE:DGI9) and Pantheon Infrastructure PLC (LSE:PINT).
All three newcomers provide exposure to "core-plus infrastructure assets through investment in operational business platforms", analyst Anthony Leatham said, tapping into an estimated US$13 trillion infrastructure spending gap projected out to 2040 created by global trends such as 5G devices, renewable energy and coal power retirements.
"Without digital infrastructure, the internet, and consequently the world as we know it, would cease to function. Technological developments rapidly move apace; ChatGPT, the metaverse, cryptocurrencies, self-driving cars, remote healthcare, precision farming, digitised logistics and much more.
"All of these would generate massive quantities of data, and would require the compute and storage capabilities provided by digital infrastructure providers. This, in turn, underpins the durability of digital infrastructure growth over the longer term."
How they differ
Unlike traditional infrastructure trusts, this quartet typically invests through operational platform businesses, Leatham said, with these operational businesses typically having their own management teams as opposed to standalone assets owned through individual vehicles.
So each of the four companies' respective portfolio assets can therefore be viewed as "distinct corporate entities", with investment manager language focusing on EBITDA, profit margins and valuations, while growth is often described as being pursued through organic revenue uplifts or inorganically via bolt-on acquisitions.
"Despite this approach (and language) these strategies still fundamentally offer look-through access to tangible real assets, often benefitting from long-term cashflow visibility and inflation linkage."
3i and Pantheon
3IN and PINT offer diversified, core-plus infrastructure exposure, with the latter gaining exposure through a unique strategy focused on co-investment.
CORD and DGI9 have digital sub-sector specialist strategies, but each, the analyst said, benefits from "secular growth themes, and active asset management applied to operational platform businesses backed by real assets".
3IN is the most established in the sector, has delivered annualised net asset value (NAV) total return (TR) of 12.3% since launch, driven by the “intense” asset management approach taken by the investment manager, and is currently trading at the narrowest discount in the Infrastructure – Equity peer group, at -1%. Peel Hunt has a ‘neutral’ rating.
While 3IN is often the 'default' choice of investors in the sector PINT, the smallest of the four, is Peel Hunt's pick of the more diversified pair.
Having so far committed over £400mln diversified across sectors, geographies and lead sponsors, its co-investment strategy benefits from typically no fees at the investment level "and the ability to engage in considered portfolio construction", says the analyst, with exposure to North America versus 3IN's European focus, and diversification with respect to the sponsor of each transaction, including KKR, Apollo and Digital Bridge.
"Whilst PINT does not benefit from the same control over investments that 3IN’s typically majority ownership stake investments afford, we take comfort in the fact that investors in PINT benefit from the stategic value that sponsors such as KKR will be seeking to build in the underlying portfolio companies," Leatham said.
PINT shares stand on a 12% discount to an end-December 2022 NAV and the analyst, bestowing an 'outperform' rating, believes it "represents the more compelling opportunity".
Cordiant and Digital 9
Both Cordiant and Digital 9, the latter being a corporate client of the broker, are also given 'outperform' recommendations, having both deployed their equity funds raised since launch.
Their portfolios are quite different, Leatham said.
CORD has two large towers businesses in Czechia and Poland that are diversified by underlying revenue generation and growth drivers, supported by a smaller third position in a US data centre business, though it has funding capacity available for further investment.
DGI9 has exposure to three key investments and six smaller holdings, including a broader mix of sub-sectors, including data centres, subsea fibre cables and terrestrial fibre, along with geographic exposure to the UK and Northern Europe.
CORD's discount is roughly 22% to an end-September NAV and DGI9 on nearer 41% to an end-December NAV.