With many investment trusts focused on infrastructure and renewables trading on significant discounts to net asset values, broker Stifel said the chances of "predatory activity are increasing".
It was five years ago, but the deal to take John Laing Infrastructure Fund Limited (LSE:JLIF) private in 2018 "set a precedent" for M&A activity in this sector, said analyst Iain Scouller, and could have read-across to today's marketplace.
If a bid were to materialise for either an infrastructure or renewables fund, "it would probably spark a significant sector re-rating", he said.
Back in 2018, JLIF was snapped up after a recommended £1.45bn bid from a consortium of Equitix and Dalmore Capital, following the shares and the wider sector moving from a premium to trading on around a 10% discount to NAV due to wider worries.
On the day the offer was first announced at a 9% premium to NAV, JLIF shares rose almost 22% and sector peers HICL Infrastructure Company Limited (LSE:HICL) and International Public Partnerships Ltd (LSE:INPP) both rose on the read-across, Scouller noted.
While there were attractions for the bidder, in the ready-made portfolio of 65 operational projects, diversified by type, and with an opportunity to take advantage of the market de-rating and intrinsic value in portfolio, Scouller said the hurdle was that as well as pitching an offer high enough to entice shareholder agreement, "which we think would need to be at least NAV and in many cases a premium to NAV", there was also debt structures and management termination compensation to think about.
On the debt, he said most trusts use short-term bank debt, where the repayment costs are likely to be minimal, (apart from HICL, which employs longer-term structural debt), while management fees are typically circa 1% per annum and notice periods range from five years at INPP to six months at Sequoia Economic Infrastructure Income Fund Limited (LSE:SEQI).
"We don’t think these potential hurdles are an insurmountable amount for a determined bidder," he said.
Given current share prices, rising share price discounts to NAV and the ‘implied’ discount rates on the portfolios, Scouller said he thinks both the infrastructure and renewables sectors are "at increased risk of some predatory interest from private funds (LPs) that may have significant cash to deploy in these sectors".
On the renewables side, with oil companies facing investor pressure to increase their exposure to renewable energy investments, "we think these listed funds could offer an attractive source of ‘ready-made’ operational portfolios for predators", with many portfolios that are reasonably diversified.
Stifel noted that the biggest discount in the infra sector is at GCP, at around 30%, followed by HILC at 21%, Pantheon Infrastructure PLC (LSE:PINT) and Sequioia at 18%, INPP at 17%, BBGI Global Infrastructure at 11% and 3i Infrastructure PLC (LSE:3IN) the smallest at 6%.