It’s not always easy for non-institutional investors to get direct exposure to the bond and loan markets, particularly with respect to private debt.
By their very nature such loans are illiquid and not easy to trade into or out of.
That’s where Sequoia Economic Infrastructure Income Fund (LON:SEQI) comes in.
Sequoia listed on the main board of the London Stock Exchange back in March of this year, with a simple proposition.
It would invest the initial £147 mln seed money that it raised on listing, net of costs, in loans and bonds in the infrastructure arena.
To date, it’s about 60% invested, and Steve Cook, the company’s portfolio manager, is confident that the rest of the money will be invested within the next few months.
The aim, primarily, is yield.
“Loans as private debt yield more,” says Cook. “Because of the illiquidity premium they yield between 6% and 10%.”
And that yield is something he’s planning to pass on to his investors in the straightforward form of a dividend.
“We are targeting a 6% dividend yield,” he says, “alongside 1-to-2% capital appreciation. That will give a total return of 7-to-8%.”
The portfolio is currently about two-thirds weighted by value in favour of loans against bonds and that, says Cook, is likely to increase to three-quarters over time.
The attraction of the loans is the yield, while the bonds offer a balance of liquidity.
All of the company’s bonds and loans are secured against the infrastructure assets they are funding, and risk is further mitigated by a judicious spread of assets both geographically and in terms of sector.
Thus, explains Cook, the company is exposed to transport, utilities and renewables in the UK, Western Europe and North America.
Going into higher risk areas is a no-go, however.
“They’ve got to be in investment grade countries in the OECD,” says Cook. “That’s set in stone.”
Thus Sequoia’s biggest positions are in a UK waste management and recycling business, a highway in the US, a Las Vegas water company, and a US-based shipping company.
What’s more Sequoia’s approach tends to steer clear of early stage debt when the risks associated with new infrastructure tend to be greater.
Cook gives the example of a toll road, where traffic flows can only be forecast before construction is complete and a certain amount of time has elapsed before accurate data can be gathered.
“We’ve got relatively little early stage debt,” he says. “We’ve got no construction risk. All the loans are backed by the assets. You’ve got to have good quality.”
That approach has thus far found plenty of favour with investors.
Sequoia has consistently traded a slight premium to net asset value (NAV) since it listed.
“That’s reflective of the fact that there’s not really any other funds doing what we’re doing,” says Cook.
It’s also because the team behind Sequoia are bringing huge experience of infrastructure and the debt markets to bear on what is still after all, a relatively small company.
Cook himself was a senior figure at UBS for many years, heading up the commercial mortgage-backed securities and corporate and infrastructure securitisation businesses.
Chairman Robert Jennings is also non-executive chairman of Southern Water and sits as a non-executive director of Crossrail, London’s largest ongoing infrastructure development by far.
And Sequoia non-exec Jan Pethick is a former chairman of Merrill Lynch International Debt Capital Markets.
These guys know the bond and debt businesses, and they know infrastructure.
And in all these spaces there’s plenty going on.
Recent commentary from Sequoia highlights that during June 12 infrastructure transactions globally accounted for US$13 bln worth of business across a wide range of projects, including waste, motorways, healthcare, and renewables.
Clearly it’s a sector that’s humming, although Sequoia does add that during June a relative decline in the dollar-sterling valuation actually trimmed its own NAV slightly, back by 1.7% to 95.92p.
At that stage there was still cash in the bank of £71.1 mln, with £72.7 mln invested across 12 infrastructure bonds and four loans.
But if the pace of deals done in June is anything to go by – four loans and two bonds - is maintained, Cook’s plans to deploy the remaining cash ought rapidly to be realised.
After that it will be all about reaping the yield.