The upcoming UK infrastructure strategy – opportunity or distraction?

Recent announcements from the UK Prime Minister and Chancellor have highlighted their desire to increase infrastructure investment substantially as a way to meet societal needs and to drive growth. With the government’s 10-year strategy for infrastructure due to be published later this year, this is potentially a pivotal moment for private investment in UK infrastructure and established investment specialists like HICL Infrastructure PLC (HICL).

 

But, before exploring the opportunity in detail and its relative attractiveness, let’s take a step back and put this into context of HICL’s approach and strategy.

 

Portfolio composition is essential

 

The current economic environment creates a new context for core infrastructure investors like HICL. Macro-economic volatility demands the resilient characteristics inherent in core infrastructure, underpinned by highly visible long-term cashflows from essential assets. Equally, a higher interest rate environment requires that investment companies further enhance these stable income streams, delivering inflation correlated returns and the potential for long-term earnings growth.

 

This is a central reason why we have been continuing to evolve HICL’s portfolio of 100+ core infrastructure assets positioned across the UK, Europe, North America and Australia & New Zealand. Over recent years, our portfolio construction has been deliberately and selectively weighted towards high quality infrastructure assets positioned for growth, via the build-out of their capital bases. We have sought to do this without compromising those key elements that define HICL’s core infrastructure positioning: critical assets delivering long-dated, stable and inflation-linked cash flows from a protected market position.

 

In this way, the make-up and structure of HICL’s portfolio is critical. With a strategy that prioritises active management and selective asset rotation, we are well-positioned to selectively capture attractive investment opportunities as they arise, where these enhance portfolio construction and long-term shareholder value. And, at present, there are some attractive entry points for core infrastructure internationally.

 

So, with that in mind, let’s return to the question of the upcoming UK infrastructure investment opportunity.

 

A new dawn for UK infrastructure investing?

 

To achieve the government’s substantial ambition, there is a real need for both the public sector and private capital to collaborate effectively. Specialist infrastructure investors bring expertise and proven execution capabilities to these partnerships with public entities. Such a framework is essential to provide investors with a stable risk profile to attract long-term capital at the right cost and in the right quantum, serving to deliver the infrastructure that meets society’s evolving needs and to stimulate economic growth.

 

Historically, models like the Private Finance Initiative (PFI) have played significant roles in UK infrastructure development. There’s now a pressing need for a new public-private cooperation model—one that retains successful elements of past initiatives while learning from their shortcomings.

 

This evolved model should be less cumbersome, allowing private capital to engage more dynamically with public projects. By fostering competition among private investors, we can ensure taxpayers receive optimal value without compromising on quality, innovation or efficiency.

 

As international investors we are cognisant that the infrastructure opportunity is a global one. Across geographies we see an almost universal need for investment into existing and new infrastructure, whether into transport, healthcare, electricity grid or digital infrastructure. McKinsey estimates that an average of $3.7 trillion per year of infrastructure investment is required globally by 2035, just to keep pace with economic growth.

 

Capital is mobile, and the UK has recently been struggling to attract it on the global stage. The government needs to ensure that the UK re-establishes its position as a pre-eminent infrastructure investment destination. To do this it must put in place a consistent regulatory framework and long-term direction that clearly signals predictability and stability to make the upcoming opportunity as attractive as possible.

 

Selection is critical

 

As an international investor, we look at opportunities across our target markets in search of the right risk and return for HICL’s strategy. Our global platform and deep networks enable us to compare markets, sectors and assets to originate the highest quality transactions. Take the global market’s huge investment in fibre over recent years across different countries: local idiosyncrasies in market structure and regulatory oversight result in assets with vastly differing risk profiles. This provides us with a pool of alternative investment options to support our portfolio ambitions. In recent years, HICL has invested in rural French fibre following a targeted effort to enter that market due to its regulated market structure, wholesale positioning and predictable long-term cashflows. This contrasts to the UK or German fibre markets, which we see as highly competitive with retail interface and therefore have a higher risk and return profile.

 

So, the attractiveness of new UK infrastructure investment remains in the hands of the government. What is for sure is that, whether in the UK or in other major economies, opportunities exist to support our portfolio construction ambitions. To do this, we will draw on our in-depth knowledge of local markets combined with our deep regional networks, as we seek to access the most attractive infrastructure investments for HICL.

Selection, as ever, is critical.

 

– Edward Hunt, Head of Core Infrastructure Funds

 

 

 

 

 

 

DISCLAIMER: This article does not constitute or form part of, and should not be construed as, an offer, invitation or inducement to purchase or subscribe for any securities nor shall it or any part of it form the basis of, or be relied upon in connection with, any contract or commitment whatsoever. This document does not constitute a recommendation regarding the securities of HICL. The value of investments and the income from them can fall and investors may get back less than the amount invested. Past performance is not a guide to future results.