3i Infrastructure’s focus on essential services pays off

3i Infrastructure [LON:3IN] is a GBP3.8bn Jersey-domiciled investment trust managed by infrastructure specialist 3i LON:III that aims to provide shareholders with a total return of 8% to 10% per annum, to be achieved over the medium term, with a progressive annual dividend per share through maintaining a balanced portfolio of infrastructure investments delivering an attractive mix of income yield and capital appreciation for shareholders.

The 3i fund is in the Association of Investment Companies’ (AIC) Infrastructure sector, a sector comprising nine funds, and is the largest fund in that sector. 3i is an investment company that operates in the Private Equity and Infrastructure sub-sectors, specialising in core investment markets in northern Europe and North America and says that it creates value: “through thoughtful origination, disciplined investment and active management of our assets, driving sustainable growth in our investee companies.”

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Launched in March 2007, the fund is managed by Scott Moseley, managing partner and co-head of European Infrastructure UK and Bernardo Sottomayor, who shares Moseley’s job title. Moseley has been with 3i since 2007, with Sottomayor joining in 2015. The investment mangers also sit on the boards of many of their investee companies.

Theme-driven megatrends

The fund is theme-driven, with the investment team looking to identify megatrends which include the transition of energy from a hydrocarbon-based system to renewables; digitalisation, the growth of automation and digital operations; demographic change, especially with an aging population in its key markets, the demand for healthcare; and the upgrade/renewal of existing essential infrastructure, specifically with the global trend to ‘smart cities’.

Despite the thematic nature of investments, 3i has a very disciplined investment process that enshrines geographic diversification and will look at a number of sectors. Moseley and Sottomayor seek businesses that combine a base of strong cash flow resilience, for example, contracted revenues, with high through-cycle underlying market growth fundamentals and operational improvements, and M&A opportunities.

The managers like asset-intensive businesses, namely companies that own or have exclusive access under long-term contracts to assets that are essential to deliver the service and of these high barriers to entry, or assets that require time and significant capital or technical expertise to develop, with low risk of technological disruption.

Companies that make the cut must provide essential services, such as energy, water, broadband or roads, and have a decent track record, enjoying a long-standing position, reputation and relationship with their customers – leading to high renewal and retention rates.

Moseley and Sottomayor target companies that have good visibility of future earnings, displaying long-term contracts or sustainable demand that allow them to forecast future performance with a reasonable degree of confidence. But the managers just don’t want a company that’s happy to sit around on an essential piece of infrastructure and just pay its directors and shareholders no-risk returns whilst sewage leaks in to sea. Instead they want to partner with companies that are always innovating and improving, that accept an acceptable level of market risk and show the opportunity to grow or to develop the business into new markets, either organically or through targeted M&A.

Uncorrelated asset class

Underpinning all this is a commitment to sustainability. Infrastructure assets typically have a low correlation with other asset classes, including listed equities, real estate and fixed income and the quality and predictability of their cash flows tend to provide for stable returns to shareholders over time. 3i aims to invest across a range of economic infrastructure sectors.

The company is a top performer across the board. In the last 12 months (to 9th August) 3i Infrastructure returned (on a share price total return basis) +14.9% against a sector average of +5.3%. Over five-years the fund beat its sector peer average by 31.2 percentage points, returning +40.3%. If you’d have invested in the fund 10-years ago, you’d now be enjoying a +226.5% return – a country mile and then some ahead of the sector average of +94.2%

3i Infrastructure has had a five-year dividend growth of 6.6% per annum, declaring a dividend per share of 5.95p in July, the same as in November 2023 and trades at a discount to premium of -6.01%. The fund has an ongoing charge of 1.65%.

3i Infrastructure Top five holdings 

Source: 3i (31st March 2024)

3i Infrastructure has consistently outperformed its peers, delivering impressive returns for investors. Its focus on essential infrastructure, coupled with a disciplined investment approach, has positioned it as a strong player in the infrastructure investment space.