Sullivan says the sell-off in infrastructure funds in recent months is, at least in part, a function of investors anticipating the future write down in the value of the assets held in those funds.
Gilligan says: “The average discount rate for the HICL Infrastructure portfolio, for example, was 6.8 per cent in the company’s last set of results in June.
"Another way of looking at this is that if everything goes according to plan (that is, based on management assumptions about the income it receives, economic conditions, etc) the portfolio will grow by 6.8 per cent over the next year.
"This discount rate will almost certainly rise by the time of the next company disclosure at the full year results in December, unless we see bond yields reverse dramatically. But markets don’t wait. They adjust prices now.”
Matthew Hose, an equity analyst at Jefferies, says: “While in the past movements in long-term government bond yields have not directly influenced portfolio valuations, nominal yields have now reached a level where the risk premium 'buffer' for some funds is effectively gone, meaning further yield movements have the potential to translate into discount rate increases.
"The caveats here are that discount rates are also dependent on transactions (which should eventually reflect the yield environment), and that funds' inflation-linkage, and to a lesser extent any deposit rate sensitivity, act as potential offsets.”
Thor Johnsen, fund manager of the Digital 9 Infrastructure fund, acknowledges that the risk-free rate has risen in recent months, with this having an impact on the share prices of infrastructure funds.
But he says: “The point is these assets are very long term, the revenues are long term as well. We own digital infrastructure assets, those are things that are a structural growth story. Of course all assets in this space are impacted by risk-free rates and discount rates, but those are short-term factors.”
There is an element of subjectivity to all discount rates, with some fund providers choosing a more aggressive number than others, reflecting the different levels of risk associated with different types of infrastructure.
Gilligan says his preference right now is for infrastructure funds that invest in social housing and other assets of that kind, rather than renewable energy assets, as there is “less certainty” around the reliability of the cash flows of the latter.
