With physically-backed assets, generally reliable income streams and plenty of government support should anything go wrong, it’s easily understandable why sovereign wealth funds and private equity firms have fallen head-over-heels in love with investing in infrastructure. Thankfully, you don’t need to be ultra wealthy to invest in these projects through publicly listed, high-yielding, closed-ended funds such as NextEnergy Solar Fund (LSE: NESF) and GCP Infrastructure Investments (LSE: GCP).
Powering up for a bright future
As its name suggest, NextEnergy Solar Fund invests in solar energy plants across the UK. The fund seeks to offer a healthy dividend that rises in line with inflation by returning income from electricity sold. In the year to March the fund paid out a 5.49% yielding 6.31p dividend that was covered 1.2 times by cash income and is targeting a 6.42p dividend next year given currently predicted inflation levels.
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On top of a very impressive dividend yield, the fund also offers fairly good capital appreciation prospects over the long term. This growth comes from reinvesting excess cash in new plants, as well as semi-frequent capital calls when the fund manager sees attractively priced assets for sale or believes they can expand existing sites.
The latest placing took place post-year-end in early June and raised £126.5m by issuing 115m new shares at 110p each. Together with the £100m of cash on hand prior to this share placement, the fund is moving forward with plans to purchase existing plants and build new ones for a total of around £250m.
The future for these projects is looking increasingly bright as operating costs and the price of solar panels continue to fall fast enough that the fund manager reckons its plants will be profitable, even without government subsidies within the next 12-24 months.
With the increased focus on renewable energy generation, plenty of growth opportunities and a very impressive dividend, I reckon NextEnergy Solar Fund shares could be a great income option despite trading at roughly a 10% premium to their net asset value (NAV).
A less sun-dependent option
The GCP Infrastructure Investments fund is a more diversified option that also offers investors a very nice dividend that currently yields 5.92%. This fund invests in the debt of everything from wind farms in Northern Ireland to schools in Scotland and healthcare centres in Norfolk.
The income and principal from the long-term debt issuances it invests in are generally backed by public sector funds and are diversified enough so that no single project accounts for more than 10% of the fund’s NAV.
In addition to the steady dividend that is paid out from these proceeds, the fund also offers the prospect of capital gains through reinvesting principal repayments, as well as raising cash from investors from time to time. The latest rights issue raised £90m, which together with existing cash reserves and debt facilities allowed for the purchase of £74m of new loans, as well as striking an agreement to buy £140m of debt from the government’s privatisation of the Green Investment Bank.
This sale makes clear that the government and investors, for better or worse, both see private investment in infrastructure as the way forward. Given this political climate, plus its diversified portfolio of debt and great dividend, the GCP Infrastructure Fund is worth a closer look even at a 17% premium to its NAV.