The UK’s infrastructure investment sector is facing a severe downturn, with data from asset manager abrdn revealing the negative impact of cost disclosure rules.
According to the research, London-listed closed-end infrastructure investment companies (ICs) are set to experience a three-year gap without raising primary capital for the first time. The UK government and the Financial Conduct Authority have acknowledged the issue and initiated a consultation process while temporarily exempting investment trusts from the cost disclosure rules.
The dual pressures of rising interest rates and stringent cost disclosure rules have caused a sharp decline in fundraising. Both 2022 and 2023 saw no primary capital raised, a trend that continues into 2024. This is only the second time in 18 years that the sector has faced two consecutive years without IPOs, the first being during the 2008-2009 financial crisis.
In the secondary market, capital raised has also plummeted. Infrastructure ICs have raised just £11 million so far in 2024, a dramatic drop compared to the £121 million raised in 2009, previously the worst year. To put it in perspective, £11 million would only cover half the annual infrastructure budget of Edinburgh City Council.
While rising interest rates have played a role, abrdn emphasised that the cost disclosure rules have had an outsized negative impact. By inflating the perceived cost of investing in ICs, these rules have diminished investor confidence in this crucial sector, which is vital for UK growth and the development of essential infrastructure, it added.
Christian Pittard, head of closed-end funds at abrdn, said: “The new government has made boosting economic growth – by channelling capital into areas like renewable energy and infrastructure– its raison d’etre.
These funds already invest billions into these areas – delivering crucial economic growth projects. However, cost disclosure rules, which have amounted to a distortive “double counting” of costs, have negatively impacted investor sentiment, therefore choking flows into investment trusts. They have been a key cause of these three lost years of infrastructure investment.
Welcoming the move by the government and the FCA to address unfair and distortive rules that have crippled investment trusts. “We believe this decision rightly reflects the government’s stated aim of making the UK an attractive place to invest and we are encouraged by the announcement to make these measures permanent.”