November 21, 2025 • 26 mins
In this week’s Merryn Talks Money market wrap, Merryn Somerset Webb and John Stepek sit down with Chris Clothier, Co-CIO of CGAM to discuss the proposed merger of two of the largest infrastructure investment trusts on the London market, HICL Infrastructure Company and The Renewables Infrastructure Group (TRIG). Fund managers at CGAM are "appalled" by the proposal. Clothier sits down with our usual hosts to explain why and what investors can do about it. The trio also talk about the upcoming budget and the collapse in central London house prices.
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, Radio News. Welcome to the Marin
Dogs Money Market Wrap, when we talk about the biggest
moves in the market this week and what is driving them.
(00:24):
I'm Arin zum stepweb editor Allows with Bloomberg UK Wealth, and.
Speaker 2 (00:27):
I'm joined Stepbeg, Senior Report an author of the Money
Distilled newsletter.
Speaker 1 (00:33):
Okay, now, John, for this week's chat. You suggested inviting
a guest who has come into the London studio. We
don't do this very often because of course John and
I are so expert we can talk about it absolutely
anything anytime, but we do know that a lot of
our listeners are very interested in investing in investment trust.
There's a big story there this week. So John, who
have you asked on.
Speaker 2 (00:52):
Advised on the one focus Cloudier of capital getting asset
management and I had sort of chatted to Curse the
earlier this week about this particular deal, and I think
it's probably the reason what we see the UKs are
not overly enthusiastic about the prospect once we got to
(01:14):
explain what the actual deal is fast.
Speaker 1 (01:17):
Yes, absolutely, and we will just as it started to
this that there's a lot of activity in the Investment
Trust SECTORHYTHM. I'm down and aul lot of discussion about activity.
So this is about one specific deal, but there is
a lot going on. So over to you, Chris, tell
us about this deal and why you are so appalled
by it to use your own language.
Speaker 3 (01:34):
Thanks very much, Marion, Thank you John for having me on.
Really appreciate it. And yes, indeed, appalled was the word
that we chose to use in our letter to the Chairman,
which we also made public earlier in the week. So
what's going on here is that there are two infrastructure
investment trusts. The first is HICKEL, which has been on
(01:54):
the market since two thousand and six. It's a well
loved core infrastructure fund. And then there is a second,
which is a trig or, the Renewables Infrastructure Group, which
as the name suggests, invests in renewables infrastructure. And now
they're both managed by the same fund manager, Infrared Partners,
(02:18):
and they have proposed merging the two vehicles together.
Speaker 2 (02:22):
And just to double JC when you see core infrastructure,
Chris for heckle, what do you mean by that?
Speaker 3 (02:29):
So HICKEL owns things like PFI contracts, so hospitals, schools,
it owns toll roads, it has an investment in the
water sector, which is perhaps not everybody's cup of tea.
It owns HS one, which is the high speed rail concession.
Those sorts of assets I saw.
Speaker 2 (02:48):
It's completely definite set of ices. So you're talking about
lots of yes, core stuff. And then what they're doing
is an emerging with this company that basically owns wind
farms and sol panels.
Speaker 3 (03:01):
Are wind farms, solar and increasingly some exposure to battery
storage and both in the UK and overseas.
Speaker 1 (03:10):
Yeah, that's correct, Cool, okay, And we should start by
before we move on to the meursur itself and explaining,
if you wouln't mind, Christ why these trusts have both
been trading on fairly hefty discounts. Sure, but of course
there's the problem.
Speaker 3 (03:23):
Indeed. Indeed, so the first thing to say is that
these vehicles are all to some extent bond proxies, and
so as interest rates have risen, so we've seen the
net present value of the cash flows associated with these
trusts fall and therefore the prices have fallen. Then, in
addition to which is I'm sure you guys have talked
(03:44):
about lots on the show you know, the investment trust
sector has been somewhat out of favor, and fundamentally you've
just got more sellers than buyers, and that pushes down prices.
And of course, unlike an open ended fund, where you know,
units are created and redeemed and therefore supply naturally meets demand,
that the supply of shares in the investment trust sector
(04:07):
is at least in the short term fixed. So that
explains the kind of general malaise. But on top of that,
renewable infrastructure funds have been really badly hit over the
last couple of years, and then over the last few weeks.
Why is that. Well, in the first instance, shortly after
the invasion of Ukraine, the government put in place an
(04:29):
extraordinary profit levy which hit renewable power generators particularly hard. Then,
more generally, there have been concerns that these vehicles may
have overstated their assets because a number of them have
had assets for sale and have not been able to
realize assets and anything approaching the book values of them.
(04:50):
And then finally, in the last couple of weeks we've
seen these proposals floated by the government to retrospectively change
the subsidy regime. And relating to renewable infrastructure here in
the UK, and obviously that's just made matters worse. And then,
of course the final thing is just that there's a
Investors have come to realize that the cash flows associated
(05:14):
with core infrastructure are really pretty predictable and so you
can have a much greater confidence in those. Conversely, with
the renewables funds we've seen. Obviously, they are affected by
the power price, and they're affected by variation in wind
speed and all of these other things, and so investors
I think have come to realize that they are a
(05:37):
less certain proposition and therefore require a higher discount rate.
Speaker 1 (05:40):
Okay, so from what you say already, I think John
and I are both thinking, well, why would you merge
these two things?
Speaker 3 (05:47):
I would have to agree with you there, but I mean,
I'd like to be clear. So we came public, and
since we've come public, we have heard from I mean
literally dozens of investors, both institutional investors and private investors
who all share our concerns. And essentially, if I were
going to summarize them, I guess i'd say the following.
(06:07):
The first is that, look, some people may differ in
their assessment of renewable infrastructure, and that's absolutely fine. And
if they want to buy infrastructure, renewable infrastructure, there are
plenty of vehicles that they can go and buy. Some people,
by contrast, and we would include ourselves in this, prefer
core infrastructure. And they own Hickel. And what the investors
(06:29):
are absolutely spitting about is that all of a sudden
they are being forced by the board through their ownership
of Hickel, to buy renewable infrastructure. And they say, if
I had wanted to own it, I would have bought it,
and I bought something else instead. So that's the first
big problem. The second big problem is that because of
(06:50):
these issues in the renewable infrastructure space, it was trading
on a much wider discount. Trigg was trading on a
much wider discount than Hickel. So a close of business
on Friday afternoon, Hickel was trading on about a twenty
two percent discount to its then nav and Trigg was
trading on about a thirty three So there's sort of
an eleven percent difference. And I guess you could say
(07:12):
that that's the market's best estimate of the difference in hardness,
if you will, of their respective NAV, so investors were
saying they had much more confidence in the NAV of Hickel,
much lower confidence in the NAV of Trigg. But the
deal has been structured on an NAV for NAV basis,
and so what that means is that not only are
(07:35):
investors being forced into buying a set of assets that
they don't want because it's being struck on an NAV
for NAV basis, they're effectively paying a higher price than
the prevailing market price before this deal was announced.
Speaker 2 (07:50):
Yes, I mean, why not just buy it in the
open market, you know, it's kind of it seems a
bit o white.
Speaker 3 (07:57):
And I mean, I'm afraid it gets even worse than that,
which is that the Trig shareholders are being offered a
cash out at a ten percent discount for some of
their stake. So actually that means that the effective price
that Hickel shareholders is even higher. And you know, alternatively,
Hickel shareholders aren't being offered any cash out at any
(08:20):
price under the term.
Speaker 1 (08:21):
So there's no out for Hickel shareholders, but there isn't
out for Trig shareholders. At a ten percent discount to NYAVY,
that's a great deal for them, absolutely, if it was
initially on a thirty four percent, so shareholders and TRIG
will be pleased. They might not get out in their entirety,
but they'll get out of some of their horrible holding
at a ten percent discount, and the rest will be
(08:43):
folded into a superior truck. Correct, This is pretty good
for Trig shareholders, assuming they don't mind holding the assets
inside hickelds.
Speaker 3 (08:51):
That's a fair comment, and so you know, obviously, if
I were a Trig shareholder, I'd be reasonably delighted, although
I would note that the difference in share price movements
since the deal was announced is quite asymmetric. So the
share price of Hickel when I last checked was down
seven percent from the undisturbed price, but the TRIG share
price was only up too, so in aggregate, this deal
(09:12):
has destroyed value. But actually you're right. I had an
email from a client a couple of days ago. I
asked him if he was involved in the transaction, and
he replied saying, for my sins, we only own Trig,
and we're completely delighted because it seems like we're being
bailed out at the expense of Hickel share and I'm
(09:35):
afraid I have to agree with him, and I was
impressed with his honesty.
Speaker 1 (09:41):
Yes, okay, So why do you think this is happening?
I mean, the suspicion is that this is just good
for the advisor because they have both trusts, so they
got to hang onto the assets and neither of these
trusts end up going anywhere else or being brought out
or merged into another trust out with their organization, so
it makes sense for them.
Speaker 3 (10:03):
Yeah, And I mean, and particularly in relation to that, so,
Trigg made a promise that they would hold a continuation
vote if the trust traded on a discount. You know,
I forget what the number was. I think it was
maybe if it averaged a wider than a ten discount
over twelve month period or whatever it was. And that
continuation vote is almost certain to be triggered next year.
(10:26):
And so you know, if you were a cynic, you
would say that this transaction means that they can avoid
that continuation vote taking place, where given I guess the
very large discount that it was trading on prior to
this announcement, you would think there was a good chance
that that continuation vote would fail.
Speaker 1 (10:44):
Yeah. So, and for Red Capital Partners, who have both
of these trusts now will effectively keep the majority of
the assets in both of them. Yes, well they may
well not have otherwise.
Speaker 3 (10:55):
Indeed, and you know, admittedly they have made some concessions
around management fees, but they're pretty modest and so in
the grand scheme of things, Yeah, I think it's a
good deal for Infrared.
Speaker 2 (11:08):
Of interesting to see someone's listening to this and the
rain shields in Hickel. What or check for that mate?
What can they do to stop the deal going through?
Or presumably this is all going to a vote at
some points that come up in December, and I think
that correct.
Speaker 3 (11:26):
Yeah, so so you know, we've not the documents haven't
been published yet, but certainly according to management, the vote
we'll be coming up in December. Look, our advice would
be first thing to do for any shareholder, and this
is just as true for institutional shareholders as it is
for retail shareholders, is to get in touch with the
board of Hickel. You can find their email address on
(11:48):
the Hickel website. And if you tell them that you
don't like the deal. By the way, you know, it
goes without saying that being shareholders is a democratic activity.
If you like the deal. You should also get in
touch with them as well and tell them about that.
I would hate to, as it were, be told that
there were some silent majority that wasn't being listened to
in all of this. It's really easy at times like this,
(12:09):
both as institutional and as retail shareholders, to feel that
you're you know that you're very small, and that your
voice doesn't count. And what we are trying to do
is gather together a group of like minded shareholders who
feel the same way about this and make sure that
the board are really hearing our voices loud and clear.
(12:30):
So we would love to hear from you. And again,
even if you like the deal, we'd love to hear
from you as well.
Speaker 1 (12:35):
That's it. There may be a lot of people who
love this deal outside trick shareholders. There maybe others who
are perfectly happy these trust to be fulled together.
Speaker 3 (12:42):
I mean, you're absolutely right, there may be Mariren. We
have been actively speaking to retail and institutionals since Monday.
We've not come across one yet, but that's not to
say they don't exist.
Speaker 1 (12:53):
Not to say they don't exist. You never know which
may people will go on this. Can I take the
conversation a bit wider and ask you then the investment
(13:16):
trust sector in the UK we're talking about it being
genuinely in the doldrooms. There are likely to be more
actions in the sector, right everyone. Everyone's trying to find
a way to get these discounts down, and so there's
bound to be more announcements of continuous and votes, more
mergers from takeovers etc.
Speaker 3 (13:33):
Yeah, I think that would be a fair assumption.
Speaker 1 (13:37):
So one of the things that you might be trying
to do here is to try and make sure that
any that come after this pay more attention to what
more shareholders might think.
Speaker 3 (13:47):
Yeah. Absolutely. So there's another core infrastructure fund I MPP
that's also held in very high regard by US certainly
and lots of other market participants. And had this been
a proposal to merge IMPP and Hickel together on an
NAV for an av basis to create a much larger,
more liquid trust, I'm absolutely sure we throw our weight
(14:10):
behind it, and that would be a good thing. When
there is in the investment trust sector, as in any market,
a greater supply than demand of shares, one thing takes
up the slack, and that is price and the way
to solve that imbalance is to reduce the supply of shares,
and so ultimately that is about trust getting taken over,
(14:32):
getting merged buybacks happening. And obviously in the case of
trusts that hold a liquid private assets, that's a longer
and slower process than for conventional investment trusts. But it
just takes time and just needs to be worked through.
Speaker 2 (14:47):
Yeah, and I'm thinking these two two fifty and if
they mail just to become fifty one hundred.
Speaker 3 (14:52):
I think that's a reasonable assumption. Yeah, they're both in
the footsy two fifty.
Speaker 1 (14:55):
Yeah.
Speaker 2 (14:55):
So yeah, so the only other overall benefit is that
I'll give it becomes a higher profil trust than it
currently is.
Speaker 3 (15:03):
Yeah, and I think, I mean, you know, and I
guess there is definitely some merit to that, But my
argument would be is that there is far better If
the aim is to create scale, there are far better
mergers out there that could be done. It's also true
that scale is not in and of itself a solutions.
So I was speaking to an institutional investor in Australia
(15:25):
who holds Hickel, and they were saying that they were
concerned that they would be forced to dispose of their
stake in Hickel because of the fact that it would
no longer fit with their mandate.
Speaker 1 (15:37):
Yep. Interesting, Okay, Chris, Because we've got you and this
is a market round up podcast, can I ask you
what on earth do you think is going on in
muggers in general at the moment?
Speaker 3 (15:51):
I mean, you absolutely can ask me. I'm afraid my answer,
as is so often the case, is that I'm completely baffled.
Speaker 1 (16:00):
Which bit babbles. I mean, really, I'm talking about the
last four or five days, we've seen constant sell offs
across the board, and everyone thinks, well, maybe this is
the beginning, the beginning of the end of the AI
bubble or the eye boom, or maybe it's because everything
is horribly expensive and so it makes sense for it
to correct a little bit. I mean, if you look
at the numbers for year to date, everything's still out
of fifteen, sixteen, seventeen, eighteen percent. Not really a big deal.
(16:22):
Bitcoin is pretty much the only thing that's lost all
its games for the year.
Speaker 3 (16:26):
Well, I certainly think i'd be in the kind of
the latter part of your explanation, which is that everything
was horribly expensive to start with, and so we're just
saying what might be the start of, as it were,
a normal correction. I mean, you know, as I'm sure
you know. You know, we set a lot of store
by the cyclically adjusted PE ratio and the reason for
(16:47):
that is that historically it's been a fantastic predictor of
long term returns. If you bucket starting CAPE ratio by decile,
you see that the prospective tenure return correlate perfectly to
each of those buckets. The ninetieth percentile and upwards, historically speaking,
(17:08):
would point to average perspective real returns of about half
a percent per year for the next ten years. And
that's for the top death style. And we're currently in
the ninety ninth percentile, so we're in the top one
percent of that top bucket. So yeah, you know, we
think that markets are pretty pretty expensive here.
Speaker 1 (17:27):
So everything has to go absolutely right. Every earning forecast
has to be beaten.
Speaker 2 (17:32):
We are being a bit hostage to fortune here because
the video is coming out later as we speak, and
I guess a lot of it hinjies on what happens,
but that doesn't it a lot of the other things
people are starting to freak out about. Then they're not
sure what to planing more about is the ISYI taking
over fast enough? And also our people now spending too
(17:56):
much money or investing in AI. Think that's the one thing.
I do think the mood has shifted. There's no longer
this obviously want you to roll out stuff as fast
as possible and really kind of take control of this space.
They're now thinking, we are we going to pay for
all of this stuff that you're building. And I think
that's one kind of narrative tweak that I would say
(18:18):
I've noticed maybe in the past two or three months,
maybe even not even that long.
Speaker 1 (18:24):
Yeah, is it also fair that this idea that depreciation
isn't quite being dealt with correctly is really beginning to
take hold? And we talked about this last week, John
and I think we both wrote about it, and that
this idea that the big GP is the probably called
graphics processing units and will lease their value faster than
people thought. Therefore they're being depreciated over the wrong period,
(18:46):
and that is artificially inflating earnings numbers. That's something that
is you know, we're so niche even a week ago
and now is part of the general conversation.
Speaker 2 (18:54):
Right interestingly, you give Chris's creator. I remember we had
a chat about about two months ago, and the first
thing have you seen me was a bit yeah, but
look at all this they'll spend, and what's the depreciation
going to be on that? I was like, oh, yeah,
that's an interesting point. I just wish i'd kind of
like listen more closely and written the.
Speaker 3 (19:10):
Boot tame.
Speaker 1 (19:14):
Christ Is. So I ahead of the game. Thank you?
Tell us something else that would make the rest of
us again.
Speaker 3 (19:18):
You know, I tend to only come up with one
good idea about every about every ten, So I don't know,
I don't I don't know what what I've got next.
I mean, I suppose, you know, I think obviously the
depreciation point is one thing. I guess. The other thing
is that a huge amount of private credit is being
(19:39):
sunk into this great AI Capex build out. And of course,
you know, Missily, most of these private credit managers are
pretty shrewd operators. I mean, I don't think anybody can
say that Apollo Naive, for instance. But by the same token,
there is such a wall of money in private credit
(20:01):
that needs to be spent, and such excitement around AI.
What I struggle to see is that the revenues will
be there that will support this huge amount of capex,
And so I guess the question is is who is
left holding the baby? And when those revenues don't materialize. Now,
the you know, the Magnificent Seven, generate such prodigious amounts
(20:22):
of free cash flow that maybe you know that they
can just write that off. Just to say, Meta wrote
off the fifty plus billion dollars that they spent on
the metaverse, and you know, essentially, I think we all
agree that that's turned out to be worthless. But investors say, well,
that doesn't really matter because the core business is fantastic.
They'll get some things right, they'll get other things wrong,
but it's all equally possible that, you know, a large
(20:45):
chunk of this capex ends up in the hands of
private debt funds and simply the revenues aren't available to
support it, and then you see some really large write downs.
But I have no idea.
Speaker 1 (20:54):
Yeah, okay, well that's that said. I mean, I think
the core thing here is expensive. Stuff doesn't was so expensive,
and that's roughly what's happening here before we move on,
And sorry, Chris, this is not something you're interested in
I should think that I'm very interested in a headline
on Bloomberg at the moment that I know John is
(21:14):
gonna love. House prices crash across London's wealthiest neighborhoods. House
prices in Kensington and Chelsea felt by almost one hundred
and sixty thousand pounds in the year to September, with
the prices of saltoms in the borough dropping eleven point
three percent, and across London as a whole, house values
down more than ten thousand pounds each, down around two
(21:36):
percent or so. And do you know what's going to
make those houses house prices fall even faster?
Speaker 2 (21:40):
Double in consal tax on the top bynes.
Speaker 1 (21:44):
It's a mentioned tax. It is what they call it
a mansion tax. And that's what it's going to work being.
And as after laugh, that was only a few weeks ago.
The worst of all taxes are these taxes on assets,
because they reduce the price of the assets or the
value of the assets, and then they go give you
a bit of a reverse wealth of fact, everyone feels poorer,
no one, no one built a new extension, etcetera. Eccent.
(22:04):
They're terrible, terrible taxes.
Speaker 2 (22:05):
Well, It's a big problem, isn't it, Because people already
like builders no longer feel its poss building in London
because they simply can't make a profit on what they build.
Speaker 1 (22:17):
So, although you know all this said, everyone keeps telling
me that, you know, the river's wealth of factor is
in place, and no one's building extensions or having worked
done in the houses anymore. But you know, I've been
looking for someone to put a new shower into my basement, breed.
Speaker 2 (22:30):
Have you not living in London the rest of the countries?
Speaker 1 (22:33):
Okay, not living in LODs is fine, Okay, brilliant. And
I suppose the only other big story this week that
we should look at briefly is the endless discussion about
what is going to be in the budget. And RSM
are very kindly sent us a list of what might
be in a smagas Board budget. I've been working all
day and trying to learn to say smorgat board is
a very difficult word for me. Their list includes a
(22:55):
few things that I hadn't even thought of. Anything the
removal of the I know, remove all of the residents.
Speaker 2 (23:03):
Maybe the routes, Maybe the routes, Yeah.
Speaker 1 (23:05):
Maybe they would that around you would raise two point
two billion, the removal of business asset disposal relief, which
would raise a mayor zero point nine billion uplift of
removal of the capital gains uplift on death, that's quite
a likely so that you now have do you will
then have to pay capital gains and then inheritance facts.
Speaker 2 (23:24):
So that's a sneaky one.
Speaker 1 (23:27):
That's really sneaky. Yeah, And I say cap introduction introduced
one hundred thousand pounds lifetime cap on I for introductions.
I mean that is the that would be horrible, horrible
because it runs into all the same things that the
lifetime allowance on penance used to run into, which is,
you know, how do you manage that? How do you
(23:47):
put inflation into that? Would you change the limit all
the time? If you hit the limit earlier and then
they changed the limits, you get to put more on earth?
Does it ever work? So I can't really see that
one happening. But interesting lest.
Speaker 2 (23:56):
I was one of the tossed and by all staff
ideas that the resolution thing. They've probably just thrown that
in on the off channel. But at that point does
seem like it would cause way too much for a pushback.
Speaker 1 (24:08):
I think it's not that it's just all too all
these things. I mean, they should I don't know when
they when they think of these things, they don't put
an ADMIN score next to it. I easy, really really hard,
and that would come under really really hard anyway. So
that's just a similar things for everyone to worry about.
I didn't have enough. Yeah, Chris, have you got any
(24:29):
thoughts about what what would be the worst thing that
could possibly happen in the budget?
Speaker 3 (24:34):
Long if you go? I mean, I mean the troublers
that I've got no idea what's going to happen in
the budget because they seem to have floated every single
trial balloon on the on the planet and then gone
back on half of them. So I mean, I'm frankly
as baffled as anybody, but I completely agree. The simple
fact is is that you know, the only taxes that
really do anything income tax, national insurance VAT, corporation tax
(24:59):
to a lesser extent, and taxes need to go up,
and frankly, they need to just grasp a nettle and
get on with raising some of the big taxes. And
you know, inevitably I would prefer some to others, but
but just get on with one of them or more
than one of them.
Speaker 1 (25:14):
Yeah, all put and pays a plan. I mean, you know,
outrageous suggestion put in plays a pan for spending over
the long term. That would do over the markets too.
Speaker 3 (25:23):
As unfortunately we have discovered there is clearly no majority
in the Parliamentary Labor Party to put any kind of
constraint on on spending. So sadly, I don't believe that
is going to happen, but yes, that would obviously be
a preferred option.
Speaker 1 (25:39):
Well, I think we have a consensus on this podcast
on that, right, anything else John that we should say,
do you think no?
Speaker 2 (25:46):
I think that's that's all been That's all been good,
And we went to nicety and bitcoins, so that's that's helpful.
Speaker 1 (25:55):
We all have our private thoughts on that one. Chris,
thank you so much for joining us today.
Speaker 3 (26:00):
Thanks John, Thanks Maren, Thanks John. Love to say to
see both you too.
Speaker 1 (26:05):
Thank you for listening to this week's Maren Dog's Money Debrief.
If you'd like us, share, rate, review, and subscribe wherever
you listen to podcasts, be sure to followed me in
John on ex or Twitter at marinis wn John Underscore
Step Back. This episode was produced by Samasadi and Moses
and Betel. Thanks to Chris Clovia. Questions and comments on
this show and all our shows always welcome. Our show
email is merin Money at Bloomberg dot net
Bloomberg Audio Studios, Podcasts, Radio News. Welcome to the Marin
Dogs Money Market Wrap, when we talk about the biggest
moves in the market this week and what is driving them.
(00:24):
I'm Arin zum stepweb editor Allows with Bloomberg UK Wealth, and.
Speaker 2 (00:27):
I'm joined Stepbeg, Senior Report an author of the Money
Distilled newsletter.
Speaker 1 (00:33):
Okay, now, John, for this week's chat. You suggested inviting
a guest who has come into the London studio. We
don't do this very often because of course John and
I are so expert we can talk about it absolutely
anything anytime, but we do know that a lot of
our listeners are very interested in investing in investment trust.
There's a big story there this week. So John, who
have you asked on.
Speaker 2 (00:52):
Advised on the one focus Cloudier of capital getting asset
management and I had sort of chatted to Curse the
earlier this week about this particular deal, and I think
it's probably the reason what we see the UKs are
not overly enthusiastic about the prospect once we got to
(01:14):
explain what the actual deal is fast.
Speaker 1 (01:17):
Yes, absolutely, and we will just as it started to
this that there's a lot of activity in the Investment
Trust SECTORHYTHM. I'm down and aul lot of discussion about activity.
So this is about one specific deal, but there is
a lot going on. So over to you, Chris, tell
us about this deal and why you are so appalled
by it to use your own language.
Speaker 3 (01:34):
Thanks very much, Marion, Thank you John for having me on.
Really appreciate it. And yes, indeed, appalled was the word
that we chose to use in our letter to the Chairman,
which we also made public earlier in the week. So
what's going on here is that there are two infrastructure
investment trusts. The first is HICKEL, which has been on
(01:54):
the market since two thousand and six. It's a well
loved core infrastructure fund. And then there is a second,
which is a trig or, the Renewables Infrastructure Group, which
as the name suggests, invests in renewables infrastructure. And now
they're both managed by the same fund manager, Infrared Partners,
(02:18):
and they have proposed merging the two vehicles together.
Speaker 2 (02:22):
And just to double JC when you see core infrastructure,
Chris for heckle, what do you mean by that?
Speaker 3 (02:29):
So HICKEL owns things like PFI contracts, so hospitals, schools,
it owns toll roads, it has an investment in the
water sector, which is perhaps not everybody's cup of tea.
It owns HS one, which is the high speed rail concession.
Those sorts of assets I saw.
Speaker 2 (02:48):
It's completely definite set of ices. So you're talking about
lots of yes, core stuff. And then what they're doing
is an emerging with this company that basically owns wind
farms and sol panels.
Speaker 3 (03:01):
Are wind farms, solar and increasingly some exposure to battery
storage and both in the UK and overseas.
Speaker 1 (03:10):
Yeah, that's correct, Cool, okay, And we should start by
before we move on to the meursur itself and explaining,
if you wouln't mind, Christ why these trusts have both
been trading on fairly hefty discounts. Sure, but of course
there's the problem.
Speaker 3 (03:23):
Indeed. Indeed, so the first thing to say is that
these vehicles are all to some extent bond proxies, and
so as interest rates have risen, so we've seen the
net present value of the cash flows associated with these
trusts fall and therefore the prices have fallen. Then, in
addition to which is I'm sure you guys have talked
(03:44):
about lots on the show you know, the investment trust
sector has been somewhat out of favor, and fundamentally you've
just got more sellers than buyers, and that pushes down prices.
And of course, unlike an open ended fund, where you know,
units are created and redeemed and therefore supply naturally meets demand,
that the supply of shares in the investment trust sector
(04:07):
is at least in the short term fixed. So that
explains the kind of general malaise. But on top of that,
renewable infrastructure funds have been really badly hit over the
last couple of years, and then over the last few weeks.
Why is that. Well, in the first instance, shortly after
the invasion of Ukraine, the government put in place an
(04:29):
extraordinary profit levy which hit renewable power generators particularly hard. Then,
more generally, there have been concerns that these vehicles may
have overstated their assets because a number of them have
had assets for sale and have not been able to
realize assets and anything approaching the book values of them.
(04:50):
And then finally, in the last couple of weeks we've
seen these proposals floated by the government to retrospectively change
the subsidy regime. And relating to renewable infrastructure here in
the UK, and obviously that's just made matters worse. And then,
of course the final thing is just that there's a
Investors have come to realize that the cash flows associated
(05:14):
with core infrastructure are really pretty predictable and so you
can have a much greater confidence in those. Conversely, with
the renewables funds we've seen. Obviously, they are affected by
the power price, and they're affected by variation in wind
speed and all of these other things, and so investors
I think have come to realize that they are a
(05:37):
less certain proposition and therefore require a higher discount rate.
Speaker 1 (05:40):
Okay, so from what you say already, I think John
and I are both thinking, well, why would you merge
these two things?
Speaker 3 (05:47):
I would have to agree with you there, but I mean,
I'd like to be clear. So we came public, and
since we've come public, we have heard from I mean
literally dozens of investors, both institutional investors and private investors
who all share our concerns. And essentially, if I were
going to summarize them, I guess i'd say the following.
(06:07):
The first is that, look, some people may differ in
their assessment of renewable infrastructure, and that's absolutely fine. And
if they want to buy infrastructure, renewable infrastructure, there are
plenty of vehicles that they can go and buy. Some people,
by contrast, and we would include ourselves in this, prefer
core infrastructure. And they own Hickel. And what the investors
(06:29):
are absolutely spitting about is that all of a sudden
they are being forced by the board through their ownership
of Hickel, to buy renewable infrastructure. And they say, if
I had wanted to own it, I would have bought it,
and I bought something else instead. So that's the first
big problem. The second big problem is that because of
(06:50):
these issues in the renewable infrastructure space, it was trading
on a much wider discount. Trigg was trading on a
much wider discount than Hickel. So a close of business
on Friday afternoon, Hickel was trading on about a twenty
two percent discount to its then nav and Trigg was
trading on about a thirty three So there's sort of
an eleven percent difference. And I guess you could say
(07:12):
that that's the market's best estimate of the difference in hardness,
if you will, of their respective NAV, so investors were
saying they had much more confidence in the NAV of Hickel,
much lower confidence in the NAV of Trigg. But the
deal has been structured on an NAV for NAV basis,
and so what that means is that not only are
(07:35):
investors being forced into buying a set of assets that
they don't want because it's being struck on an NAV
for NAV basis, they're effectively paying a higher price than
the prevailing market price before this deal was announced.
Speaker 2 (07:50):
Yes, I mean, why not just buy it in the
open market, you know, it's kind of it seems a
bit o white.
Speaker 3 (07:57):
And I mean, I'm afraid it gets even worse than that,
which is that the Trig shareholders are being offered a
cash out at a ten percent discount for some of
their stake. So actually that means that the effective price
that Hickel shareholders is even higher. And you know, alternatively,
Hickel shareholders aren't being offered any cash out at any
(08:20):
price under the term.
Speaker 1 (08:21):
So there's no out for Hickel shareholders, but there isn't
out for Trig shareholders. At a ten percent discount to NYAVY,
that's a great deal for them, absolutely, if it was
initially on a thirty four percent, so shareholders and TRIG
will be pleased. They might not get out in their entirety,
but they'll get out of some of their horrible holding
at a ten percent discount, and the rest will be
(08:43):
folded into a superior truck. Correct, This is pretty good
for Trig shareholders, assuming they don't mind holding the assets
inside hickelds.
Speaker 3 (08:51):
That's a fair comment, and so you know, obviously, if
I were a Trig shareholder, I'd be reasonably delighted, although
I would note that the difference in share price movements
since the deal was announced is quite asymmetric. So the
share price of Hickel when I last checked was down
seven percent from the undisturbed price, but the TRIG share
price was only up too, so in aggregate, this deal
(09:12):
has destroyed value. But actually you're right. I had an
email from a client a couple of days ago. I
asked him if he was involved in the transaction, and
he replied saying, for my sins, we only own Trig,
and we're completely delighted because it seems like we're being
bailed out at the expense of Hickel share and I'm
(09:35):
afraid I have to agree with him, and I was
impressed with his honesty.
Speaker 1 (09:41):
Yes, okay, So why do you think this is happening?
I mean, the suspicion is that this is just good
for the advisor because they have both trusts, so they
got to hang onto the assets and neither of these
trusts end up going anywhere else or being brought out
or merged into another trust out with their organization, so
it makes sense for them.
Speaker 3 (10:03):
Yeah, And I mean, and particularly in relation to that, so,
Trigg made a promise that they would hold a continuation
vote if the trust traded on a discount. You know,
I forget what the number was. I think it was
maybe if it averaged a wider than a ten discount
over twelve month period or whatever it was. And that
continuation vote is almost certain to be triggered next year.
(10:26):
And so you know, if you were a cynic, you
would say that this transaction means that they can avoid
that continuation vote taking place, where given I guess the
very large discount that it was trading on prior to
this announcement, you would think there was a good chance
that that continuation vote would fail.
Speaker 1 (10:44):
Yeah. So, and for Red Capital Partners, who have both
of these trusts now will effectively keep the majority of
the assets in both of them. Yes, well they may
well not have otherwise.
Speaker 3 (10:55):
Indeed, and you know, admittedly they have made some concessions
around management fees, but they're pretty modest and so in
the grand scheme of things, Yeah, I think it's a
good deal for Infrared.
Speaker 2 (11:08):
Of interesting to see someone's listening to this and the
rain shields in Hickel. What or check for that mate?
What can they do to stop the deal going through?
Or presumably this is all going to a vote at
some points that come up in December, and I think
that correct.
Speaker 3 (11:26):
Yeah, so so you know, we've not the documents haven't
been published yet, but certainly according to management, the vote
we'll be coming up in December. Look, our advice would
be first thing to do for any shareholder, and this
is just as true for institutional shareholders as it is
for retail shareholders, is to get in touch with the
board of Hickel. You can find their email address on
(11:48):
the Hickel website. And if you tell them that you
don't like the deal. By the way, you know, it
goes without saying that being shareholders is a democratic activity.
If you like the deal. You should also get in
touch with them as well and tell them about that.
I would hate to, as it were, be told that
there were some silent majority that wasn't being listened to
in all of this. It's really easy at times like this,
(12:09):
both as institutional and as retail shareholders, to feel that
you're you know that you're very small, and that your
voice doesn't count. And what we are trying to do
is gather together a group of like minded shareholders who
feel the same way about this and make sure that
the board are really hearing our voices loud and clear.
(12:30):
So we would love to hear from you. And again,
even if you like the deal, we'd love to hear
from you as well.
Speaker 1 (12:35):
That's it. There may be a lot of people who
love this deal outside trick shareholders. There maybe others who
are perfectly happy these trust to be fulled together.
Speaker 3 (12:42):
I mean, you're absolutely right, there may be Mariren. We
have been actively speaking to retail and institutionals since Monday.
We've not come across one yet, but that's not to
say they don't exist.
Speaker 1 (12:53):
Not to say they don't exist. You never know which
may people will go on this. Can I take the
conversation a bit wider and ask you then the investment
(13:16):
trust sector in the UK we're talking about it being
genuinely in the doldrooms. There are likely to be more
actions in the sector, right everyone. Everyone's trying to find
a way to get these discounts down, and so there's
bound to be more announcements of continuous and votes, more
mergers from takeovers etc.
Speaker 3 (13:33):
Yeah, I think that would be a fair assumption.
Speaker 1 (13:37):
So one of the things that you might be trying
to do here is to try and make sure that
any that come after this pay more attention to what
more shareholders might think.
Speaker 3 (13:47):
Yeah. Absolutely. So there's another core infrastructure fund I MPP
that's also held in very high regard by US certainly
and lots of other market participants. And had this been
a proposal to merge IMPP and Hickel together on an
NAV for an av basis to create a much larger,
more liquid trust, I'm absolutely sure we throw our weight
(14:10):
behind it, and that would be a good thing. When
there is in the investment trust sector, as in any market,
a greater supply than demand of shares, one thing takes
up the slack, and that is price and the way
to solve that imbalance is to reduce the supply of shares,
and so ultimately that is about trust getting taken over,
(14:32):
getting merged buybacks happening. And obviously in the case of
trusts that hold a liquid private assets, that's a longer
and slower process than for conventional investment trusts. But it
just takes time and just needs to be worked through.
Speaker 2 (14:47):
Yeah, and I'm thinking these two two fifty and if
they mail just to become fifty one hundred.
Speaker 3 (14:52):
I think that's a reasonable assumption. Yeah, they're both in
the footsy two fifty.
Speaker 1 (14:55):
Yeah.
Speaker 2 (14:55):
So yeah, so the only other overall benefit is that
I'll give it becomes a higher profil trust than it
currently is.
Speaker 3 (15:03):
Yeah, and I think, I mean, you know, and I
guess there is definitely some merit to that, But my
argument would be is that there is far better If
the aim is to create scale, there are far better
mergers out there that could be done. It's also true
that scale is not in and of itself a solutions.
So I was speaking to an institutional investor in Australia
(15:25):
who holds Hickel, and they were saying that they were
concerned that they would be forced to dispose of their
stake in Hickel because of the fact that it would
no longer fit with their mandate.
Speaker 1 (15:37):
Yep. Interesting, Okay, Chris, Because we've got you and this
is a market round up podcast, can I ask you
what on earth do you think is going on in
muggers in general at the moment?
Speaker 3 (15:51):
I mean, you absolutely can ask me. I'm afraid my answer,
as is so often the case, is that I'm completely baffled.
Speaker 1 (16:00):
Which bit babbles. I mean, really, I'm talking about the
last four or five days, we've seen constant sell offs
across the board, and everyone thinks, well, maybe this is
the beginning, the beginning of the end of the AI
bubble or the eye boom, or maybe it's because everything
is horribly expensive and so it makes sense for it
to correct a little bit. I mean, if you look
at the numbers for year to date, everything's still out
of fifteen, sixteen, seventeen, eighteen percent. Not really a big deal.
(16:22):
Bitcoin is pretty much the only thing that's lost all
its games for the year.
Speaker 3 (16:26):
Well, I certainly think i'd be in the kind of
the latter part of your explanation, which is that everything
was horribly expensive to start with, and so we're just
saying what might be the start of, as it were,
a normal correction. I mean, you know, as I'm sure
you know. You know, we set a lot of store
by the cyclically adjusted PE ratio and the reason for
(16:47):
that is that historically it's been a fantastic predictor of
long term returns. If you bucket starting CAPE ratio by decile,
you see that the prospective tenure return correlate perfectly to
each of those buckets. The ninetieth percentile and upwards, historically speaking,
(17:08):
would point to average perspective real returns of about half
a percent per year for the next ten years. And
that's for the top death style. And we're currently in
the ninety ninth percentile, so we're in the top one
percent of that top bucket. So yeah, you know, we
think that markets are pretty pretty expensive here.
Speaker 1 (17:27):
So everything has to go absolutely right. Every earning forecast
has to be beaten.
Speaker 2 (17:32):
We are being a bit hostage to fortune here because
the video is coming out later as we speak, and
I guess a lot of it hinjies on what happens,
but that doesn't it a lot of the other things
people are starting to freak out about. Then they're not
sure what to planing more about is the ISYI taking
over fast enough? And also our people now spending too
(17:56):
much money or investing in AI. Think that's the one thing.
I do think the mood has shifted. There's no longer
this obviously want you to roll out stuff as fast
as possible and really kind of take control of this space.
They're now thinking, we are we going to pay for
all of this stuff that you're building. And I think
that's one kind of narrative tweak that I would say
(18:18):
I've noticed maybe in the past two or three months,
maybe even not even that long.
Speaker 1 (18:24):
Yeah, is it also fair that this idea that depreciation
isn't quite being dealt with correctly is really beginning to
take hold? And we talked about this last week, John
and I think we both wrote about it, and that
this idea that the big GP is the probably called
graphics processing units and will lease their value faster than
people thought. Therefore they're being depreciated over the wrong period,
(18:46):
and that is artificially inflating earnings numbers. That's something that
is you know, we're so niche even a week ago
and now is part of the general conversation.
Speaker 2 (18:54):
Right interestingly, you give Chris's creator. I remember we had
a chat about about two months ago, and the first
thing have you seen me was a bit yeah, but
look at all this they'll spend, and what's the depreciation
going to be on that? I was like, oh, yeah,
that's an interesting point. I just wish i'd kind of
like listen more closely and written the.
Speaker 3 (19:10):
Boot tame.
Speaker 1 (19:14):
Christ Is. So I ahead of the game. Thank you?
Tell us something else that would make the rest of
us again.
Speaker 3 (19:18):
You know, I tend to only come up with one
good idea about every about every ten, So I don't know,
I don't I don't know what what I've got next.
I mean, I suppose, you know, I think obviously the
depreciation point is one thing. I guess. The other thing
is that a huge amount of private credit is being
(19:39):
sunk into this great AI Capex build out. And of course,
you know, Missily, most of these private credit managers are
pretty shrewd operators. I mean, I don't think anybody can
say that Apollo Naive, for instance. But by the same token,
there is such a wall of money in private credit
(20:01):
that needs to be spent, and such excitement around AI.
What I struggle to see is that the revenues will
be there that will support this huge amount of capex,
And so I guess the question is is who is
left holding the baby? And when those revenues don't materialize. Now,
the you know, the Magnificent Seven, generate such prodigious amounts
(20:22):
of free cash flow that maybe you know that they
can just write that off. Just to say, Meta wrote
off the fifty plus billion dollars that they spent on
the metaverse, and you know, essentially, I think we all
agree that that's turned out to be worthless. But investors say, well,
that doesn't really matter because the core business is fantastic.
They'll get some things right, they'll get other things wrong,
but it's all equally possible that, you know, a large
(20:45):
chunk of this capex ends up in the hands of
private debt funds and simply the revenues aren't available to
support it, and then you see some really large write downs.
But I have no idea.
Speaker 1 (20:54):
Yeah, okay, well that's that said. I mean, I think
the core thing here is expensive. Stuff doesn't was so expensive,
and that's roughly what's happening here before we move on,
And sorry, Chris, this is not something you're interested in
I should think that I'm very interested in a headline
on Bloomberg at the moment that I know John is
(21:14):
gonna love. House prices crash across London's wealthiest neighborhoods. House
prices in Kensington and Chelsea felt by almost one hundred
and sixty thousand pounds in the year to September, with
the prices of saltoms in the borough dropping eleven point
three percent, and across London as a whole, house values
down more than ten thousand pounds each, down around two
(21:36):
percent or so. And do you know what's going to
make those houses house prices fall even faster?
Speaker 2 (21:40):
Double in consal tax on the top bynes.
Speaker 1 (21:44):
It's a mentioned tax. It is what they call it
a mansion tax. And that's what it's going to work being.
And as after laugh, that was only a few weeks ago.
The worst of all taxes are these taxes on assets,
because they reduce the price of the assets or the
value of the assets, and then they go give you
a bit of a reverse wealth of fact, everyone feels poorer,
no one, no one built a new extension, etcetera. Eccent.
(22:04):
They're terrible, terrible taxes.
Speaker 2 (22:05):
Well, It's a big problem, isn't it, Because people already
like builders no longer feel its poss building in London
because they simply can't make a profit on what they build.
Speaker 1 (22:17):
So, although you know all this said, everyone keeps telling
me that, you know, the river's wealth of factor is
in place, and no one's building extensions or having worked
done in the houses anymore. But you know, I've been
looking for someone to put a new shower into my basement, breed.
Speaker 2 (22:30):
Have you not living in London the rest of the countries?
Speaker 1 (22:33):
Okay, not living in LODs is fine, Okay, brilliant. And
I suppose the only other big story this week that
we should look at briefly is the endless discussion about
what is going to be in the budget. And RSM
are very kindly sent us a list of what might
be in a smagas Board budget. I've been working all
day and trying to learn to say smorgat board is
a very difficult word for me. Their list includes a
(22:55):
few things that I hadn't even thought of. Anything the
removal of the I know, remove all of the residents.
Speaker 2 (23:03):
Maybe the routes, Maybe the routes, Yeah.
Speaker 1 (23:05):
Maybe they would that around you would raise two point
two billion, the removal of business asset disposal relief, which
would raise a mayor zero point nine billion uplift of
removal of the capital gains uplift on death, that's quite
a likely so that you now have do you will
then have to pay capital gains and then inheritance facts.
Speaker 2 (23:24):
So that's a sneaky one.
Speaker 1 (23:27):
That's really sneaky. Yeah, And I say cap introduction introduced
one hundred thousand pounds lifetime cap on I for introductions.
I mean that is the that would be horrible, horrible
because it runs into all the same things that the
lifetime allowance on penance used to run into, which is,
you know, how do you manage that? How do you
(23:47):
put inflation into that? Would you change the limit all
the time? If you hit the limit earlier and then
they changed the limits, you get to put more on earth?
Does it ever work? So I can't really see that
one happening. But interesting lest.
Speaker 2 (23:56):
I was one of the tossed and by all staff
ideas that the resolution thing. They've probably just thrown that
in on the off channel. But at that point does
seem like it would cause way too much for a pushback.
Speaker 1 (24:08):
I think it's not that it's just all too all
these things. I mean, they should I don't know when
they when they think of these things, they don't put
an ADMIN score next to it. I easy, really really hard,
and that would come under really really hard anyway. So
that's just a similar things for everyone to worry about.
I didn't have enough. Yeah, Chris, have you got any
(24:29):
thoughts about what what would be the worst thing that
could possibly happen in the budget?
Speaker 3 (24:34):
Long if you go? I mean, I mean the troublers
that I've got no idea what's going to happen in
the budget because they seem to have floated every single
trial balloon on the on the planet and then gone
back on half of them. So I mean, I'm frankly
as baffled as anybody, but I completely agree. The simple
fact is is that you know, the only taxes that
really do anything income tax, national insurance VAT, corporation tax
(24:59):
to a lesser extent, and taxes need to go up,
and frankly, they need to just grasp a nettle and
get on with raising some of the big taxes. And
you know, inevitably I would prefer some to others, but
but just get on with one of them or more
than one of them.
Speaker 1 (25:14):
Yeah, all put and pays a plan. I mean, you know,
outrageous suggestion put in plays a pan for spending over
the long term. That would do over the markets too.
Speaker 3 (25:23):
As unfortunately we have discovered there is clearly no majority
in the Parliamentary Labor Party to put any kind of
constraint on on spending. So sadly, I don't believe that
is going to happen, but yes, that would obviously be
a preferred option.
Speaker 1 (25:39):
Well, I think we have a consensus on this podcast
on that, right, anything else John that we should say,
do you think no?
Speaker 2 (25:46):
I think that's that's all been That's all been good,
And we went to nicety and bitcoins, so that's that's helpful.
Speaker 1 (25:55):
We all have our private thoughts on that one. Chris,
thank you so much for joining us today.
Speaker 3 (26:00):
Thanks John, Thanks Maren, Thanks John. Love to say to
see both you too.
Speaker 1 (26:05):
Thank you for listening to this week's Maren Dog's Money Debrief.
If you'd like us, share, rate, review, and subscribe wherever
you listen to podcasts, be sure to followed me in
John on ex or Twitter at marinis wn John Underscore
Step Back. This episode was produced by Samasadi and Moses
and Betel. Thanks to Chris Clovia. Questions and comments on
this show and all our shows always welcome. Our show
email is merin Money at Bloomberg dot net
Host
Merryn Somerset Webb
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