3i Infrastructure returns 6.1% in half year results.

Citing a cautious approach and a deliberately slowed investment pace, 3i Infrastructure today reported profits of £50.3 million and 6.1 percent return on average shareholders’ equity in the six months through 30 September, versus profits of £33.6 million and 4.8 percent return for the same period last year.

Michael Queen, managing partner of infrastructure for 3i Investments, the private equity firm that advises the publicly listed UK infrastructure fund, said on a press call that returns were “bang in line with where we expect to be”.  3i Infrastructure has a 12 percent annual return objective.

Queen also said that while the fund has lowered its pace of investments, having invested £105.2 million in the six months through 30 September, the competitive intensity in the infrastructure market overall is lower. He said competitors have been forced out because of liquidity constraints, and a large volume of potential transactions are available.

The largest portion of the new investment activity came from a further investment of £87.6 million into a portfolio of three UK junior debt instruments that include electricity provider Viridian, water utility Thames Water and broadcast provider NGW/Arqiva.

Queen said 3i Infrastructure paid an average price of 84 percent compared to par on the debt instruments, which represents a yield to maturity of 14 percent and a cash yield of 11 percent. He also said the opportunity to invest in this sort of debt will continue for the next three to four months due to dislocations in the markets and forced selling by hedge funds. Queen said he doesn’t expect the fund to invest more than £200 million in the debt instruments.

Queen said 89 percent of 3i Infrastructure's debt, all of which is held at the asset level, does not come up for refinancing until after 2018. In the short term, the biggest refinancing risk the fund faces is £200 million that will need to be refinanced before the end of the current fiscal year. The fund’s cash balance stood at £329 million and £225 million in an undrawn credit facility as of 30 September.

Bank lending remains a constraint on the infrastructure sector, Queen said, but the long term prospects are positive. He said governments will be more willing to deficit spend on infrastructure, which will drive growth in the sector.

“I think a bigger driver will be that in the developed world a number of older assets are reaching their point where they have to be replaced, there’s no other options”, Queen said.

3i Infrastructure also is looking for a way into BAA's forced sale of Gatwick Airport, according to Queen.

“If there is a deal to be done on Gatwick, we would like to be a part of it,” he said.