Whilst HICL makes investments at the lower end of the infrastructure equity risk spectrum, an investment in HICL carries a degree of risk. Principle risks are referred to below. For further information on risks associated with the investment, please refer to the section entitled “Risk Factors” of the Company’s 4 March 2019 Prospectus and in the Company’s latest annual report.
Political and regulatory risk
The nature of the businesses in which HICL invests and the strong public sector infrastructure service aspect they display exposes HICL to potential changes in policy and legal requirements. Further, the HICL portfolio includes five regulated assets, which operate in highly regulated industries within statutory legal frameworks. Unfavourable changes to such regulatory and legal frameworks could materially and adversely affect the performance of affected investments.
Project companies in which HICL invests typically subcontract the provision of services to specialist providers (construction, operations or maintenance companies). The failure of a supply chain provider could negatively impact the project company’s ability to fulfil its contractual obligations with the client.
The performance of HICL’s investments is dependent on contractual arrangements with an array of counterparties (for example lending institutions or facilities management subcontractors). Therefore, HICL is exposed to the risk that such contracts fail to provide the protection from poor performance or recourse anticipated by HICL.
Revenue (demand) risk
Some investments in the HICL portfolio are in project companies which have “demand-based” concessions. Returns from “demand-based” concessions are impacted in whole or part by revenues receivable from users and are thus exposed to levels of demand risk. There is a risk with such projects that demand and revenues fall below the current projections and this may result in a reduction in expected revenues for the relevant project company.
Financial and market risk
Investment cash flows are typically correlated to inflation, and therefore portfolio-wide increases/ decreases to inflation at variance to HICL’s inflation expectations would impact on HICL’s cash flows;
Changes in market rates of interest could affect HICL’s investments in a variety of different ways including: (i) the discount rate used to value HICL’s future projected cash flows and valuation; (ii) debt finance; and (iii) interest receivable on cash balances; and
HICL holds part of its investments in entities in jurisdictions with currencies other than Sterling but will borrow corporate level debt, report its NAV and pay dividends in Sterling. Changes in the rates of foreign currency exchange may therefore impact on HICL’s cash flows and valuation.
With oversight from HICL’s Risk Committee, the underlying robustness of the portfolio cashflows is regularly tested by the Investment Manager through stress tests, which are published in the Company’s interim and annual results.