Buy a pound of assets for around 79p, then collect a 9 per cent income while you wait for the gap to close. That, in rough terms, is the case for GCP Infrastructure Investments.

The company holds a portfolio worth over £850m, spread across 47 separate investments in UK infrastructure. Its shares change hands at a 21 per cent discount to net asset value, which stands at a little over 100p.

The income has been paid consistently for 15 years.

What the company actually owns

GCP lends to UK infrastructure projects that carry some form of public sector support. Think long-dated, inflation-linked subsidies attached to schools, hospitals, social housing and clean power. It focuses on debt rather than equity, which shapes how investors get repaid.

'We have fully amortising debt that's underpinned by the cash flows generated by an asset,' says Phil Kent, CEO of Gravis Capital, the FTSE 250 company's manager.

In plain terms, each loan is repaid over its life from the cash a project throws off. GCP assumes no residual value at the end. A wind farm or a concession hands nothing back once its working life is over.

The portfolio spans three core areas: old PFI contracts, renewable energy and supported social housing. Within renewables, it holds wind, solar, hydro, biomass, geothermal and anaerobic digestion.

That spread softens the risks troubling pure-play green funds, from power price falls to grid curtailment.

A discount built by a buyers' strike

The 21% discount is the heart of the story and the source of the opportunity. For most of its life, the company traded at a premium of 5 per cent to 15 per cent.

That was the era of near-zero interest rates, when income hunters had to work hard to find yield.

Higher rates changed the maths. A long-dated, fixed-rate income offering looks less tempting against cash, gilts and bonds.

Kent accepts that rate move explains part of the fall. He does not think it explains all of it.

The rest, he argues, is a buyers' strike. 'There's just been an exodus among wealth and retail investors to alternative income,' he says.

Some peers made it worse with asset write-downs and falling power-price forecasts. Many original buyers were sold the story 10 to 15 years ago. They have moved on, or handed portfolios to heirs who never understood them.

Kent is blunt on one point. He sees no asset-specific problem that would justify a loss of faith in what GCP holds.

Selling assets to make the point

In December 2023, the board set out a capital allocation plan with one aim: shrink the discount through actions it controls.

The clearest of those actions is selling assets and proving they fetch more than the share price implies.

The thesis has a precedent. When Drax bid for Bluefield, it saw value in assets the wider market had written off. The share price reflects a thin pool of UK fund buyers, while industrial players spot value those sellers miss.

GCP has announced £128m of disposals, struck on average at around net asset value. The target was £150m, and Kent expects fresh announcements within weeks to clear it. A further £200m sits in the disposal pipeline beyond that.

The choice of what to sell is deliberate. GCP has exited supported social housing, a corner of the market tarred by the troubles at Civitas and Home REIT.

It is also cutting equity-style stakes in wind and solar, where power prices and weather make returns lumpy. 'We want the portfolio to look stronger coming out of this than it did going in,' Kent says.

The cash raised has funded buybacks. The company has repurchased more than £51m of its own shares. Net debt has fallen close to zero as a result.

The dividend cover question

Income investors will reach for the dividend cover figure, and at first glance it looks thin. GCP reported a cover of 0.97 times at the half-year, below the level that signals a covered payout.

Kent says the number misleads, because a debt fund is not a renewables fund. His point turns on what the cash flow has to do.

A renewables trust quoting cover of 1.2 or 1.3 times is measuring operating cash flow from a depreciating asset.

That cash has to cover both the dividend and the slow return of the original capital. On that basis, he argues, true cover should sit nearer 1.8 to 2 times.

GCP takes in interest, pays its costs and keeps the principal intact. Measured on total cash received against dividends paid, its cover runs close to 1.8 times.

'Income in less cost versus income out,' is how Kent frames it.

The bigger picture

Step back from the discount and there is a structural case too. Kent points to forecasts that UK power demand will double by 2050, driven by electric vehicles, electric heating and the digital economy.

That points to years of fresh infrastructure to fund, whatever the political weather. The company has also leaned into disclosure. It runs an online portal that lets investors drill into every underlying asset, a first among its direct peers.

What new money is buying

The yield does the rest of the talking. At around 79p, the shares offer close to 9 per cent, paid in quarterly instalments. The dividend target for this year is 7p, with 3.5p paid at the half-year stage.

The risks are real. UK political noise, high gilt yields and a slow market for asset sales all weigh on the shares.

Kent's own concern is any wind-back on net zero, a cross-party stance since 2008 that competes with the cost of energy and security of supply. He admits disposals are taking longer than hoped because buyers want a strategic reason to act, rather than access to yield.

For new investors, the appeal is simpler. You are buying a 15-year income record at a fifth below the value of the assets behind it.

The board is selling those assets at full value to prove the point and paying 9% to those who wait.

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