Episode Transcript
Duncan: It's certainly been a good space to be in for the last decade, but I think there's some demand drivers that are particularly attractive right now. We call them the seven Ds.
Charlie: Hello, everyone, and welcome to the London Stock Exchange's Be Inspired series. In this series we have the privilege of chatting to CEOs, founders, and senior leaders of London's listed and private companies and to ask them to share their journey with us. My name is Charlie Walker. I'm the deputy CEO of the London Stock Exchange and I'm absolutely delighted to be joined here today by Duncan Ball, the CEO of BBGI.
Duncan: Well, thank you very much, Charlie, and I'm very honoured to be here. As mentioned, I'm the CEO of BBGI. We're a global infrastructure investment company. We listed on the London Stock Exchange in 2011 and our purpose is to deliver social infrastructure for the betterment of communities while providing stable, predictable dividends for our shareholders.
Charlie: When you launched the fund, you listed it on the exchange, what were you trying to create? What were the motivations behind founding it?
Duncan: We initially started with a seed portfolio of 19 assets from a German construction company called Bilfinger Berger. Bilfinger Berger had a large portfolio of infrastructure assets that they were thinking of monetising and they looked around the world. They looked at Frankfurt. They looked at the Toronto Stock Exchange, the New York Stock Exchange, the Australian Stock Exchange, and landed on the view that the London market was the most liquid, was the best market to understand these types of assets. There had been a couple similar funds. Two had listed in 2006 and one had listed in 2010. So there was a well-established base. We looked at that market and the idea was that this would create liquidity for these social infrastructure investments and give the construction company the ability to take some money off the table and reinvest it in new projects. We did some test marketing and structured the vehicle to have all the attributes that was going to make it a successful launch.
Charlie: And in terms of, I guess, the heritage of the business, just from a geographic perspective now, it's quite diversified, right?
Duncan: Yes. So we're in seven countries. We're in Australia, Canada, the US, UK, Norway, Netherlands, and Germany. We're paid by governments for this social infrastructure, so we wanted to be in countries with sound governments, well-observed rule of law, and strong credit ratings. So all those countries we’re in have either a double-A or triple-A-rated central government. So we might contract with a local authority or it might be a province or a state or some branch of government, but the consistent theme is, we’re paid by secure, sound governments for critical social infrastructure.
Charlie: And it may just be worth, just for the listeners, just talking a little bit about some of the types of projects that you're in, just to give them a bit of a flavour.
Duncan: Yes. So just a little over half of our portfolio, I think about 53%, is roads. When I say roads, it's not necessarily toll roads. Some of these roads may have a toll on them that is collected by government, but these are availability-style roads. So, if the road is available for use, we get paid and we're not taking risk on traffic volumes. We also have healthcare. So that's primary clinics. It's regional hospitals. We have two iconic women's hospitals, one in Australia and one in Canada. We have a collection of police stations and fire stations and correctional facilities and administrative buildings. We call that civic infrastructure. But the common theme in all of these is that the counterparty is typically credit-worthy governments and, as long as the assets are made available, we get paid.
Charlie: I'd be interested, just with the evolution, if you like, of the global economy at the moment, that it seems as though, particularly in developing worlds, developing markets, I should say, there's a need for infrastructure investment. Are you seeing that drive a lot of these types of demand for funds like yours?
Duncan: Yes. Many call it the golden age of infrastructure investment. They think it’s just around the corner. It's certainly been a good space to be in for the last decade, but I think there's some demand drivers that are particularly attractive right now. We call them the seven Ds. So governments have large deficits coming out of COVID, irrespective of the government. There was so much fiscal stimulus during COVID that they now have stressed balance sheets. If they want to invest in infrastructure, they may not have the ability to do it directly, so they want the private sector to join them. So deficits is number one. Just the decaying nature of infrastructure and deferred maintenance on infrastructure. So there's a need for upgrade. There's the whole decarbonisation going on that creates need for additional investments. There's the digital impact. Energy usage has been fairly stable, but, all of a sudden, due to EVs and ChatGPT, the demand on our grid and energy production has increased significantly. There's a lot of emphasis on deglobalisation. Demographics is another D, just the aging nature of our societies and the need for more healthcare and related spending. And then I guess the final D would be the development objectives. There's well-documented research just talking about the multiplier effect that comes from investing in infrastructure and how it can help an economy in so many ways.
Charlie: You mentioned a little bit earlier about why you listed the fund in the first place around liquidity for one of the shareholders. Was that the primary driver? Were there any other reasons to list the fund?
Duncan: I think the attraction of the London market is that one, it's sophisticated. It understands these projects. It has a long history in the investment trust space of providing stable, predictable returns for investors. We saw that there's a strong demand for yield and we're very much a yield product. If someone is saving for their retirement, saving for their kids to go to university, whatever the case may be, we offer a stable, predictable return over a long period. And I think the other thing is that it's a product that has been well received by investors because it's typically hard to access these. There are a lot of unlisted funds, the Brookfields, the Macquaries, the BlackRocks of the world that have mega-funds, but it's very hard for a retail investor or a smaller institutional investor to access those.
The beauty of the London listing is, you get an exposure to a geographically diverse portfolio of infrastructures. You have liquidity. So, if you have a need for capital, you can sell your shares and be on with it. If you have inflows of capital, you can invest. So it seems to be well suited for the investors and it seems to be well suited for us. We've been able to grow the portfolio from 19 assets originally to… We're at 56 now and we've been able to continue to deploy capital, continue to grow the portfolio but do it in a very disciplined and conscientious manner.
Charlie: Just exploring that a little bit more in terms of growing your portfolio, do you typically do that by disposing of projects already in the portfolio and reinvesting the capital or has it been the follow-on capital-raisings that have allowed you to do that?
Duncan: So, historically, we've been very disciplined buyers. So there's been some pretty significant tailwinds in the infrastructure space over the last decade. Declining interest rates until recently made it a very attractive space. So the challenge for us was never access to capital. It was always finding deals and being disciplined and not overspending and you had to maintain that discipline. It was very tempting when interest rates were very low to have a large revolving credit facility at a very low interest rate and effectively put some leverage in the fund. We never fell into that temptation of having large amounts outstanding. So, when the interest rates did start to back up, we were in a position where we didn't have to sell assets. So we're very proud. We've never sold an asset. It's not that we're opposed to selling assets. If someone offers us a great price for an asset, we would absolutely sell it, but we're very happy with the portfolio we've constructed and it continues to behave as we expect. So we've never been for sellers.
Charlie: I just wanted to talk a little bit about BBGI’s unique selling proposition, what differentiates it, if you like. You've touched on giving investors the ability to access a portfolio of projects that they probably wouldn't in ordinary circumstances, find easy to access. One of the other interesting things is that you're internally managed as another dynamic to it. Do you want to just talk a little bit about that?
Duncan: Yes. So, when I say we're internally managed, what that means is, myself and everyone else in the company works for the company. So there's no external manager that's providing advisory services to the fund. So, when we listed in 2011, we were extolling the virtues of internal management and I think a lot of people said, okay, that's interesting, what does that mean?
But I think it has really demonstrated the benefits over the last 12-plus years in that we've been very disciplined. We're all about making the portfolio better, not bigger. We're not remunerated on assets under management, so it's not this frenetic energy to make it bigger and just buy everything. We're very selective in what we add to the portfolio. And we act like owners. A significant portion of my wealth is tied up in this vehicle. Every one of our supervisory board members is a shareholder. Every one of our management board members is a shareholder. Amongst our employees, 89% of our employees own shares. So we really bring that mindset of, we have to serve our clients, which are public-sector counterparties. We have to serve our investors. We have to be sensitive to our partners and our employees. It's very much a stakeholder alignment model, but it's not this imperative to grow at all costs. So I think it's the right governance model. I do think, particularly now with some of the governance issues that have happened in the income trust space, people are seeing the benefits of a very strong supervisory board or board of directors. They're seeing the benefits of having managers that are owners and aligned with shareholders.
Charlie: I was going to say, one of the interesting questions we often talk about on this series is, how do you align management? How do you incentivise employees? How do you empower staff throughout an organisation? I imagine having 89% of your employees being shareholders helps in that endeavour?
Duncan: Yes. It absolutely does. Another game-changer for us has been ESG. There's been a lot of embracing of ESG and more recently there's been a question, does ESG deliver value? I think it's a really interesting way to look at the interaction. We’ve spent a lot of time with our clients making sure we're delivering what we need to deliver to make them happy. We do a Net Promoter survey where we ask them how happy they are and we have a very high Net Promoter Score. And our employees feel good about what they're doing. We have hospitals. We have schools. We have infrastructure assets that serve society. The fact that our employees are typically owners and the fact that they feel good about what they're doing… It makes a tremendous difference.
Charlie: And that's on the deployment of capital and on the employee side. Have you seen the rise in ESG have much of an impact on the investor side of the equation, so people coming in to buy shares in the fund?
Duncan: When we started the ESG journey, we didn't really know where to begin. It was new for everyone and we had to learn a lot of this stuff along the way. But, as we've embraced it, what we've really found is that it's a proxy for good management. So, as an example, one of the things we've done is, we've looked at all 56 assets and we've done detailed climate analysis. We've used third-party climate experts to see how our portfolio of assets would be impacted by climate change. So, as part of that exercise, we came away from it not knowing what the outcome was going to be, but we were very pleased to learn that all the 56 assets have very low-risk exposure to climate change. So, again, it's preparing things for the unexpected and you're able to share that information with clients. It helps them. We can use the information productively and, if there is an issue, we can address it in advance. I think it's been an interesting journey with a lot of lessons learned along the way.
Charlie: So, Duncan, obviously, people investing in BBGI will be interested in the yield, I guess, as one of the key aspects to it. Can you just talk a little bit about your track record in terms of dividends?
Duncan: Yes. So at our current share price, BBGI is trading at about a 6.3 dividend yield. So I think it's a very attractive entry point. What we're particularly proud of is just the consistency of the dividends we've been able to pay and the consistency of our net asset value per share. So we've increased the dividend every year since 2013. The average increase per year has been 3.4%. The AIC recently recognised us as a next-generation dividend hero, so we're very proud of that. So, even during the depths of COVID, we continued to pay a dividend without interruption. And then more recently in periods of higher inflation, because we have strong inflation linkage in the portfolio, we've been able to grow that. So we grew the dividend 6% last year. We’ll grow it 6% this year. So we've been able to pay a progressive dividend since the outset and it has outpaced CPI. And I think one of the points probably worth mentioning right now is, in a challenging environment where a lot of investment funds have been under pressure, we're very comfortable with our portfolio. We've said that we can pay a progressive dividend for the next 15 years without making any further investments. So I think that's really a testament to the strength and predictability of the income that comes out of our portfolio.
Charlie: Duncan, last question. What does the future hold? What's exciting you about what's coming out?
Duncan: Well, as I say, I think the DNA of BBGI is unchanged. We're focused on low-risk assets. We're internally managed. We're globally diversified. We have a strong approach to ESG. That's going to remain consistent. I think we see the benefits of infrastructure investment and we think that that's going to continue. What we're trying to do is, we're trying to create a product that provides stable, predictable income for investors, irrespective of the economic cycle. We're able to see some of these mega-trends and we think that there's going to be lots of opportunities to continue to selectively choose projects that are going to be beneficial for society and provide stable returns for investors.
Charlie: Well, absolutely fascinating. Duncan, thank you so much for spending the time with us. I hope everyone who has been listening has found it incredibly interesting. Thank you very much.
Duncan: Thanks very much, Charlie. I appreciate the opportunity.
