Final Results

Sequoia Economic Infra Inc Fd Ld

26 June 2024

 

26 June 2024

SEQUOIA ECONOMIC INFRASTRUCTURE INCOME FUND LIMITED

(the "Company")

Final Results for the year ended 31 March 2024

The Directors of SEQI, the specialist investor in economic infrastructure debt, are pleased to announce the Company's results for the year ended 31 March 2024.

KEY Highlights

Resilient portfolio generating substantial cash, demonstrating prudent management of investments

·      NAV total return of 8.1% for the year (2023: -0.9%), in excess of target return of 7-8%.  

·      Total dividends of 6.875p per ordinary share, in line with November 2022, increase of target by 10% effective February 2023.

·      Dividend represents an 8.5% yield on the share price at the beginning of the financial year.

·      58% fixed rate investments (2023: 42%) to take advantage of expected interest rate decreases.

·      Continued proactive approach to capital allocation; repayment in full of Revolving Credit Facility to reduce net debt to zero and returning £88 million to shareholders.

Portfolio performance supported by prioritisation of credit quality over yield throughout FY24

·      Well diversified portfolio of 55 investments across 8 sectors, 30 sub-sectors and 10 mature jurisdictions.

·      97% of investments in private debt (2023: 98%) with no single investment accounting for more than 4.0% of NAV at time of investment.

·      50.8% of the portfolio in defensive sectors including digitalisation, accommodation, utilities and renewables.

·      59% of portfolio allocated to senior secured debt and 41% in subordinated debt.

·      Reduction of construction risk in the portfolio to 7.4% (2023: 14.2%).

Strong pipeline of investment opportunities, allows highly selective investment policy and focus on maintaining diversification and credit quality

·      Short weighted average life of 3.9 years (2023: 3.5 years), creating reinvestment opportunities.

·      Investment policy revised to sharpen focus on maintaining the credit quality of the portfolio whilst targeting a gross portfolio yield of 9-10%.

·      Diverse array of attractive potential investments currently under consideration.

·      Commitment to maintaining very selective approach to new investments, favouring highly defensive sectors with significant barriers to entry that provide essential services and that are expected to benefit from an improving economic backdrop and higher rate cycle.

Proactive management of share price discount to NAV driven by key strategic initiatives

·      Total share price return of 9.6% including dividends (2023: -16.1%) and improvement of share price to 81.10p (2023: 80.40p), resulting in modest decrease of the share price discount to NAV to 13.5% (2023: 13.8%).

·      Significant share buyback programme with 109.3 million shares repurchased over the financial year.

·      Commitment to active dialogue with shareholders reflected in capital markets seminar event and shareholder meetings throughout the year.

·      Delivery against plan to expand universe of investors and increase proportion of retail shareholders evidenced by recent appointment of Kepler Partners.

·      Directors and Investment Adviser team members participated in share purchases during the period, reflecting shared conviction in the investment case and value provided by current share price.

Continued progress along ESG metrics and initiatives

·      Portfolio ESG score improved for the fourth consecutive year to 62.77 (2023: 62.29), which was independently assured by KPMG.

·      Assurance extended this year to also cover negative screening and thematic investing - 70% of the portfolio falls within the positive themes.

·      Increased engagement with borrowers, including record 93% response rate to annual ESG questionnaire and seven deals that have ESG-related covenants embedded in the loan agreement.

·      First year reporting Company and Fund emissions data, along with other quantitative sustainability metrics.

James Stewart, Chair, commented

"I am pleased to announce another resilient year of performance, despite ongoing challenges in the macroeconomic backdrop. Whilst I remain mindful of the continuing economic uncertainty, I am confident that the Company has the ability to remain agile in the face of changing market conditions, as seen in the strong track record of resilience SEQI has built in the past nine years. We have continued to prioritise the credit quality of our portfolio and this strategy which, combined with ongoing market demand for infrastructure debt, enables the Investment Adviser to be extremely selective as it considers the strong pipeline of future opportunities.

We believe that the current yield opportunity presented by the portfolio should allow the Company to deliver both stable income and improved NAV in the year ahead. The Board remains focussed on the discount to NAV at which the Company's shares trade and continues to address this proactively against the challenging market backdrop."

Randall Sandstrom, Director and CEO/CIO, Sequoia Investment Management Company, said:

"The infrastructure sector presents numerous exciting opportunities in the short, medium and longer term, and we anticipate significant developments in the market over the coming years. It continues to be a defensive asset class with steadier returns, higher yields and lower loss rates than comparable corporate bonds.

We remain confident that our investment strategy will enable the portfolio to remain well positioned to continue to deliver attractive and sustainable returns into the future, underpinned by our strategic focus on maintaining credit quality and making selective investments in a diverse range of economic infrastructure assets with highly defensive characteristics.

Whilst the geopolitical and trade outlook remains somewhat uncertain, global growth is expected to be steady in 2024 and 2025 and improve in the UK and the Eurozone. Looking forward, the there are reasons for cautious optimism, as inflation rates in the US, UK, and Europe have fallen significantly since 2022/23 and are expected to continue to soften throughout 2024 and 2025. Short-term interest rates are expected to drop in 2H2024, throughout 2025 and into 2026. Furthermore, market default rates are expected by Moody's to peak by year end 2024 and drop throughout 2025. We believe these are positive tailwinds for SEQI and the listed alternative funds market in general."

ANNUAL REPORT

A copy of the annual report has been submitted to the National Storage Mechanism and will shortly be available at https://data.fca.org.uk/#/nsm/nationalstoragemechanism. The annual report is also available on the Company's website at https://www.seqifund.com/investors/financial-results-reports/ where further information on SEQI can be found.

INVESTOR PRESENTATION

The Investment Adviser will host a presentation on the annual results for investors and analysts today at 08:00am BST. There will be the opportunity for participants to ask questions at the end of the presentation. Those wishing to attend should register via the following link: https://stream.brrmedia.co.uk/broadcast/665ef724025b0d99d3b969ef

Copies of the Annual Report and Accounts will shortly be available on the Company's website www.seqi.fund and on the National Storage Mechanism.

For further information, please contact:

Sequoia Investment Management Company	[phone]
Steve Cook
Dolf Kohnhorst
Randall Sandstrom
Anurag Gupta
Jefferies International Limited (Corporate Broker & Financial Adviser)	[phone]
Gaudi Le Roux
Harry Randall
Teneo (Financial PR)	[phone]
Martin Pengelley
Elizabeth Snow
Faye Calow
Sanne Fund Services (Guernsey) Limited (Company Secretary)	[phone]
Matt Falla
Devon Jenkins

About Sequoia Economic Infrastructure Income Fund Limited

The Company is a closed-ended investment company that seeks to provide investors with regular, sustained, long-term distributions and capital appreciation from a diversified portfolio of senior and subordinated economic infrastructure debt investments. The Company is advised by Sequoia Investment Management Company Limited (SIMCo).

LEI: 2138006OW12FQHJ6PX91

Chair's statement

It is my pleasure to present to you the Annual Report and Audited Financial Statements of the Company for the financial year of operations ended 31 March 2024 particularly as this is my first report since taking over as Chair in January.

The market environment has once again been challenging for all investment companies, and in particular the alternatives sector, but despite this, the Company has had a good year. The Board continues to believe strongly in the investment qualities of the infrastructure sector and infrastructure debt as an asset class.

The portfolio remains resilient and generates significant levels of cash despite the continuing economic uncertainty. This reflects the strategy for the last year to prioritise credit quality over yield, as discussed in more detail under Portfolio performance below. We continue to benefit from the diversification of the portfolio and the short duration which allows us to recycle capital to take advantage of changing market conditions.

This is evidenced by the Company producing a NAV total return and a share price total return in excess of our targets. After a 10% increase in our dividend target last year, the Company paid total dividends of 6.875p per Ordinary Share. This dividend represents an 8.5% yield on the share price at the beginning of the financial year.

Investor concerns over rising interest rates, high inflation and a sluggish global economy have weighed on investment companies, and most of the alternative investment sector on the London Stock Exchange is currently trading at a significant discount to NAV. We believe that our discount is predominantly unrelated to the Company's performance, and we are pleased that during the financial year our discount has consistently been towards the lower end of the range and been one of the least volatile in the sector. Nevertheless, the Board continues to take a number of proactive steps to narrow the discount further, including its share buyback programme, which is the biggest amongst our peers, and in which we have invested £88.2 million (2023: £28.8 million) during the year.

NAV and share price performance

Over the financial year, the Company's NAV per Ordinary Share increased from 93.26p to 93.77p, after paying dividends of 6.875p, producing a NAV total return of 8.1% (2023: -0.9%), compared to our target return of 7-8%.

The modest increase in the NAV is mostly due to strong interest income during the year (10.37p per Ordinary Share), offset in part by dividends (6.875p per Ordinary Share), operating costs (1.38p per Ordinary Share) and negative valuation changes (2.29p per Ordinary Share). Our Investment Adviser, Sequoia Investment Management Company Limited, discusses these movements in more detail in its report. The share buyback programme delivered a positive NAV gain of 0.88p per Ordinary Share over the year.

It is also worth noting that the majority of mark‑to‑market price declines represent unrealised losses, driven by overall market risk as opposed to credit issues, and are anticipated to gradually reverse over time, as loans approach their maturity date - the so-called pull-to-par effect.

We have underperformed the liquid credit markets this year, with leveraged loans and high yield bonds generating total returns of 12.5% and 11.6% respectively - this is in large part a result of those markets bouncing back strongly from a low point. For example, the total return on high yield bonds was -4.7% in the previous financial year.

The Board believes that the share price is not a reflection of our specific strategy. This is discussed in the share performance section of the Investment Adviser's report. However, we are not complacent. Key strategic objectives of the Board are to reduce the discount, return the share price to a premium to NAV and ultimately resume our capital raising programme. A number of steps have been taken to support the share price and address the discount during the year, including:

·     an active buyback programme, with 109.3 million Ordinary Shares repurchased over the financial year;

·     a continuing active dialogue with investors - including a capital markets seminar, investor meetings (both one-on-one and group meetings) and a philosophy of open and transparent dissemination of information with considerable investment in online content on the Fund's website and monthly investor reporting; and

·     an ongoing programme working with the Investment Adviser and our broker, Jefferies, to expand the universe of investors and particularly the proportion of retail investors. With this in mind we have recently appointed Kepler Cheuvreux to support research and marketing to retail investors.

The ongoing share purchases by the Directors of the Company and the directors of the Investment Adviser reflect our shared conviction in the investment case and the value provided by the current share price. In total 122,656 Ordinary Shares were bought by these parties during the year.

The share buybacks were accretive to NAV, but we also believe that they have helped to reduce the discount and the volatility of the share price in times of significant capital reallocations away from the alternatives sector.

The Company's share price increased slightly over the year, from 80.40p to 81.10p with a share price total return of 9.6% (2023: -16.1%), once dividends are taken into account. Over the course of the year, the share price discount1 to NAV fractionally decreased from 13.8% to 13.5%.

Dividend

Our dividend of 6.875p per Ordinary Share remains cash covered at 1.06x. This is lower than last year and one of the reasons for this is the realisation of less capitalised interest than the previous year. The Board is confident that the current level of dividend is sustainable and will remain cash covered even if, as expected, interest rates in the UK and the other jurisdictions we lend in fall over the coming year. This sustainability is the result of a number of factors, including a decision to increase the proportion of fixed rates in the portfolio and continuing fee income from new investments. We also anticipate that the Fund will receive in cash a material amount of capitalised interest that has accrued over previous years.

The Board will continue to review the level of dividend in the context of our ambition to pay out a sustainable and attractive level of income to our Shareholders.

Portfolio performance

Given the uncertain economic climate we have continued to take a prudent approach to portfolio management:

·     we have prioritised defensive sectors such as digitalisation, accommodation, utilities and renewables;

·     we have not chased yield at the expense of credit quality;

·     we have ensured that the portfolio remains diversified in terms of sector and geography; and

·     we have continued to monitor credits closely and to engage and strengthen our relationship with borrowers.

As a result, our portfolio has performed well over the course of the year, with credit characteristics typically stable or improving. The weighted average credit rating of new loans has improved compared to investments made in the last financial year and the rating of the overall portfolio has remained stable.

The overall number of investments reduced from 68 to 55, in line with our prudent approach, using the capital received from repayments to reduce leverage, buyback shares and increase the liquidity available to the Company while investing in new opportunities. The proportion of our portfolio allocated to senior secured debt (rather than subordinated debt) increased from 57% to 59%, with the proportion relating to projects still in their construction phase falling from 14% to 7%. The diversification of the portfolio ensures that no single investment is worth more than 4.0% of NAV at the time of investment, albeit in some limited cases this percentage may increase over the life of the loan through restructurings. The portfolio also benefits from an improved average equity cushion1 of 38%. The performance is a reflection of our investment policy, stated a year ago, of taking advantage of attractive lending terms to improve the average credit quality of the portfolio whilst maintaining yield. Going forward, and taking into account the market outlook, we have recently revised this policy slightly such that we will look to redeploy capital so as to maintain the level of credit quality across the portfolio whilst targeting a gross portfolio yield of 9-10%.

We have made progress on our three material non‑performing investments. Our loan to Bulb Energy (1.7% of NAV) has now improved to the point where we expect to recover all or almost all of the amount we originally lent - we even have the potential to recover some of the interest that has accrued on this loan since it defaulted. This is a good example of the high recovery potential in infrastructure debt and the significant efforts of our Investment Adviser in maximising the recovery.

Our Investment Adviser is making similar efforts to maximise the recovery from our loan (1.4% of NAV), backed by a property in Glasgow that has been repurposed as a hotel (having been originally designed to be student accommodation). We made the decision to foreclose on our loan and steps are underway to exit the investment.

In relation to the third non-performing loan (2.2% of NAV), backed by a property in Washington D.C. that was formerly leased to a school, the Investment Adviser has been working with the owner of the property and the other lenders involved to find a long-term solution for the investment. We will keep investors informed as progress is made on this loan.

After the end of the financial year, we took steps on another loan: we restructured the balance sheet of the Active Care Group, a UK healthcare business. By showing decisive financial leadership, we have protected our investment while preserving 4,000 jobs in the UK and the provision of critical healthcare services. As part of this restructuring, we agreed to provide additional senior secured loans to the group and now hold majority equity ownership. This is not classified as a non‑performing loan.

The Investment Adviser discusses our non‑performing loans in more detail in the NAV and Fund Performance section of its report.

The Investment Adviser closely monitors each and every loan within the portfolio, and a review of the portfolio is carried out by the Board semi-annually, in addition to quarterly Board reviews. At times, loans are subject to enhanced scrutiny by our Investment Adviser. As at year end, approximately 12% of our portfolio (including the non-performing loans mentioned above) was receiving enhanced scrutiny. This compares to 11.6% at the time of the Interim Financial Statements and 7.9% at the prior year end. The Board has closely reviewed these positions and is comfortable that their current marks, which are generated by our Investment Adviser and independently reviewed by our valuation agent PricewaterhouseCoopers and our Independent Auditor Grant Thornton, fairly reflect the current value of these positions.

Capital allocation

The nature of the portfolio, and particularly the relatively short duration of loans, means that fresh capital is naturally generated throughout the year. This is an important differentiator for us compared to equity funds with significantly longer duration, where complex asset sales may be required to reduce leverage or evidence valuations.

How capital is allocated is a key strategic decision for the Board and the Investment Adviser and often a point of discussion with investors. Our approach seeks to take into account the full range of views and needs expressed by our investors. During the financial year, the Company has adopted a "balanced approach" to capital allocation, reducing net debt to zero by repaying in full its Revolving Credit Facility and returning £88 million to Shareholders through its share buyback programme. At the same time, the Investment Adviser has had a highly selective approach to new investments in line with the principles set out above.

The Board believes that, with an eye on the future, it is important for the Company to continue making new investments to maintain an active presence in the market and keep the Investment Adviser team motivated and support retention. New investments also help preserve the diversification of the portfolio.

The outlook for infrastructure debt markets

One of the key attractions of the Company to investors is that it provides an opportunity to participate in some of the large themes in infrastructure, notably decarbonisation and digitalisation. These transformations will require a staggering amount of capital, estimated at tens of trillions of pounds, over the coming years. This is on top of the capital needed simply to maintain the current stock of traditional infrastructure, such as transport systems and utility companies.

Infrastructure remains at the top of government priorities all over the world. It is abundantly clear that governments cannot provide all the capital needed and the private sector will have to step in. Central to our investment thesis is that, while very large amounts of private equity for infrastructure have been raised, there is a genuine shortage of the commensurate debt financing in our target sectors and geographies. Currently infrastructure equity funds have raised an estimated USD 1.2 trillion in equity capital. Typically, such equity would be geared two or three times, implying a debt funding requirement of USD 2.4 to USD 3.6 trillion. In fact, globally only USD 160 billion has been raised to date and this fundamental mismatch between demand and supply augurs well for the future of the Company.

Environmental, Social and Governance ("ESG")

This year, the Company continued to progress and reflect on its ESG framework and activities. The Board twice reviewed and updated its ESG Policy during the year. We describe the updates to the ESG Policy and our work on borrower engagement in more detail in the sustainability report. We added clarity and more detail to our negative screening criteria, which are implemented in tandem with our positive screening themes and both have been subject to independent assurance for the first time this year. Additionally, we also updated our ESG scoring methodology to reflect current market views, specifically with regards to the sustainability of the nuclear sector. In pursuit of the highest levels of transparency, we publish our full methodology, as well as our ESG Policy, on the Company's website.

This year, the portfolio's weighted average ESG score ticked up to 62.77¹ from 62.29 - a fourth year of improvement. Most of this increase is attributable to the strong focus on engagement with borrowers over the course of the year. Our Investment Adviser worked more closely with borrowers on enhancing their ESG credentials, forming action plans and embedding ESG-related covenants into loan agreements where possible.

Going forward, we believe that it is more important than ever to consider funding transition programmes, especially in the energy sector. This is challenging, as the initial pre-transition ESG score will be low, only improving over time once the investment is made. This may mean that it is not necessarily a given that our portfolio's average ESG score will improve at every year-on-year reporting date. However, successful investment in transition assets and the ability to improve underlying ESG metrics should improve the Fund's overall ESG score in the medium to long term.

We continue to report as an Article 8 fund under the Sustainable Finance Disclosure Regulation ("SFDR"). Whilst not having sustainable investment as its objective, the Company promotes ESG characteristics, the achievement of which is measured through the three KPIs of our ESG framework: negative screening, thematic investing (positive screening) and ESG scoring. This year, the scope of the ESG assurance carried out by KPMG was extended to cover our negative screening and thematic investing activities.

The Company continues to take steps to minimise its own carbon emissions. Unavoidable emissions from operations are offset through credits produced by a UK peatland restoration project verified under the Peatland Code. This carbon offsetting programme is financed by a voluntary deduction taken from the fees of the Directors and our Independent Consultants.

Congratulations to our Investment Adviser, who won Best ESG Infrastructure Investment Strategy (Capital Finance International) last year.

The Company, along with many other participants in the sector, anticipates the further development of the regulatory and reporting landscape as we navigate what has been a "moving feast". We look forward to enhanced consistency of reporting and standardisation in the future in order to assist Shareholders and potential investors in their decision making with regard to these types of investments.

1.     KPMG has issued independent limited assurance over the selected data indicated in the reporting criteria and assurance opinion available in the Sustainability Publications section of our website here: www.‌seqi.‌fund/sustainability/publications/

Board changes

I would like to thank my predecessor, Robert Jennings, who served as the Company's first Chair from its IPO in 2015 until the end of 2023. Under Robert's leadership, the Company grew tenfold and became the largest debt fund listed on the London Stock Exchange. He led the Board with great expertise, insight and energy through numerous economic challenges and took particular interest in helping the Investment Adviser develop and implement its award-winning ESG policies. It was a privilege to serve my first two years on the Board under his leadership.

We welcomed Margaret Stephens to the Board in January 2024. She brings a wealth of infrastructure and wider experience from her time as a partner at KPMG and her active non-executive portfolio.

In June 2024 we also sadly said goodbye to Sandra Platts, the last of the original Board members. Sandra has made a significant contribution to the success of the Company over the last nine years and we will miss her wise counsel and insights. Paul Le Page joined the Board to replace Sandra. Paul is a Guernsey resident and brings considerable experience of the alternatives sector as well as wide board experience. The appointment of Paul brings to completion a very successful Board succession plan, and I am confident that we have a Board with the skills and experience to navigate the future.

Outlook

After six months in the Chair and over two years on the Board, I would like to offer some reflections on the current position and the future of the Company.

Investment in infrastructure is a priority for governments around the world and therefore demand for infrastructure debt in the sectors and geographies that we lend to will remain high. The Company remains the only listed economic infrastructure debt vehicle, which is a differentiator and gives us a competitive advantage.

I am mindful of the continuing economic uncertainty and particularly the pace and trajectory of the economic recovery. However, I take confidence from the fact that the Company has a track record of resilience over the last nine years with its diversified portfolio, strong interest income and disciplined approach to capital deployment, and that we have the ability to remain agile in the face of changing market conditions.

Our investment strategy will be to redeploy capital as loans mature so as to maintain the level of credit quality across the portfolio, whilst targeting a gross portfolio yield of 9-10%. This strategy, enabled by the continuing market demand for infrastructure debt, allows the Investment Adviser to be extremely selective in the investments it chooses to pursue from its significant pipeline of opportunities.

We will also continue to monitor our share price closely and, where appropriate, engage in limited share buybacks. The rate at which we buy back shares will flex depending on various factors, including the level of our share price discount to NAV.

In August 2024 we will hold our tri-annual Continuation Vote. The Board will never be complacent about these types of events. However, we believe that the Company has a bright future, a critical mass, a portfolio that is resilient and will deliver our target returns, and that we will achieve our objective of increasing the NAV per Share. Shareholders should rest assured that we will do everything we can to return the share price to a premium. We always welcome regular open and transparent dialogue with our Shareholders so that we can take account of their views when setting strategy.

James Stewart

Chair

25 June 2024

Investment Adviser's report

The Investment Adviser's objectives for the year

Over the course of the financial year, Sequoia Investment Management Company Limited ("SIMCo" or the "Investment Adviser") has had the following objectives for the Fund:

Goal	Commentary
Gross portfolio return of 8-9%	The Company is invested with a portfolio that currently yields in excess of 10% and produced a NAV total return of 8.1% in the financial year, slightly above the Company's target annual gross return of 8-9% after approximate annual costs of 1%
Manage the portfolio responsibly through an inflationary and rising interest rate environment	The Fund has previously positioned its portfolio defensively to minimise the effects of the rise in interest rates and is now in a position to lock in these higher rates, reflected by a decrease in the floating rate proportion of its portfolio from 58.4% at 31 March 2023 to 42.1% at 31 March 2024 and the acquisition of an interest rate swap
Follow a sustainable investment strategy	The Fund has modestly improved the overall ESG score of its portfolio from 62.29 to 62.771, mainly driven by increased ESG engagement with the companies that it lends to. There was a net reduction from acquisitions driven by the need for diversification
Timely and transparent investor reporting	The Company's Factsheet (which was awarded the AIC's 2023 Shareholder Communication Award for Best Factsheet), commentaries and full portfolios have been provided monthly for full transparency. Investor engagement has continued over the financial year including a capital markets seminar, smaller bespoke investor events and a results roadshow as well
Continue to improve the ESG profile of the Company and the portfolio	The Fund reviewed and updated its ESG framework, given the continually evolving nature of ESG, to ensure it remains up to date and best reflects current thinking and the future direction of travel. In particular the Fund revisited its scoring of nuclear power and added more detail to its negative screening criteria. The latest ESG policy can be found on our website: www.seqi.fund/publications/
Dividend target of 6.875p per Ordinary Share per annum	The Company paid four quarterly dividends of 1.71875p per Ordinary Share in line with its dividend target, amounting to a total of 6.875p

1.     KPMG has issued independent limited assurance over the selected data indicated with a reference number in the 2024 Annual Report. The reporting criteria and assurance opinion are available in the Sustainability Publications section of our website: www.seqi.fund/sustainability/publications/

Economic infrastructure is a diverse and highly cash-generative asset class

Economic infrastructure debt is a form of investment that has gained a reputation for its resilience and reliability, attracting a broad range of investors. This asset category possesses several unique qualities that investors find attractive. One of these is the significant barriers to entry enjoyed by the borrowers (e.g. high capital expenditure requirements, regulations, etc.), which discourage new competitors and protect the interests of current investors. Another is the regular and predictable cash flows that these investments generate, offering a dependable revenue stream for investors. This is largely due to the vital nature of the services provided, which ensures a steady demand. Furthermore, the physical assets that underpin economic infrastructure debt offer tangible security for the investment.

These attributes have continued generating interest in economic infrastructure debt among investors looking for a steady income stream and a reliable long-term investment. The sectors applicable to this type of debt include transportation, utilities, power, telecommunications and renewables, and some social infrastructure projects with very similar attributes. These sectors often operate under long-term concessions or licenses, with revenues linked to demand, usage or volume.

To manage demand risk, economic infrastructure projects typically have lower leverage than availability‑based social infrastructure, maintain larger equity cushions, conservative credit ratios, strong loan covenants, and provide more substantial asset backing for lenders. This strategy has been consistent over the financial year, guiding the Fund's investment strategies.

Despite market volatility during this period, the Fund has proactively positioned its portfolio to defend against potential downturns. This includes focusing on operational projects, senior debt and non-cyclical industries as well as decreasing our exposure to construction assets. These measures have helped mitigate risks from the current inflationary market conditions and other global uncertainties, such as the ongoing conflict in Ukraine and the Middle East.

Following the 2008 global financial crisis, most banks were restricted to financing only the most established sectors at modest gearing levels. However, a revolution was emerging as developed market governments faced the need to fund ever-expanding social programmes driven partly by ageing populations and economic weaknesses post-crisis, as well as the economics of globalisation.

As a result they began to rely on the private sector, not only for traditional infrastructure, but also for the new mega-sectors of energy transition and digitalisation. These sectors were not only more commercially driven, though initially supported by subsidies in the case of renewables, but also naturally more geographically dispersed.

This shift was creating a more fragmented mid-market for economic infrastructure, moving away from a world of centralised assets funded by governments or major corporations, including privatised utilities. This period also marked the decline of the UK's and Europe's experience with Public-Private Partnerships ("PPPs") social infrastructure, a segment that still attracted bank financing at higher loan-to-values but fell out of favour due to public sentiment.

Given these investment characteristics, it is unsurprising that the private infrastructure financing markets have been growing rapidly. Private infrastructure equity funds have grown at a compound annual growth rate of 17% since December 2012, with their debt counterparts growing even faster at 27%. While the equity sector gained momentum in 2006-07 due to PPP and traditional infrastructure, it significantly accelerated in 2015-16, driven by energy transition and digitalisation. Currently, the industry is approaching a value of USD 1.2 trillion in assets under management ("AUM"), making it one of the fastest-growing asset classes and now a mainstream component of any institutional portfolio. Private infrastructure debt funds experienced accelerated growth after 2010 with the emergence of the energy transition and digitalisation sectors. The market has now reached an AUM of around GBP £160 billion, and whilst lagging behind the equity side, there are ample opportunities to take advantage of.

The data presented here excludes investments outside fund structures, such as those by governments, corporations and direct investments by institutions. These additional investments are estimated to make the total market size even larger.

The market environment during the year

While infrastructure debt funds lagged behind their equity-backed counterparts in terms of capital invested, the Investment Adviser believes that a multitude of growth factors will lead to a continuing expansion of the private infrastructure debt market:

·     after the 2008 global financial crisis, constraints have been put into place on bank lenders in the alternatives space leading to opportunities for private debt providers;

·     private equity investment has a symbiotic relationship with private debt investment. The need for private equity investment in sectors such as energy transition, digitalisation and urban revitalisation creates demand for private debt to support these projects via refinancings, M&A financing and leveraged growth investments; and

·     investors are seeking additional diversification in their portfolios, which private infrastructure debt offers at an attractive cash yield, low correlation to other markets and lower risk compared to equity investments.

While infrastructure debt benefits from inherent revenue stability, the Fund's valuations have been affected by the volatility observed in the financial markets over the last year, particularly the rapid decline in government bond prices in the first half of the financial year and subsequent recovery.

The first half of the financial year saw a continued normalisation of interest rates, as central banks were reining in inflation by increasing policy rates. At the end of the financial year, yield curves were inverted, as long-term government bond yields did not increase to the same extent as short‑term rates.

The US, UK and Europe have witnessed a decline in their high inflation rates in the first six months of the year from the highs seen in the previous fiscal year, with further stabilisation noted in the latter half of the year. The anticipation of additional interest rate increases from central banks has diminished, as these rates are believed to have reached their maximum value. The attention has now shifted towards the viability of a high-interest rate environment considering the individual economies of each region, and the timing of any potential rate reductions.

The Fund's private debt portfolio performance is susceptible to changes in interest rates and credit spreads in liquid markets. On the one hand, declines in the value of government debt, high yield bonds or leveraged loans have at times negatively impacted the valuation of the Fund's investment holdings. However, these fluctuations are generally unrealised mark-to-market changes that will reverse as our loans near their maturity date. On a positive note, the Fund has benefitted from challenging market conditions.

Businesses, including infrastructure companies, have struggled to raise new capital due to weak capital markets globally, bolstering the Fund's pricing power when negotiating new loans. The Fund has, over the last year, taken advantage of this by looking to improve the average credit quality of its lending book, while maintaining its yield. Hence, despite market hurdles, the Fund's infrastructure debt investments continue to present an attractive risk-return profile to investors.

Market backdrop

Consumer price index year-on-year

What is happening?

Inflation is past its peak levels in all of the Fund's investment jurisdictions, as inflation reduces in most developed markets globally.

Why this matters to the Fund

As inflation drops, the likelihood of future interest rate cuts increases, which makes alternative investments such as infrastructure more attractive when compared to liquid credit. Furthermore, lower inflation leads to less cost pressure during the construction of a project, decreasing construction risk, all else being equal.

Overnight financing rates

What is happening?

Short-term interest rates have plateaued in the second half of the financial year in the US, UK and Europe.

Why this matters to the Fund

The portfolio's floating rate investments will start to de-risk as their borrowing costs have peaked and are expected to start decreasing. Once a downwards trend toward a lower interest rate environment unfolds, this will be supportive of fixed rate loans and bonds, as it will accelerate their pull-to-par. Further, as short‑term rates begin to fall, yield curves will become less inverted or turn positive again, supporting a bid for risk in the market.

Commodity Index

What is happening?

The Commodity Research Bureau Index has peaked ahead of inflation rates in the US due to built-up demand during the COVID-19 pandemic.

Why this matters to the Fund

Goods make up a large portion of inflation and as commodity prices cool, inflation can be expected to soften, lowering the cost of construction and taking pressure off interest rates, all else being equal.

Portfolio overview

Throughout the fiscal year, our persistent strategic focus has been on the continuous development and administration of a broad-based portfolio of private debt investments, in a diverse range of infrastructure sectors and subsectors, located in regions with low political/regulatory risk. Our main goal has been to maintain our projected returns while prioritising the reduction of credit risk. During this period, we have maintained our cautious investment strategies such as keeping a substantial part of the portfolio in resilient sectors, prioritising senior debt over mezzanine debt and preserving or gradually improving the portfolio's credit quality.

The current highlights of our portfolio, which reflect the results of these efforts, include:

·     50.8% of the portfolio in defensive sectors. These include digitalisation, accommodation, utilities and renewables, which are viewed as defensive because they provide essential services, often operate within a regulated or contractual framework or have high

·     barriers to entry.

·     Reduction of construction risk in the portfolio from 14.2% to 7.4%, achieved via repayments of investments in construction and higher scrutiny being applied to new construction assets at the origination stage of the investment process.

·     58.6% of the portfolio in senior secured loans and 41.4% in subordinated debt, a substantially higher proportion of senior secured debt than we have previously held.

·     Improved the credit quality of new loans made over the year, compared to the portfolio average.

·     Maintained credit quality of the portfolio over the last 12 months without a reduction in targeted yields. Our policy not to invest in CCC profile loans remains in place.

·     Continued low modified duration of 2.2, with 42.1% of the portfolio in floating rate deals and 57.9% in short-term fixed rate assets, both including the effects of interest rate swaps, and a current low portfolio weighted-average life of 3.9 years. Interest rate swaps have been added to the portfolio as a cost-efficient product increasing visibility of future cash flows and providing protection against a faster-than-expected fall in short-term rates.

The Fund's investment portfolio is diversified by borrower, jurisdiction, sector and subsector, with strict investment limits in place to ensure that this remains the case. The chart below shows portfolio sectors and subsectors on 31 March 2024:

Diversification by sector

Digitalisation	26.0%
Data centres	13.0%
Telecom towers	7.2%
Telecom infra services	3.4%
Broadband & fibre	2.4%

Power	20.6%
Base load	8.8%
Other electricity generation	6.0%
Energy efficiency	2.8%
Power services	1.4%
Energy transition	1.0%
Nuclear power	0.6%

Transport - vehicles	8.9%
Specialist shipping	4.9%
Rolling stock	2.3%
Aircraft	1.7%

Accommodation	3.3%
Healthcare	1.8%
Student housing	1.5%

Renewables	10.0%
Solar & wind	5.7%
Landfill gas	4.3%

Utility	11.55
Midstream	5.6%
Utility services	4.0%
Renewable electricity supply	1.9%

Transport - systems	7.3%
Port	3.1%
Ferries	3.0%
Rail	1.1%
Road	0.1%

Other	12.4%
Waste-to-energy	4.1%
Residential infra	3.0%
Private schools	2.4%
Hospitality	1.6%
Social infra	1.2%
Agricultural infra	0.1%

The Fund places a strong focus on investments in areas known for their stability and low risk, in line with its predefined investment criteria. This approach leads the Fund to limit its investments to countries that meet certain standards, such as having an investment-grade classification. The Fund's investment approach is centred on identifying opportunities that offer attractive risk-adjusted returns, while carefully steering clear of potential hurdles, particularly those related to regulatory and legal risks.

Portfolio overview

The Fund adopts a prudent stance in its investment endeavours, particularly with regard to the risk associated with greenfield construction projects. Although the Fund may allocate up to 20% of its NAV for lending to such investments, its actual exposure to assets under construction as of 31 March 2024 stood at 7.4% of its overall portfolio. This is lower than the average historical construction exposure because of our conservative investment approach given the slow growth environment and recent supply chain disruptions.

The Fund exercises careful discretion in project selection, exclusively investing in those where it perceives that it is adequately compensated for the moderate construction-related risks it undertakes. Additionally, the Fund maintains stringent criteria for evaluating the inherent strength of the borrower's business or project to ensure effective risk mitigation. For example, the Fund tends to avoid investing in projects that have both construction and ramp-up or demand risk.

The Fund's strategy is fundamentally centred on private debt, which makes up the vast majority of its portfolio. This strategic direction is motivated by the fact that private debt usually provides an "illiquidity premium", that is, a return that is higher than that of liquid bonds with comparable features. Given the Fund's primary "buy and hold" investment strategy, securing this illiquidity premium is considered a wise approach. Research conducted by the Investment Adviser validates the presence of this extra premium, indicating that infrastructure private debt instruments typically yield 1-2% more than similar publicly rated bonds.

Factor	NAV effect
Interest income on the Fund's investments	10.37p
Portfolio valuation movements, net of foreign exchange and hedge movements	(2.29)p
IFRS adjustment from mid-price at acquisition to bid price	(0.19)p
Operating costs	(1.38)p
Gains from buying back shares at a discount to NAV	0.88p
Gross increase in NAV	7.39p
Less: Dividends paid during the year	(6.88)p
Net increase in NAV after payments of dividends	0.51p

NAV performance

Over the last 12 months, the Company's NAV per share increased from 93.26p per share to 93.77p per share ex-dividend, driven by the following effects:

The total return on the NAV was equal to 8.1% over the period. This is in excess of the Company's long-term return expectations of 7-8% p.a. The portfolio has performed approximately in line with the FTSE All-Share index and FTSE 250 Index, with a small underperformance of 0.1% and 0.5% respectively. More substantial underperformance arose relative to high-yield bonds by 3.5% and leveraged loans by 4.3%. The Company's NAV total return outperformed 10-year Gilts by 7.9%.

As evident from the table provided on this page, the principal factor that positively influenced NAV performance was the interest income derived from investments. This was partially offset by moderate valuation declines in the Fund's investments, mostly as a result of rising discount rates. It is worth noting that the majority of mark-to-market price declines represent unrealised losses, driven by overall market risk as opposed to idiosyncratic risk, and are anticipated to gradually reverse over time, as loans approach their maturity date (the "pull-to-par" effect). Less than half of the portfolio's negative valuation movements are attributable to the Company's non-performing loans.

The Investment Adviser believes that the portfolio is well positioned to outperform the liquid credit markets in the long run for the following reasons:

·     private debt has higher yields than liquid credit, for a like-for-like credit quality;

·     debt supported by infrastructure exhibits resilience due to higher asset backing. This resilience is evident in the Fund's lower loss rates compared to broader liquid credit, again when considering equivalent credit quality; and

·     a high level of portfolio diversification by sector, subsector and jurisdiction, thereby minimising the impact of single asset-, sector- and country-specific political and economic risks. This reduces overall portfolio risk as assets have low correlations and are exposed to different risks.

Share performance

As at 31 March 2024, the Company had 1,625,484,274 Ordinary Shares in issue (31 March 2023: 1,734,819,553). The closing share price on that day was 81.1p per share (31 March 2023: 80.40p per Ordinary Share), implying a market capitalisation for the Company of approximately £1.3 billion, a decrease of c.£76.5 million compared to 12 months ago due to the Company's share buyback programme, which has reduced the number of Ordinary Shares in issue. After the financial year end, the Company cancelled all 154,046,443 of its Ordinary Shares held in treasury as at 26 April 2024.

After taking account of quarterly dividends amounting to 6.875p per Ordinary Share, the share price total return over the period was 9.6%. The observed 0.7p increase in the share price over the year was driven by two factors:

·     the increase in NAV as discussed above; and

·    a small improvement in the rating of the shares due to a narrower discount to NAV (13.5% as at 31 March 2024 and 13.8% as at 31 March 2023).

One of the main reasons for the share price discount to NAV is the adverse market sentiment towards alternative assets, including debt funds in the listed investment company sector. This is partly due to the residual effects of inflation and sluggish growth, coupled with a certain degree of scepticism in the accuracy of some alternative fund valuations in general as well as capital flows in the market, such as index flows and multi-asset flows. The Investment Adviser is focused on managing variables within the Fund's control and hence wants to reassure investors that the Fund's valuations are independently reviewed and accurately reflect the value of its assets. Unlike most private equity, infrastructure equity and real estate equity funds, the Fund's valuations are published monthly.

However, the problem has been exacerbated by capital outflows from those who are reallocating from liquid alternatives to government bonds and money market instruments, which have recently offered higher yields on a tax-adjusted basis. This has led to "forced sellers" driving down share prices across the sector, although the sector has observed more stability in the second half of the financial year as policy interest rates in key markets appear to have reached their peak. The Company is able to take advantage of the prevailing market conditions due to the short weighted-average maturity of the portfolio. A considerable amount of capital has been reinvested at the current higher rates. To further facilitate this strategy, the Investment Adviser has amended the investment policy to allow for up to 60% of investments to be held as fixed-rate assets. In addition, an interest rate swap has been put in place for which the Fund is the receiver of fixed rate payments and pays a floating rate coupon in exchange to the counterparty.

Both the Investment Adviser and the Company's Directors believe that the current discount of the share price to NAV is excessive.

We collectively believe that it does not accurately reflect: the potential of the investment portfolio to deliver attractive risk-adjusted returns during periods of economic uncertainty; its shorter investment duration; and its robust NAV approach. With this in mind, the Fund continues to buy back its Ordinary Shares, which it considers to be undervalued, thereby providing NAV accretion for existing Shareholders. In the past 12 months alone, the Company has repurchased 109,335,279 Ordinary Shares. The share buyback programme was first announced to Shareholders in July 2022, and since then, the Company has bought back a total of 142,754,724 Ordinary Shares, nearly 9% of its total outstanding Ordinary Shares as of 31 March 2024. This has resulted in an increase in NAV per Ordinary Share of 1.06p since the implementation of the buyback programme.

Dividend cover

The Fund has paid 6.875p in dividends during the last 12 months in accordance with its target.

The Company's dividend cash cover was 1.06x for the financial year. This is lower than in the previous year, for the following reasons:

·     The Fund has realised less capitalised interest compared to last year, namely around £13 million in the period compared to £20 million in the prior year. Receipt of this component is tied to refinancing or repayments and therefore exhibits high year-on-year volatility;

·     The Company has increased its dividend target from last year as the Board was confident in the level of income produced by the portfolio. Given that the Company's dividend remains comfortably cash-covered, the portfolio's floating rate assets have successfully offset the higher dividend payments; and

·     The Company has repaid its Revolving Credit Facility ("RCF") balance in full whilst building up increased levels of liquidity. As a result, the income generated by the spread between RCF utilisation cost and yield on investments funded by such drawings has not been captured in the period.

Fund performance

		31 March 2024	30 September 2023	31 March 2023
Net asset value	per Ordinary Share	93.77p	92.88p	93.26p
	£ million	1,524.3	1,561.5	1,617.9
Cash held (including in the Subsidiaries)	£ million	99.4	141.7	68.7
Balance of RCF	£ million	0.0	0.0	181.8
Invested portfolio	percentage of NAV	90.6%	90.3%	106.5%
Total portfolio	including investments in settlement	94.2%	92.2%	109.6%

Portfolio characteristics¹

		31 March 2024	30 September 2023	31 March 2023
Number of investments		55	57	68
Valuation of investments	£ million	1,380.7	1,410.2	1,723.5
ESG Score		62.772	62.84	62.29
Single largest investment	£ million	60.6	60.2	61.0
	percentage of NAV	4.0%	4.3%	3.8%
Average investment size	£ million	22.6	23.5	25.3
Sectors	by number of invested assets	8	8	8
Sub-sectors		30	27	26
Jurisdictions		10	10	12
Private debt	percentage of invested assets	96.9%	97.3%	98.1%
Senior debt		58.6%	53.5%	57.2%
Floating rate		42.1%	54.4%	58.4%
Construction risk		7.4%	11.2%	14.2%
Weighted-average maturity	years	4.4	4.2	4.1
Weighted-average life	years	3.9	3.6	3.5
Yield-to-maturity		10.0%	10.9%	11.9%
Modified duration		2.2	1.5	1.5

1.     Relates to the portfolio of investments held in the Subsidiaries

2.     KPMG has issued independent limited assurance over the selected data indicated in the reporting criteria and assurance opinion available in the Sustainability Publications section of our website here: www.seqi.fund/sustainability/publications/

Fund performance

As can be seen in the table above, the Fund has reduced its number of investments from 68 to 55 within the last 12 months. The Investment Adviser has selectively decided not to redeploy some of the capital received from maturing assets, instead using these proceeds to de-lever the Fund, increase the liquidity available to the Company and buy back shares while they are trading at a discount. The decrease in investments has been actively managed so as not to impact the diversification the Fund provides to its investors; the portfolio remains invested in eight different sectors and has increased its subsector count to 30 from 26 at the prior year end. Furthermore, some of the exited positions were construction assets, which has allowed the Company to de-risk the portfolio even further.

The Company's portfolio of investments has decreased by approximately £342.8 million, attributable primarily to two factors. Firstly, the Company has concentrated on liquidity management, repaying £181.8 million of its outstanding RCF and increasing the Fund's cash reserves by £30.7 million. Secondly, the Company has repurchased £88.2 million worth of shares to return value to Shareholders and mitigate a widening share discount. The remaining decrease in size of the portfolio is primarily due to asset valuations, which are discussed in detail in the NAV performance section above.

Over the past twelve months, the proportion of the Fund's investment in senior secured debt has increased marginally. Despite multiple repayments and a reduction in the total amount invested in senior secured positions, the Investment Adviser has successfully identified and invested in new opportunities, maintaining the level of senior secured debt above 50% despite the overall reduction in the portfolio size. Additionally, following a strategy to lock in currently high long-term rates, there has been a shift towards a higher percentage of fixed-rate assets.

This shift has been achieved through a preference for fixed-rate assets at origination and the implementation of a portfolio-level interest rate swap, which has effectively converted some existing floating-rate investments into fixed-rate. Consequently, the proportion of floating-rate assets has decreased by 16.3%, and the portfolio's modified duration has increased to 2.2 from 1.5 in the previous financial year.

Credit performance

Over the past financial year, the credit performance of the entire portfolio has remained resilient. Given that the portfolio is made up of high-yield debt instruments, it is to be expected that a small fraction of investments might face some credit issues over their lifetime. The Company's experience so far indicates that credit losses have only slightly impacted investment returns, contributing to an annual loss rate of about 0.53%, a marginal improvement from the previous year's 0.56%. This fares well when compared to non-financial corporate debt with a similar credit rating, where the historical annual loss rate is approximately 1.6%.

We will be proactive where appropriate to protect our investments. For example, after year end, we restructured the balance sheet of Active Care Group, a UK healthcare business. As part of this restructuring, we provided additional funding of £34.8 million as a senior secured loan. In return we received majority equity ownership of ACG HoldCo, the new holding company. Not only did this enhance the value of our HoldCo loan, the restructuring saved 4,000 jobs and ensured the continued provision of healthcare for vulnerable service users.

Lenders are, in general, obligated to maintain confidentiality towards the companies they lend to. Therefore, the Company's policy is not to publicly discuss underperforming loans, except when the borrower has entered an insolvency process (such as administration in the UK, or Chapter 11 in the US).

Publicly discussing an underperforming business could potentially worsen its problems, for instance, by making it more difficult to retain employees or secure new contracts.

US private school

A large building in a prime location in Washington D.C. was used as collateral for a loan. This building was initially occupied by a private school under a long-term lease agreement. However, due to the COVID-19 pandemic, the school experienced a significant challenge in ramping up enrolment, leading to increased operational costs and eventually, insolvency. In 2022, the loan terms were revised and extended to support the borrower's post-pandemic business plan. Unfortunately, the school was not able to bounce back and was officially evicted from the property on 19 October 2022. The lenders are currently in the forbearance period and the property owner is actively marketing the building to potential tenants, mainly from the education sector, and has received initial responses from several educational institutions in the Washington D.C. area. Despite this, the global commercial real estate market continues to struggle due to decreased demand, the rise of remote work, economic instability and high interest rates. These factors have collectively led to a decrease in the property's valuation over the year. As of 31 March 2024, this loan represents 2.2% of NAV.

UK energy supply company

The Investment Adviser has continued to make substantial progress on recovering value from the Fund's loan to Bulb Energy. During the year, as part of a £25 million partial settlement of claims with the Joint Energy Administrators of Bulb, the Company received a distribution of £9 million in cash and expects to receive a further £16 million in cash (conditional on criteria which the Company expects to be met) in or shortly after September 2024.

The latter amount may be deferred until or shortly after September 2025 (in certain limited circumstances), in which case the amount will increase from £16 million to £18.4 million. The Company also received an additional distribution of £2 million in cash from the Administrators of Simple Energy (the parent of Bulb) during the year. In total these distributions take the total recoveries from the defaulted loan to Bulb to £41.0 million in cash and £11.3 million in shares of Zoa Technologies Ltd ("Zoa").

Further distributions are expected over time from Simple Energy. It is also possible that there may be further distributions by Bulb over time. Realisation of value from the Company's majority equity stake in Zoa will be dependent on Zoa's business performance and any future fundraise. Following the recent developments and increased visibility on eventual recovery of the loan, the Investment Adviser believes that the loan no longer requires enhanced scrutiny. We will continue to provide updates as appropriate to Shareholders on any material developments relating to the investment.

The combined value of the Fund's shares in Zoa and its loan to Bulb is 1.7% of NAV as at 31 March 2024.

Glasgow property

During the year, the Company decided to foreclose on a loan backed by a property in Glasgow that was operating as a hotel (having been originally designed to be student accommodation.) This decision was made to protect our position, once it became clear that the property's owners were not in a position to fund the combined cost of operating losses at the hotel and interest expense on the loan. The Investment Adviser has been working with the administrator and property agents on resolving the situation, by a sale of the property to a new owner, or otherwise. As at 31 March 2024, this loan represents 1.4% of NAV.

Balance sheet management

During the year, the Fund has cleared all its outstanding loans from the revolving credit facility. At the start of the year, it had a net debt position of £113.1 million, which comprised a £181.8 million drawing on the Company's revolving credit facility and a cash balance (including cash held in the Subsidiaries) of £68.7 million. By the end of the year, it had an undrawn revolving credit facility and a cash balance of £99.4 million. The Fund does not plan to maintain such high cash balances: although having liquidity provides flexibility, it comes at too high an opportunity cost. The revolving credit facility remains available to manage the timing mismatch between repayments and new investment. The Investment Adviser, therefore, continues to look to originate new loans and currently has a dynamic pipeline of over £250 million of potential investment opportunities.

Considering the current portfolio composition, the Fund is actively generating deals in sectors that would merit increased exposure such as Transport Systems and Transport Vehicles as the Investment Adviser looks to increase the portfolio diversification. More details can be found in the "Strong pipeline of opportunities" section of the Investment Adviser's Report.

In addition to selectively investing in new infrastructure loans, we are of course mindful that the Company has an active share buyback programme. We are perhaps fortunate that infrastructure debt is such a highly cash-generative investment that we can pursue a balanced approach to buybacks while also maintaining our investment objectives.

The "pull-to-par" effect (pence)

These NAV estimates are calculated on the basis that interest rates and bond yields remain constant and do not take into account NAV-accretive mechanisms other than the pull-to-par; the only variable is the passage of time.

Non-performing loans are excluded from the calculation and recoveries of underperforming loans are based on internal credit ratings. In monetary terms, the pull-to-par is expected to be material over the next three years:

	Pull to par	Pull to par
Period	(£m)	(pence per share)
1 April 2024 to 31 March 2025	25.1	1.6
1 April 2025 to 31 March 2026	20.1	1.2
1 April 2026 to 31 March 2027	12.2	0.8
1 April 2027 onwards	8.5	0.5

Portfolio valuation

Currently the average single B or higher-rated loan in the portfolio is marked at a price of about 97 pence on the pound; this mostly reflects the higher interest rates and credit margins used to value the loan, compared to those available in the market at the time the loan was made (i.e. effect of increasing base rates).

Over time, as loans marked down due to the above-mentioned effects approach their repayment dates, we will see their valuations accrete back up to 100 pence on the pound (assuming no credit losses) - this is the so-called "pull‑to‑par" effect, the additional value on the NAV per share of which is shown on the graph to the left.

Origination activities          

The Fund's investment strategy is designed to target assets in both the primary and secondary debt markets, each offering distinct benefits. Investments in the primary market enable the Fund to earn immediate lending fees and customise its investments to meet specific needs. On the other hand, acquiring assets in the secondary market allows for the quick allocation of capital into mature assets with a proven track record.

Primary market origination

The Fund continues to focus on the primary loan markets, which consistently offer substantial opportunities. The Investment Adviser actively seeks bilateral loans and participates in "club" deals, where a small consortium of lenders work together. In addition, the Fund has been involved in more broadly syndicated infrastructure loans. Primary market loans are attractive due to their beneficial economics. As the lender, the Fund enjoys upfront lending fees and increased flexibility in negotiating terms. As the Fund has expanded, its primary market investment activity has grown and now represents the vast majority (87.0%) of the portfolio.

Secondary market origination

While the primary market remains a key focus, the Fund also procures certain investments from banks or other lenders in the secondary markets. This strategy allows for the rapid deployment of capital, as primary market transactions in infrastructure debt can often take time to execute. It also provides the Fund with more liquid assets, offering flexibility when there's a need for increased liquidity. Research indicates that infrastructure loans typically see improvements in credit quality over time. Therefore, in many instances, secondary loans have enhanced credit quality since their initial origination.

Strong pipeline of opportunities

While the Investment Adviser's main focus has been on monitoring current positions, there is also a broad spectrum of potential investments which are currently being evaluated.

Regarding the current opportunities observed by the Investment Adviser in the market, it is pertinent to highlight the evolution of infrastructure debt over the past few decades and the potential future opportunities.

Initially, in the early 2000s, the market was dominated by established subsectors such as oil and gas infrastructure, privatised utilities, shipping and roads. However, these subsectors have swiftly adapted to technological advancements and shifting market dynamics.

This adaptation has led to the emergence of mainstream investment opportunities in areas such as data centres, offshore wind and liquified natural gas infrastructure. These newer sectors, combined with the established ones, now constitute the core of the Fund's investment scope.

Evolution of the market opportunity

Established	Mainstream	Nascent	Speculation
Rail Airports Privatised utilities Hydro Oil & gas Waste Roads Ports Shipping PPP/PFI Nursing homes Student living Hospitals Sports/leisure Mobile towers Solar PV Onshore wind	Fibre-to-the-home Recycling Batteries Bioenergy Offshore wind Liquefied natural gas Co-living EV charging Bioscience parks Interconnections Data centres	Drones Security & surveillance Orbital/space Maglev trains Carbon capture and storage Agri-infrastructure Nuclear & renewables decommissioning Flood defences Hydrogen Water efficiency Driverless transport Wave & tidal Geothermal Floating wind	Robotics AI assisted living AI education Fusion energy Geoengineering
2000 Then	2020 Now	2030	2040+ The Future

The Investment Adviser has identified emerging trends in hydrogen infrastructure, water efficiency and floating wind projects. These trends have the potential to generate the next wave of investment opportunities, provided they are viable and align with the Fund's investment objectives. Looking further ahead, infrastructure credit might play a role in future projects involving nuclear fusion energy, which remains perpetually on the horizon, and the burgeoning interest in the application of artificial intelligence in education and assisted living.

In summary, the infrastructure sector presents numerous exciting opportunities, and the Investment Adviser anticipates significant developments in the market over the coming decades.

Our strategy for the coming year will be to target investments that maintain the average credit quality of the portfolio, whilst hitting a target return of 9-10%. This is a slight amendment on the previous financial year, when we aimed to improve credit quality, while maintaining portfolio yield: this change in strategy simply reflects the credit improvements we have already made and acknowledges that in a falling interest rate environment it is unrealistic to expect that it will be possible to achieve ever-higher credit quality without compromising on yield.

We are also mindful, of course, of other important portfolio characteristics, such as having a diversified portfolio, spread across a range of sectors and jurisdictions. We are fortunate that we continue to find ourselves able to decline over 90% of the lending opportunities we encounter. This means we are able to be highly selective in our approach to asset selection.

Team

Earlier this year, one of the founding directors of the Investment Adviser retired to pursue other interests. Given the growth of our team over recent years, there has been a seamless transition and effective handover of responsibilities. We are also pleased that a number of senior team members have been promoted to managing director, executive director and senior vice president roles over the last few years. Additionally, the Investment Adviser has experienced minimal staff turnover and is actively recruiting for junior team members. A long-term incentive plan remains in place to retain existing experienced team members. Consequently, the Investment Adviser continues to maintain a knowledgeable and skilled team, essential for providing the necessary investment advice to the Company.

Sequoia Investment Management Company Limited

Investment Adviser

25 June 2024

Case study

Project Octopus

Investment

£45.6m

12.0%

Yield-to-maturity

10

Bolt-on acquisitions

This year, SEQI participated in the term loan and upsized capex facilities of Project Octopus, having supported the business since 2022. The loan benefits from senior secured first-ranking position, robust financial covenants and a margin ratchet to incentivise de-leveraging. Furthermore, the loan has an ESG-linked ratchet which contemplates a margin reduction subject to strong ESG performance verified by a third-party ESG rating report.

Project Octopus is a leading engineering services provider focusing on expansion, reinforcement and maintenance of UK energy and telecom infrastructure. Their utilities business unit is one of the UK's leading contractors fully accredited to work in the power, water, gas and telecoms sectors. Their energy design and engineering capability maintains power infrastructure including underground cable systems, overhead lines and substations. The company also deliver a full spectrum of water and wastewater treatment projects. In telecoms, they support the ongoing development of the UK's digital infrastructure, providing homes and businesses with enhanced fibre and broadband capability and connectivity.

The company is backed by an experienced private equity investment firm, which primarily invests in Europe and has 47 companies in its portfolio, with a strong track record of investing in the engineering services sector.

Going forward, the company's utilities business unit will continue building and renewing key parts of the UK's utility infrastructure that will be suitable for decades to come. Their energy segment will be a pivotal contractor as the UK undergoes the energy transition to a net zero future. From deploying EV charging infrastructure to building battery energy storage plants to undertaking micro-grids, the company will be an essential part of securing safe and sustainable energy infrastructure for future generations.

As such, the asset benefits from strong industry tailwinds. Rapid adoption of EVs, renewable generation, and rollout of fibre optic networks has created strong market fundamentals in power and telecom infrastructure markets, with PwC forecasting strong market growth until at least 2030. Due to its long-term contracts with customers, the company has a strong visibility of cash flows with ~85% of revenue plan between FY2022-FY2026 secured under framework agreements with blue chip utilities and telecom players in the UK.

Since 2022, the company has also pursued acquisition growth, making several bolt-on acquisitions to further enhance its capabilities. The company is also resilient with infrastructure-like characteristics due to inflationary cost passthrough mechanisms in its customer contracts.

Additionally, the company's strong ESG case is further supplemented by their continued progress on internal sustainability initiatives. This year, the company hired a new Safety, Health, Environment and Quality Director and a new Head of ESG who have been very responsive to engagement with SEQI's Investment Adviser. During the course of the year, the company also produced and shared a new Environmental Strategy, which provides a thorough review of their current environmental profile, discloses monthly scope 1, 2 and 3 emissions, and lays out the planned initiatives to deliver on in order to reach net zero by 2040.

We look forward to continuing our relationship with the company and monitoring the developments along their environmental strategy.

LINK TO ESG

Infrastructure with social benefits

Statement of comprehensive income

for the year ended 31 March 2024

		Year ended 31 March 2024 £	Restated Year ended 31 March 2023 £
Revenue
Net/gains on non-derivative financial assets at fair value through profit or loss		70,975,563	72,944,797
Net gains/(losses) on derivative financial assets at fair value through profit or loss		40,756,355	(96,628,102)
Investment income		20,023,606	34,760,783
Net foreign exchange gains/(losses)		161,656	(1,513,107)
Total revenue		131,917,180	9,564,371
Expenses
Investment Adviser fees		9,937,332	11,989,220
Investment Manager fees		401,973	369,422
Directors' fees and expenses		367,726	366,699
Administration fees		504,656	440,937
Auditor's fees		210,700	201,990
Legal and professional fees1		2,523,484	2,973,313
Valuation fees		733,100	741,000
Custodian fees		231,465	255,108
Listing, regulatory and statutory fees		142,101	143,257
Other expenses		512,949	497,307
Total operating expenses		15,565,486	17,978,253
Loan finance costs		5,926,840	9,534,772
Total expenses		21,492,326	27,513,025
Profit and total comprehensive income/(loss) for the year		110,424,854	(17,948,654)
Basic and diluted earnings/(loss) per Ordinary Share		6.58p	(1.02)p

1.     Legal and professional fees include an amount of £1,237,263 (2023: £2,218,093) in respect of fees relating to the Fund's investment in Bulb Energy.

All items in the above statement are from continuing operations.

Statement of changes in Shareholders' equity

for the year ended 31 March 2024

Year ended 31 March 2024		Share capital £	Retained losses £	Total £
At 1 April 2023		1,808,622,511	(190,769,209)	1,617,853,302
Ordinary Shares buybacks during the year		(88,170,418)	-	(88,170,418)
Total comprehensive income for the year		-	110,424,854	110,424,854
Dividends paid during the year		-	(115,825,192)	(115,825,192)
At 31 March 2024		1,720,452,093	(196,169,547)	1,524,282,546

Year ended 31 March 2023		Share capital £	Retained losses £	Total £
At 1 April 2022		1,837,390,531	(60,347,699)	1,777,042,832
Ordinary Shares buybacks during the year		(28,768,020)	-	(28,768,020)
Total comprehensive loss for the year		-	(17,948,654)	(17,948,654)
Dividends paid during the year		-	(112,472,856)	(112,472,856)
At 31 March 2023		1,808,622,511	(190,769,209)	1,617,853,302

Statement of financial position

at 31 March 2024

		31 March 2024 £	Restated 31 March 2023 £
Non-current assets
Non-derivative financial assets at fair value through profit or loss		1,493,171,675	1,803,011,023
Current assets
Cash and cash equivalents		7,507,495	7,363,120
Trade and other receivables		602,507	1,605,043
Derivative financial assets at fair value through profit or loss		28,098,804	23,254,199
Total current assets		36,208,806	32,222,362
Total assets		1,529,380,481	1,835,233,385
Current liabilities
Trade and other payables		4,322,344	4,530,899
Derivative financial liabilities at fair value through profit or loss		775,591	31,060,322
Total current liabilities		5,097,935	35,591,221
Non-current liabilities
Loan payable		-	181,788,862
Total liabilities		5,097,935	217,380,083
Net assets		1,524,282,546	1,617,853,302
Equity
Share capital		1,720,452,093	1,808,622,511
Retained losses		(196,169,547)	(190,769,209)
Total equity		1,524,282,546	1,617,853,302
Number of Ordinary Shares		1,625,484,274	1,734,819,553
Net asset value per Ordinary Share		93.77p	93.26p

The Financial Statements were approved and authorised for issue by the Board of Directors on 25 June 2024 and signed on its behalf by:

Fiona Le Poidevin

Director

Statement of cash flows

for the year ended 31 March 2024

		31 March 2024 £	Restated 31 March 2023 £
Cash flows from operating activities
Profit/(loss) for the year		110,424,854	(17,948,654)
Adjusted for:
Net gains on non-derivative financial assets at fair value through profit or loss		(70,975,563)	(72,944,797)
Net (gains)/losses on derivative financial assets at fair value through profit or loss		(40,756,355)	96,628,102
Investment income		(20,023,606)	(34,760,783)
Net foreign exchange (gains)/losses		(161,656)	1,513,107
Loan finance costs		5,926,840	9,534,772
Decrease in trade and other receivables (excluding prepaid finance costs and investment income)		52,156	521,871
(Decrease)/increase in trade and other payables (excluding accrued finance costs, investment income and Ordinary Share buybacks)		(546,980)	67,578
		(16,060,310)	(17,388,804)
Cash received on settled forward contracts		31,086,892	16,174,078
Cash paid on settled forward contracts		(25,459,874)	(124,603,014)
Cash investment income received		131,219,401	122,355,919
Purchases of investments		(349,917,050)	(302,102,305)
Sales of investments		619,536,166	394,522,483
Net cash inflow from operating activities		390,405,225	88,958,357
Cash flows from financing activities
Proceeds from loan drawdowns		77,384,713	138,712,919
Loan repayments		(256,710,836)	(80,000,000)
Payment of loan finance costs		(4,810,404)	(9,058,791)
Ordinary Share buybacks		(87,992,882)	(27,770,733)
Dividends paid		(115,825,192)	(112,472,856)
Net cash outflow from financing activities		(387,954,601)	(90,589,461)
Net increase/(decrease) in cash and cash equivalents		2,450,624	(1,631,104)
Cash and cash equivalents at beginning of year		7,363,120	8,759,040
Effect of foreign exchange rate changes on cash and cash equivalents during the year		(2,306,249)	235,184
Cash and cash equivalents at end of year		7,507,495	7,363,120

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