Good morning, everyone, and thank you for joining us. You will have seen our announcement this morning, and we're delighted now to take you through a formal presentation. We expect this to take about 30 minutes, after which we'll take questions which you can submit through the online portal. With that said, I'll now hand over to Mike Bane and Richard Morse to kick us off.
Thanks very much, Mo, and my thanks as well for taking the time to join us today. Richard and I believe we have an exciting and compelling proposition for you. You'll have seen our announcement this morning, where we're looking to combine HICL and TRIG to create the U.K.'s largest listed infrastructure investment company with net assets in excess of $5 billion and a powerful balance sheet. We'll refresh the investment mandate to access the wider investment universe of infrastructure assets, more later on how we're going to do that. We'll reorient towards a total return strategy with a target in excess of 10%, retaining a progressive dividend with capital growth greater than income growth. Why are we doing this? Firstly, both boards have been acutely aware of the accelerating convergence between core infrastructure and renewable energy. This deal will capitalize on that convergence.
It will unlock synergies of opportunity, and the sum will be greater than the parts. The transaction itself delivers a stable day-one NAV and a dividend that balances the existing risk-adjusted returns of both companies. Richard and I are convinced that no other combination can deliver these wins for investors. Second, we all know that the investment world is very different today compared to three years ago, particularly for listed alternative companies. Over that period, both boards have led the way in responding to the re-rating of risk-free. We've ramped up disposal programs, accelerated asset enhancements, paid down debt, executed share buyback programs, and we've engaged in and led the debate on regulatory change. There has been a growing appreciation, both for the boards and from what we hear from investors, that something more fundamental and more ambitious could bring greater and quicker benefits for our shareholders.
All of the large recent infrastructure fundraisers, whether public or private, have involved co-mingled or diversified strategies. A broader investment remit makes a great deal of sense. We've heard the cries for greater scale, for consolidation, and for total return, not just for income. In summary, we're responding to the convergence within infrastructure more widely and the shift in investor appetites. We think this combination is the best way of meeting the needs of our existing shareholders and positioning the company for potential new investors. Richard.
Thank you, Mike. You have described the thinking behind the benefits of a combination of HICL and TRIG. The more we have discussed and developed the idea over the past few months, the more convinced we have become that the combined vehicle offers investors more, much more than the component companies, even though each company has strong prospects on its own. What we are creating has market-leading scale and profile, buttressed by a stronger balance sheet and quality of earnings built on diversified and resilient cash flows. This will allow us to tap flexibly into the evolving mega trends in our target markets. Together, we will be much better equipped to take advantage of the numerous growth creation opportunities in our sectors. We will continue to have the benefit of the proven success of our combined investment manager InfraRed, ably supported by RES in respect of the clean energy portfolio.
The combination creates a vehicle with real credibility, relevance, and purpose. It represents a new market offering that adds value for existing shareholders and is designed to attract new institutional and retail investors. It should become the go-to company in the listed infrastructure and renewables space, with the potential to drive a meaningful and sustained re-rating of our company's shares, something we're all keen to see. I'll run through the transaction details later on, but in essence, it's based on a FAV for FAV share exchange, utilizing the equivalent of a Section 110 structure, with a $250 million cash component in the offer for TRIG shareholders, and a further GBP 100 million of aftermarket support committed by SunLife, who are InfraRed's parent company. We've negotiated fee reductions over and above the significant fee cuts that were delivered earlier this year.
The detailed terms have been put together in such a way as to secure positives for both sets of shareholders, and particularly for those investors continuing into the combined vehicle. We are keen to share more detail about the strategy and the proposals with you, so at this point, I will hand over to Ed and Minesh to talk you through the story in more detail, so that you can hear for yourselves why we are so excited about the project and what we think it can deliver for you, our shareholders. Ed.
Thanks, Richard, Mike, and good morning. I'm very pleased to be able to run you through this transformational opportunity as we see it. Together with Minesh, we're going to run through the next 15 or so slides, and we'll go through the Q&A afterwards. If I can also just start with an overarching comment before we get into the detail of the slides. As Richard and Mike have both mentioned upfront, the last two to three years have certainly encouraged a great deal of strategic work around both companies. In taking this on, two guiding principles have been really important. Firstly, the most appropriate strategy to benefit from the next 20 years of infrastructure development rather than the last 20 years. Secondly, the extent to which investor preferences have evolved against a markedly different economic backdrop.
In this way, we've sought to enhance and reinvigorate a strategy for long-term infrastructure investment on the back of bringing these two companies together into a co-mingled or diversified structure that has the scale, strategy, management to matter and to thrive in this market. You can see the thinking set out here on slide six. The combination establishes a clear market leader with a strategy that's optimized to invest with and across those powerful infrastructure mega trends. I'm going to spend some time on the infrastructure market in a moment. It's a vehicle with greater resilience and diversification in cash flows, in portfolio construction, and balance sheet. We highlight the balance sheet strength on the bottom left here, and Minesh will expand on this as we go through the slides.
Importantly, we hear investor calls to increase target returns, with the enhanced strategy targeting a 10%+ NAV return, still very much anchored in the core infrastructure risk profile, but with enhancements to portfolio construction to push that expected return higher. Of course, that's alongside the ongoing active management role that investors expect from InfraRed and RES, seeking to deliver outperformance over and above that. In solving for that return, we intend to re-strike the balance such that NAV growth exceeds dividend growth, providing greater reinvestment and compounding of free cash, whilst also delivering that strong cash yield that investors expect from high-quality infrastructure. The progressive dividend will be set at $0.09 per share for the first operational year. We recognize that this is a reduction for TRIG shareholders and increase for HICL shareholders.
Importantly, it right-sizes the dividend for this strategy and for the delivery of long-term growth for shareholders. Finally, in support of the transaction and in alignment with the ongoing strategy, InfraRed's parent, SunLife, will be investing GBP 100 million through secondary market purchases post-transaction, whilst also offering a day-one fee saving and a competitive fee structure against this expanded strategy. Moving on to slide seven, we believe that this strategy also fits with the evolution of investor preferences and provides the attributes that are prerequisite in order to prosper in this market. Starting on the left, in a structurally higher-rate world, these vehicles need to further increase their total return target and growth profile in order to remain relevant and attractive to shareholders, while still maintaining that income component that investors expect from high-quality infrastructure.
The strategy also responds to preferences in the market for fewer, larger vehicles, vehicles of scale, best equipped to capture interest from a global investor base, and best equipped to continue to press for further industry consolidation. The combined company meets this ask at a portfolio valuation of over GBP 6 billion and the U.K.'s largest infrastructure investment company by some margin. Stepping along the slide again, this repositioning of the combined company allows us to better capture the significant private market demand for high-quality assets, maintaining our sector-leading approach to accretive asset rotation, and that will remain a key feature of the company's business model going forward. Finally, on the right, a vehicle with the cash flow resilience, debt capacity, and balance sheet strength, all unlocked or enhanced on combination, to get onto the front foot and deliver a proactive, forward-looking strategy on behalf of shareholders.
These are all themes that we'll unpack as we step through the slides. Moving on to slide eight, I just want to take a step back and talk about the infrastructure market. It's almost unrecognizable from when InfraRed started investing in infrastructure in the mid-1990s and has evolved significantly since launching HICL and TRIG 20 and 12 years ago, respectively. We believe that the opportunity in front of infrastructure investors today is as great as at any time in the history of the asset class. The three mega trends driving infrastructure development are not just persisting, but accelerating. The energy transition has now moved beyond generation, permeating the energy value chain. Marked demographic shifts will continue to intensify infrastructure demand and asset decay, particularly in our urban areas. The transport and storage of data arguably ranks ahead of that of people and goods.
Perhaps most importantly, these mega trends are converging. To take a few examples from our own portfolio, renewables demand in Texas is as dependent on data as it is energy security. EV charging is being installed up and down our motorways. We're enhancing returns on a water utility with smart meters and solar rollout. In meeting this opportunity, successful investors will utilize a global platform. They'll arbitrage the best opportunities across sectors and markets and adopt a co-mingled or diversified strategy across energy and infrastructure, recognizing the integration of the two. Both at specialist managers like InfraRed, but also at global large-cap managers, unlisted funds are being raised to do exactly this, using a co-mingled or diversified approach, getting better access to the underlying infrastructure mega trends and the ability to arbitrage the very best opportunities in the market.
That approach also translates into a far more substantial, addressable market. Passing to Minesh.
Thanks very much, Ed. This next slide sets out some example investment themes to try and bring the mega trends to life. Now, conscious it's a very busy slide, just breaking it down, the dark green circle in the middle represents our existing areas of focus. The light blue ring around that, the themes that are unlocked immediately on combination. The light gray ring around the outside are those more value-add opportunities that we're seeking to supplement the portfolio with to really drive that total return strategy. Now, building that up more slowly, you can see in the dark green circle in the middle, TRIG's existing areas of focus, renewables and energy storage in Europe, and the other examples there you'll recognize as HICL's portfolio. We look at that light blue around, those areas that are immediately unlocked on combination.
This really reflects what Ed was speaking to, the convergence of the infrastructure mega trends. Just drawing out a couple of examples there, international interconnectors for the transmission of electricity or other forms of conventional low-carbon generation, just to pull out a couple. The dark green and the light blue continue to be areas requiring significant investment and will remain the vast majority of the combined company's portfolio. Like we said, supplementing with value-add investments as represented by that outer gray circle. Value-add is actually the genesis of InfraRed's business over 25 years ago. It is an area where we've made over 75 realizations at a net IRR in excess of 18%, two times multiple. A very strong track record. The examples listed here, we've made investments in half of the examples presented and screened the remaining examples as well as many more beyond that.
We feel now is the time that it's right to bring the value-add strategy into a listed total return strategy, but crucially in moderation. Over the medium term, we see this growing to about 20% of the combined company's portfolio. The other point to take away from this slide is what Ed referred to. By looking at the whole investment universe, we have that opportunity to arbitrage the relative risk-reward propositions to optimize returns and portfolio construction for the combined company's shareholders. On this next slide, we seek to root that investment universe in our day-one portfolio that spans the mega trends. This brings together 86% contracted and regulated revenues on the HICL side and 70% contracted revenues on the TRIG side. These investments are defensive in nature. That's a fundamental characteristic of infrastructure assets, and that is because they are woven into the fabric of society.
I mean, just to bring the example home, I live in Affinity Water's catchment area. I commute on our trains. My daughter was born in one of our hospitals. My telephone provider sources electricity from our portfolio. These investments are well and truly woven into the fabric of society. That is looking at the infrastructure universe by investment theme. Ed will pick up on portfolio construction.
This next slide, slide 11, gets to the heart of how we're thinking about medium-term portfolio construction and actually stays true to the existing approaches of both HICL and TRIG. For HICL, you've heard us segment the portfolio into yielders and growers to articulate strategic portfolio construction. For TRIG, you've heard Minesh and the team talk about earlier stage investments with higher returns. The combination brings these components together and then takes it forward. Put simply, a portfolio that is anchored in core infrastructure with yielders and growers segments making up 80% of the long-term portfolio, and then that further return uplift provided by a measured exposure over time to higher returning infrastructure investments. Just peeling that back again, the portfolio's yielders today, they're predominantly PPP and mature renewables, shorter life assets yielding strongly and underpinning today's dividend, complemented by that middle piece, the growers.
These are operating assets such as utilities, digital, transport, extending cash flows well beyond the maturing yielders and compounding asset-level returns with growth CapEx. These growers are key to that long-term earnings profile, which underpins dividend and NAV growth over the long term. Thirdly, it enhances that return enhancement from a measured exposure to higher returning infrastructure investments. TRIG's existing development positions sit here. To round out this exposure over time, we will utilize InfraRed's extensive track record in value-add infrastructure. You can see that track record on the bottom right of this slide, and Minesh has already referred to it. Put simply, mid-market specialists compelling high-teens returns over 25-plus years on a realized basis, which is a key differentiator for our strategy and objectively ranked in the top 10 by Pitchbook. Naturally, there is an interplay here between the segments.
As assets mature and de-risk, it's possible that they have the potential to cascade down this risk-return spectrum, crystallizing value as they do so. In particular, for growers, as they deliver their growth CapEx and commence their yielding phase, we will reclassify those as yielders, and that keeps the yielding portion of the portfolio buoyed over time. Finally, for enhancers, we assume a higher degree of asset rotation, but compounding back into enhancers. That 20% allocation is arrived at in the medium term from a small base initially. Taken together, a defensive platform positioned for growth. Slide 12 also illustrates this from a slightly different perspective, and I should reiterate that this is illustrative. This shows NAV over time by segment, and you can see the portfolio construction approach and that growth flywheel really taking hold and propelling the NAV higher over time.
A couple of things just to reiterate here. Firstly, the portfolio remains anchored in that core infrastructure risk profile. There is no step change in risk profile here, and the allocations to enhancers are small initially before the power of compounding really takes effect. Secondly, you can see that dynamic where the growers mature and turn into yielders, keeping that yielding portion buoyed at over 50% over the long term. If this is very much the what, important to spend some time on the how, which we do on the next slide. Minesh.
Thanks, Ed. How do we get to returns in excess of 10%? Those who tuned into the TRIG Capital Markets seminar in May will recognize this schematic. It is also consistent with HICL's business model. We start on the left-hand side with a portfolio discount rate of 8.6%, and then we layer on top active management, the first being asset value enhancement. This is how we go about the day-to-day management of the portfolio, seeking operational excellence as well as portfolio efficiencies. We then add reinvesting at higher returns to really drive returns forward. Asset rotation will continue to be a core part of the strategy, seeking to outperform valuation, inform portfolio construction, as well as create dry powder for reinvestment. All of that on its own gets us to 10% plus returns.
That final box we have on the right-hand side is to propel returns beyond that. Operational enhancements like hardware installations, follow-on investments into existing positions, as well as commercial enhancements like the corporate power purchase agreement we signed three weeks ago. It also includes inorganic opportunities, M&A, further consolidation if it's accretive for our shareholders. The opportunity with bringing HICL and TRIG together is to pursue this strategy at greater scale and at greater pace than we would be able to do in the two companies individually. Now, on the next slide, we set out our four pillars for success. The first, growth. You've heard a lot from us today about growth. This is about investing at higher returns to drive returns for shareholders forward. Equally, we recognize distributions continue to be important for a large proportion of our shareholder base.
We set the initial dividend at 9 pence. That's right size for this strategy with a sustainable dividend cover, and it remains at an attractive level, around 6% NAV dividend yield. The next two pillars speak to portfolio construction beyond 10% returns. Firstly, diversification. This is something you've heard Ed and me major on over the years, and it will continue to be important for us. The dimensions of low single asset concentration, diversification by sectors, geographies will continue to be a focus. The fourth pillar, durability. This speaks to the core characteristics of infrastructure investments. Long or eternal life assets, contracted revenues, often with inflation correlation, and low refinancing risk, maintaining that conservative approach to balance sheet. Let's unpack the balance sheet a bit more on the next slide.
The balance sheet strength is furthered on combination, and that is because we have lower exposure to any one investment and lower exposure to individual risks in the combined portfolio. Now, portfolio debt will continue to be fixed-rate amortizing, low refinancing risk. Only 2% of our project-level debt is due to be refinanced in the next two years. On combination, our debt capacity is increased to GBP 650 million, which is GBP 250 million more than the companies have individually. That is based on typical A-minus credit rating criteria, firmly into investment grade and demonstrating that continued conservative mindset. That debt capacity, together with proceeds from disposals, retained cash in excess of the dividend, will be our dry powder, our firepower. How we go about using that will be governed by the board's rigorous approach to capital allocation.
Changing tack slightly, slide 16 sets out the credentials of the ongoing managers, InfraRed, and in respect of the renewables portfolio, RES. This preserves continuity across the existing assets, existing portfolio, existing initiatives, ensures that we hit the ground running from day one. You'll be familiar with InfraRed as manager of two of the leading infrastructure investment companies, perhaps less so with InfraRed's private business. It's a global platform, six international offices, and 11 private funds raised to date across both core and value-add strategies. InfraRed's business began in the value-add space in the mid-1990s, and it's this multi-strategy track record which allows the combined company to tap into the right expertise, spanning geographies, sectors, risk spectrum, drawing from right across the InfraRed platform. RES, Minesh?
Thanks, Ed. RES have been central to TRIG's management team. They draw from their 40-year-plus heritage in renewable energy amongst the founders of that technology, and they will continue to drive operational excellence and value on the renewables side of the combined company.
Slide 17 just takes this down a layer. Hopefully, a lot of familiar faces here on the slide. In bringing the teams together, we've prioritized continuity of expertise and balance from across HICL and TRIG. That's reflected both in the day-to-day management team as well as the investment committee. The management structure is mirrored within InfraRed. The senior team report to me, and we've bulked up the investment committee with additional value-add expertise, with Tom Buss joining the investment committee going forward, a senior partner in our value-add team. Mike.
Thanks very much, Ed. On to slide 18. Both boards have been very focused on securing value for investors and alignment with the management arrangements. I'm going to talk about the two components that are on the slide here, the GBP 100 million investment by SunLife and the detailed terms of the investment management agreement. First of all, in support of the transaction and aligning with the company's strategy, SunLife, InfraRed's parent, has committed to make GBP 100 million of secondary market purchases in the weeks and months following the transaction. This is a binding commitment by SunLife. It'll provide valuable secondary market liquidity for shareholders and supports the share price in the aftermarket. More importantly, though, this is something that SunLife is readily prepared to do.
Richard and I met with senior management there, and we stressed the importance of them standing publicly and unequivocally behind the deal. They fully recognized and acknowledged that. This is a strong endorsement of the strategy from a blue-chip institutional investor, which provides real alignment of interest and real skin in the game for SunLife and InfraRed. The second half of this page summarizes the management arrangements. This is a straightforward structure, preserving alignment with the 50/50 NAV market cap basis that both companies have at present. No performance fees, no transaction fees, absolute transparency. We think this is the right fee for the expanded strategy. It is a significantly heavier lift than the two standalone strategies.
Nevertheless, we recognize that it's important to show upside on day one, and we've calibrated this proposal so the managers only earn the same as the standalone structures if the combined company re-rates to a discount around 20%, similar to HICL's immediately before announcement. At a blended rating of the two companies, the managers' fees, including those of RES, would reduce by over GBP 1 million. This would be on top of the significant fee reductions achieved earlier in the year. All in, and including RES fees, in relation to the renewables portfolio, you'll see in the bottom right-hand corner that we expect a pro forma OER of 92-96 basis points. This fee compares very favorably against listed peers who are executing this type of strategy, and it's highly attractive against equivalent unlisted strategies in the same space.
Importantly, we're comfortable this incentivizes the manager to deliver the strategy to grow NAV and support a share re-rating in strong alignment with investors. Richard.
Thank you, Mike. The transaction is structured as the equivalent of a Section 110 scheme, resulting in the voluntary liquidation of TRIG, with TRIG's shareholders effectively rolling their shareholding over into HICL at an approximate ratio of 0.7 new shares in HICL for every TRIG share. That will require a vote in favor by 75% of TRIG's voting shareholders and a 50% vote in favor by HICL's voting shareholders. The exchange ratio for the transaction is based on the September NAVs adjusted to create a formula asset value, or FAV, for each company. As a result of this, TRIG shareholders will benefit to the extent that their shares are presently trading at a discount greater than that applicable to HICL shares.
Both boards have done extensive due diligence and are satisfied that the exchange ratio taken with the other terms of the transaction reflects a fair allocation of risk for both parties. There is a cash component of $250 million in the offer, and the price of that will be set at a 10% discount to TRIG's September NAV on a mix-and-match basis. Based off last week's share price for TRIG, that represents about a 30% premium to market. As you have heard, SunLife is committed to supporting the combined company with GBP 100 million of aftermarket support. In our view, that is about GBP 350 million of total cash in the transaction. The new dividend has been set at GBP 0.09 a share, as you have heard from Ed and Minesh.
The first combined company dividend is expected to be paid at the end of March 2026, and each company will pay its September 2025 dividend in December this year, as per normal. The profile of the dividend payments will not change. The new dividend represents an increase for HICL shareholders and a decrease for TRIG shareholders. As has already been said, the focus of the dividend has been to right-size it for the strategy and risk profile of the combined company. The initial board will be an amalgamation of the two existing boards so as to ensure a smooth transition and no loss of key skills as we go through the necessary period of integration. I'm delighted to say that Mike has agreed to chair the board. In due course, we expect the board to reduce to a more sustainable level of directors.
An important feature of the new board will be the creation of a subcommittee specifically to address capital allocation, which we acknowledge will be a critical topic for the new combined company.
I'm delighted to say that Richard has agreed to chair that committee.
In terms of timetable, we expect documents to be sent out to shareholders later this week and the general meetings to take place in mid-December, probably in the week of the 15th of December, and for the transaction to close in mid-January next year. Thanks, Mike.
Thanks, Richard.
You have heard from Richard and me about the strategic drivers for this transaction and some of the transaction terms. Ed and Minesh have described the what and the how and how it creates something that is greater and stronger than the sum of the parts. We think this combination demonstrates real leadership, real momentum, and is highly responsive to shareholder views. We are really excited about it and look forward to taking questions. Thank you.
Brilliant. We've had a number of questions come through, and broadly, they could fall into three distinct areas. The transaction economics, which we'll go through first, governance questions, and then portfolio construction, looking at the strategy going forwards. There are a fair few, so we'll have to go at a bit of a clip. We'll do our best to get through all of the questions. On the transaction economics, why is HICL paying NAV for TRIG given the relative discounts? Why is this not structured as a market value-to-market value deal?
We think this is the best form of transaction for HICL shareholders and for TRIG shareholders. TRIG's valuation is at a relatively low point in the cycle, and we think that is attractive. This is the way that these types of deals have typically been executed in the investment trust space, and we think it properly reflects the spread of risk and opportunities for both sets of shareholders.
Thank you. Why was it necessary to have a cash option, and why is this cash option only for TRIG shareholders?
The cash option we believe is a necessary feature of the deal. Again, it is a common feature of transactions of this kind. There are some TRIG shareholders who will not be able to hold this vehicle for investment mandate reasons, so we think it is important that they have an opportunity to exit. Of course, that will be supported by the GBP 100 million commitment from SunLife in the transaction.
Okay. Thank you. What other financial incentives for HICL shareholders from the proposed merger?
From a HICL shareholder perspective, obviously, HICL shareholders are getting an increase in dividend. They're getting a stable NAV, but much more importantly, they're getting exposure to a larger, more diversified portfolio with greater opportunities for growth. It's very clear from the soundings we've taken from shareholders that the desire for a greater degree of capital growth, which we've embodied in the concept of capital growth being greater than income growth, is a target that most of the shareholders on the HICL register would prefer us to try to achieve.
How have you reflected the RPI consultation on ROCs in the transaction? Would it have been better to have waited for the outcome of the review?
No, we've absolutely considered the consultation. We struck the deal terms after many weeks of negotiation on many matters after that consultation has been issued. Clearly, there's a balance of components in the transaction here. There's the cash in the deal. There's the increase for one set of shareholders, for HICL shareholders in the dividend, and a decrease for TRIG shareholders. There's also a balance of the NAV on the transaction. We've reflected all of the economics that we were aware of in the market, including this regulatory intervention at the point that we struck the terms of the deal.
Final one on the transaction economics and market backdrop. What is the HICL board's reaction to the share price movement this morning?
The immediate share price movement is the immediate share price movement. It'll take a little bit of time for the market to fully digest this transaction. The current share price movement is not outside the realms of what we might have expected. Immediately, we expect the share price to improve over time.
Thank you. Moving on to the topic of governance, what are the synergies you expect from the transaction?
The main synergies are synergies of opportunity rather than synergies of cost. The scale of this company makes the opportunities for return significantly greater than for the two individual companies.
Why isn't the management fee being reduced more?
As I explained earlier, the management fee has been set at a level that we think is appropriate for this strategy, and the manager only benefits from the management fee arrangements if the share price improves, creating full alignment between the managers and shareholders.
Why is the board so large? This should be a synergy. How long do you expect it to take to reduce the number?
We will certainly be reducing the number of directors on the board over time. Richard and I are used to working with much smaller boards than this, and so that's an objective. We think it's particularly important at the time of transition in a merger like this that we have the full suite of skills available from existing both boards to allow us to make the merger work as well as it can at the point of execution, but it will be coming down over time.
Thank you. Sorry, the discount to NAV on both companies has been very disappointing. How do you anticipate the combined entity closing this over the next 12-36 months?
We think that the investment rationale for this merger is compelling, and we think that shareholders will come to see it. The increased scale, the diversification, the ability to attract new shareholders, we think that all of these, together with the execution of the strategy, will see the discount come down over time.
Why has such a long management contract been granted with very long breaks? It appears that InfraRed and RES would secure a minimum seven-year management contract.
No, it's not a seven-year management contract. It's a three-year management contract at most. It'll go down to two years after three years, but to be clear, it's never more than three years. That's consistent with HICL's existing management contract. We've sought to bring down the terms over time, and the reason we've structured it in this way is that it allows a combination of the two companies' management contracts, but most particularly, it allows a three-year period for the transaction to really show its benefits.
Surely a merger with IMPP makes more sense for HICL. What other options have both boards considered in this process, and how developed did any of those conversations become?
To be clear, the HICL board has considered lots of different options for transactions. A very important component of this transaction relative to other transactions is that there is no break fee paid at the point of the transaction. This is a really significant factor for both companies. We have looked across the spectrum at other opportunities. More importantly, we think that a diversified strategy is much more powerful for investors in both the short, medium, and long term than a sector-specific strategy. We are deliberately embracing the convergence of the infrastructure sector.
In terms of the TRIG board, thank you for the question, in terms of the TRIG board, yes, we considered a full range of options, particularly after Mike had approached me about this idea. We have been convinced that this is the best route forward, the strongest growth, stronger balance sheet, more resilient earnings. It is a company with much more scale and a much stronger balance sheet. I think looking at it through a different dimension, it gives us the capability to turn our recent history of having to dispose of assets and to do buybacks. It sort of turns that on its head, and it makes us a potential player in that market. I think that is an incredibly important dynamic for TRIG shareholders.
Thank you. For HICL shareholders, what are your thoughts on how the share register may change? In particular, how have you considered those shareholders who rely or focus on the lower risk aspect of HICL strategy versus the new, more growth orientation of this strategy?
The HICL share register is very broad indeed. We have people at one end of the share register who seek very low risk returns in what I would call an old HICL world. At the other end of the register, we have shareholders who prefer a greater element of total return. We think that the economic environment today and looking forward really requires a strategy that is oriented more towards total return. It has not been possible to please every shareholder on the register. We believe that this proposition has been deliberately designed to appeal to the majority of shareholders, and we think we have done it in the most effective way.
Thank you. Can you outline how you perceive the likely inflation linkage or relationship in the dividend going forward?
Yes, the dividend will be progressive. Because the strategy is oriented as much towards total return, we're not expecting the progression of the dividend to be greater than the existing progression within the HICL dividend.
Thank you. Final governance question. What is the net impact of the new fees for InfraRed?
I described that earlier in the presentation. It really depends on where the share price settles. The way the management fees are computed is complicated enough, so we have tried to make the structure as simple as possible. Just to reiterate what I said earlier, InfraRed will lose, sorry, will earn less fee if the combined company's discount settles at the blended discount of the two companies at the moment. InfraRed will only break even on management fees if the combined company's discount settles around 20% HICL's discount pre-announcement.
Thank you. Moving on to portfolio construction now. How will you manage power price risks? How do you reconcile the two different risk profiles of core infrastructure and renewables?
Yeah, I'll kick this one off, and then maybe Minesh will talk. I mean, one of the great attractions of TRIG's portfolio is the extent to which it is contracted and the capability that we have to continue to contract the asset. Over the next 10 years, about 70% of TRIG's portfolio is contracted. That sits very well with our philosophy on the HICL side around long-term contracted, visible, stable cash flows. That is one of the real appeals of this deal. In terms of the ongoing management, Minesh.
Yeah, thanks, Ed. In addition to having one of the highest contracted percentages in our space, we actually see the ability to contract out further as one of the value drivers. I mean, I touched on it as a commercial enhancement. I mean, in the last two years alone, we've secured five arrangements with corporates, three of which are 10 years in duration. We'll continue to do that. We have specialist resources to do that and continue to seek to move that contracted percentage up, consistent with the combined company strategy.
I think I would just add to that that this is one of the components of the TRIG business that's been enormously attractive to the HICL board. The degree of contracted cash flows over the medium term is a highly attractive feature and aligns very much with HICL's existing effectively contracted cash flows through PPPs and other underlying assets.
Okay. If a future U.K. government cancels all renewable subsidies without a change of law protection, i.e., the old ROCs, not the new CFDs, what would the impact on NAV and dividend be?
Sorry. In terms of the broad picture there, I mean, again, the attraction of TRIG's portfolio is that it's among the least affected by what's been proposed under the consultation, and that's due to the strength of its diversified approach across both technologies and countries. That's been, again, a real reassurance in terms of the quality of TRIG's underlying portfolio. Relatively limited impact on NAV and cash flows based on a probability-weighted outcome on the current consultation. I didn't quite catch the specific scenario envisaged, but I think the principles apply.
No, I think it's a reflection of the very solid diversified earnings that we have, and 40% of our earnings are outside the U.K., and it's worth remembering.
Perfect. A question on the higher returning infrastructure investment strategies. Can you be more specific about what this means in practice?
Yeah, if I may. I mean, just to reiterate the approach here, we are talking about a portfolio that remains anchored in core infrastructure with 80% of the portfolio in yielders and growers, and then bringing in a measured component of return enhancement over time in order to really drive that total return strategy. It is not a step change in risk profile here. It recognizes some of the existing positions that we have in TRIG, earlier stage investments that have potential for those mid-teens returns, but it also provides access to InfraRed's value-add strategy.
We have provided some examples around what that value-add strategy is currently pursuing to give more texture of the last three transactions that InfraRed's value-add strategy has achieved on behalf of some of the value-add funds: a Norwegian ferry and ambulance vessel business, a Canadian data center business, and a Finnish district heating business using ground source heat pumps. All assets are very much at that nexus of traditional and energy infrastructure, but opportunities to achieve solid higher double-digit returns. We will have the opportunity from the combined company perspective to really tap into that pipeline and to be quite selective around the investments that we choose to bring in, very much in line with that disciplined portfolio construction approach and that disciplined capital allocation approach that we have outlined today.
Continuing on a similar topic, in the combined universe, why are the middle sectors that are immediately unlocked on combination? What has been hindering HICL or TRIG independently moving into those areas?
Yeah, it's a good question. I mean, one of the things that we're highlighting today is the extent to which the energy transition is moving beyond generation and really permeating other parts of both the energy value chain, but also moving into industry. The big themes now in respect of the energy transition are the decarbonization of heat, the decarbonization of transport. We've highlighted a number of areas that are unlocked, and really it's about leveraging the combined skills and combined risk profiles of the company. For example, to take district heating, a number of district heating schemes have an element of power price exposure in addition to a generation component, in addition to a transmission and distribution component. That's quite a good example of how the two companies' existing mandates come together.
International Interconnectors is another good example, which has similar themes, combining asset types and risk profiles across the two companies. We see that this particular sector is best addressed and best harnessed utilizing the combined skill sets and approaches of the two companies and also leveraging the strength of the balance sheet, the strength of the cash-generative qualities of the combined portfolio in order to get into those growth sectors.
Thank you. Can you provide evidence regarding the discount rate methodology comparability used by TRIG and HICL, given the differing risk profiles of the underlying assets?
Yeah, I mean, I guess as a starting point, having the same manager across both vehicles ensures that we use the same valuation rigor to a very similar standard that benefits from all of the controls and protections within InfraRed-regulated organization, including our valuation committee, which ensures valuation consistency across the vehicles. In terms of discount rate comparability, I mean, the two discount rates are fairly similar for a similar risk profile asset as it stands today. There is obviously a range around that, which flexes around the risk return profile of the existing assets. TRIG obviously also utilizes a bifurcated approach to discount rates around the profile. A significant amount of work's also been done independently of InfraRed, and I'll let Mike comment on that.
Yes, thanks very much, Ed. I mean, to be clear, both companies use independent valuation experts. The companies, although the valuation is done by InfraRed in the first instance for both companies, both companies use independent valuation specialists in order to test that valuation and have done for a considerable amount of time. Investors should already take comfort from that, and there's no change here. I would add that as part of the extensive due diligence that both boards have done on one another's business is we have used our valuation specialists and indeed specialists within the subsectors of valuation in order to satisfy ourselves that the valuations that have been produced are appropriate and consistent with previous valuations.
Richard, is there anything you want to?
No, that's exactly what I was going to say, that the due diligence has been done with the benefit of third-party experts who are unrelated to the managers.
Given the enlarged HICL will have substantial subsidy exposure, can you provide a dividend and earnings progression roadmap to the period post-subsidies?
I don't think that's the sort of roadmap that either company has provided historically in that way. We've guided earnings forward one, two, in some cases, three years, depending on exactly how you calibrate the timing. We'll continue to look at how we comment on the combined company's potential dividend progression and indeed dividend cover, which is just as important, if not more so, as we go through time. I mean, we're not expecting any change in the way we do that.
No, the only thing I'd add to that from a TRIG perspective is that we amortize our debt so that when the subsidy period has run out on our assets, we also have no debt attached to it. That's a significant reassurance for shareholders.
It is very conservative relative to the market more generally.
Thank you. Okay, will TRIG's energy storage projects still go ahead?
Can I take that?
Yes.
Yeah, I think absolutely. They're an important part of the combined portfolio. As Ed outlined, they are our day-one enhancers. They offer really attractive returns both in the U.K. and we see in Spain. And we look forward to, over time, adding to the enhancer part of our portfolio to drive returns forward.
Brilliant, thank you. What are the sustainability credentials of the combined strategy in the SDR/SFDR context?
Yeah, I mean, first and foremost, infrastructure investments are woven into the fabric of societies. They contribute to a well-performing economy and society. I think therefore every investment we make by its nature has strong sustainability credentials. When we put the two companies together, each on its own has an SFDR category of Article 8. The combined company will maintain that. We think that's very important. Under U.K. SDR, we are yet to take a label. I think that regulation is evolving, and we're continuing to monitor that. At the appropriate juncture, we'll take a view on that.
Okay, why not introduce an earnings per share or cash flow per share growth target, especially if the target is to outgrow the dividend per share?
We will continue to publish our sort of earnings information that HICL has produced historically to be part of the combined company's continued reporting, and we'll continue to publish cash cover in relation to the dividend together with the sort of forward guidance that we've provided historically.
Thank you. Just circling back to a couple of more governance questions, will HICL's buyback be continuing through the period up to combination?
Yes, we'll continue part of the buyback program that we've already committed to, so there's no change for that.
We should make it clear that the TRIG program is stopped as of today.
An interrelated question, I think. What would the policy for buybacks be in both the immediate and long term for the combined entity?
Yeah, thank you for asking that. I mean, one of the reasons for setting up the capital allocation committee for the new company is precisely to judge those issues. I think we all perceive that there will be active rotation of assets on a strategic basis. Anyway, that aspect of it will not stop. What is done with that cash generated, including the cash from operations and the surplus over the dividend payment, is very much for discussion, and nothing is ruled out at this stage.
Okay, did the board consider internalization as one of the options as part of this transaction?
Say which board. For TRIG, the answer is yes. We considered a wide number of options, and this is the one that we think is the right option for shareholders going forwards.
The HICL board has had similar considerations about the best way of structuring the transaction and the management arrangements prospectively.
Great. Closing out on portfolio construction, how do you see the sector allocation of the combined entity evolving over time?
Ed, do you want to take that in relation to the slide that you presented?
Yes. We do not have a set view on sector allocation. Clearly, as a company, and you have seen this on both sides of the HICL and TRIG ledger, we do monitor as part of our risk framework exposures to certain clients, to certain regulatory regimes, to certain risks. We manage that through sector diversification as well as geographic diversification. We do not have a set allocation to digital any more than we have a set allocation to renewables. Really, one of the key themes of today's presentation is flexibility. Being able to look across a global investment mandate and arbitrage the very best opportunities for risk and return across markets and sectors.
That allows us to build a portfolio within the framework that was provided today, but in a flexible way and one that captures the most value for shareholders, clearly with an eye on risk as we do that.
Perfect. This is the final question that we have time for. Can you give any comfort to more defensive-minded HICL shareholders who prefer infrastructure over renewable energy?
I think that the comfort is that the scale of this company and the diversification of its returns will allow it to continue to provide, first of all, an increased dividend and a dividend that is well covered in the future. We think that the diversification created in this portfolio is a significant factor of safety for the future.
Brilliant. Thank you. Thank you for all the questions submitted online. Thank you for joining us this morning. With that, we conclude this morning's presentation. Thank you.