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Gravis looks to PFI

Specialist UK infrastructure advisers Gravis Capital Partners has established a fund for experienced and high-net-worth investors that invests in the Government’s private finance initiative projects such as hospitals and schools.

PFI provides the Government with a way of funding such projects without needing to use immediate public sector capital. The public sector contracts project companies to design, build and manage the projects. Management contracts typically last 30 years and during this time, the public authority can use the school, hospital or other asset in return for a series of payments, which are often linked to inflation.

This fund will raise money to lend to project companies for PFI projects with management contracts of five to 30 years and will target a return of 8 per cent a year net of all costs. A dividend yield of 5p for each £1 share will be paid in the first financial year to September 2010, growing steadily after that. Returns are expected to be higher if inflation rises.

The initial portfolio will comprise around £20m in junior debt, yielding 9 per cent a year. Junior debt is above equity in terms of the priority of payments when the loan is repaid by the project companies. Senior debt or bonds take first priority, but equity shareholders take on the most risk.

The initial portfolio relates to four PFI projects – two mental health facilities for NHS trusts in Essex and Newcastle, a children’s healthcare unit in Country Durham and a community hospital in Essex. Further opportunities mainly in the education and waste sectors are being considered.

This fund could be useful as a diversifier for investors with self-invested personal pension schemes or bonds. Banks have been pulling out of the PFI market or reducing the amount they will lend to projects which has left a gap in financing PFI projects that this fund could take advantage of.

Gravis will mitigate project risks through due diligence, independent valuation and outsourcing the legal aspects. It says public authorities are unlikely to default because they are government organisations.

Another potential risk is that payments may be partially withheld by the public authority if, for example, a leaking hospital roof means part of the building cannot be used. Gravis says the fund should be unaffected by such situations because this risk is usually transferred to a company that operates as a facilities manager.

However, PFI is a controversial and complex area that may not appeal to some investors.


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