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With Our Distributed Energy Strategy, We Often Find That Small is Beautiful

When discussing the two flagship products at Oxford Capital – Growth Capital and Infrastructure, I meet a number of investors who seek the best of both worlds and ask me a derivative of the same question – can we manage an infrastructure-style portfolio with growth-style returns over 15%?

The answer, of course, is yes. We have the depth and range of skills within the Oxford Capital team to originate & manage assets with return profiles well above 15%. But here is the rub – to invest in these assets we must accept higher risks – typically through a combination of higher development risk, higher construction risk, higher country risk, and higher revenue risk. And once we factor in these associated risks, we believe that the best risk-adjusted return is not with higher-risk overseas projects offering 15%, but with lower-risk UK projects offering 8-10%.

We notice that a number of large infrastructure investors with long track records and global investment mandates see value in the same markets as we do, and are also gravitating towards UK investments. Whilst this brings greater interest in the sector, it also brings the risk of excess capital compressing yields and lowering the return available to our investors. This is particularly notable in larger, higher-profile projects that attract media and political attention.

At Oxford Capital, we avoid many of these headwinds by investing in smaller infrastructure projects within our Distributed Energy strategy. These are projects that we understand in detail, are quick to construct, and typically require less than £5m in equity. These projects typically attract lower bidding pressures, have shorter timelines for capital deployment, and allow us to acquire quality assets for our investors at higher initial yields. The key then becomes one of efficient cost management from our asset management team. Managing a large number of small assets has obvious cost disadvantages over managing a small number of large assets, and it is not uncommon for higher yields on purchase to be eroded by higher costs. At Oxford Capital, however, we believe the old adage that success is often dressed in overalls and looks like hard work – and we have developed deep expertise in streamlining the asset management process to allow yields of 8-10% to be passed through to our investors.

When it comes to acquiring and managing infrastructure assets to get the best returns for our investors, we believe that small is often beautiful.

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