WORKING with the public sector to raise investment in a time of austerity poses challenges. However, if you are prepared to innovate and think creatively, it can also be a period of opportunity.
Through services to business, delivery of professional training, consultancy and services, higher education generates almost £60bn a year for the UK economy. But our university partners are not immune to government funding decisions and with the changes to the funding regime for students and institutions still bedding in, we have had to find new ways to draw in investors.
Investing in high-quality accommodation, teaching and leisure facilities is vital to the continued attractiveness of higher education institutions, but with a reduction to capital investment from the Higher Education Funding Council for England (HEFCE), institutions are looking to the private sector for solutions.
That is why we decided to take radical action to help our partners finance much-needed infrastructure. We attracted institutional investors into the university infrastructure market and launched a bond – with an initial issuance of £382m – in nominal and index-linked tranches with six of our university partners, ring-fencing a portfolio of over 9,000 student bedrooms. This was the first issuance from our programme, part of our strategy to match long-term institutional investment to the longevity of university business models with a programme size of £5bn.
It attracted interest from over 50 investors and was more than 100% oversubscribed, but it wasn’t easy. To launch our programme, we worked with leading bond arrangers to persuade investors that our niche model was an attractive proposition for bondholders. Previous issuances in the sector had been directly rated on the credit-worthiness of the university and had involved single projects, unlike our portfolio which offered bondholders the opportunity to invest in a diversified portfolio of high-quality income streams.
There were, of course, the bond road shows, organised by the arrangers, prior to launch, but we had also been undertaking soft soundings on behalf of UPP, as well as for higher education infrastructure as an investment in its own right.
The UK higher education sector – while ideal for long-term investors – didn’t have the history or the presence in the capital markets that would lead to ready access to long-term investment. We had to engage in a great deal of promotion of the sector to explain its long-term financial health and prospects to investors. Promoting the sector involved walking them through policy, historic and future growth data and business models – all of which underlined the importance of the sector and its stability. Key to this was demonstrating how our interests and those of our partners were aligned. For investors, the issuance offered access to attractive, secure and relatively low-risk returns, while it offered access to long-term, cost-effective funding for our university partners.
Completing the first issuance gives us firepower in terms of sourcing new credit in capital markets. It also creates a strong platform, providing long-term security which underpins the future of our company, partnerships and portfolio. It has allowed UPP to replace all short-term borrowing facilities and start planning for the future.
What’s next? Having effectively re-opened the university infrastructure project bond market – and established higher education as an attractive investment opportunity – we will be working with our existing investors to ensure we are creating opportunities that meet their requirements as we look to expand our bond programme. The opportunities are growing. In fact, a huge amount of investment is required just to keep pace – the sector faces a £5bn maintenance backlog in the UK higher education sector – and we are looking at drawing capital investment for different types of transactions with our partners.
Gabriel Behr is CFO at UPP, a provider of university accommodation
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