Sequoia Economic Infrastructure Income Fund Limited (SEQI.L) Q2 FY2026 Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Sequoia Economic Infrastructure Income Fund Investor Presentation. [Operator Instructions] Before we begin, we would like to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. And I would now like to hand you over to the team from SEQI. Randy, good morning, sir.

Good morning, everyone. Welcome to the First Half Fiscal Year 2026 Results Call for SEQI. This covers the period 1 April 2025 through 30 September 2025. I'm Randall Sandstrom. And on the call with me this morning is Steve Cook, Matt Dimond and Rahul Narang. Rahul is an Executive Director in SEQI's credit transactions team, and he's one of our senior originators. If we could just go right to Page 1 to the introduction, let me just first give a short synopsis of what SEQI offers. And the current dividend yield as of the 30th of September was 8.83%. And today, the current dividend yield is 8.6%. We had an annualized NAV total return of 10.1% for the reporting period. And SEQI, of course, offers exposure to a fixed income portfolio in a defensive asset class backed by infrastructure assets. During the period, we had a resilient portfolio generating substantial cash, our NAV per share growth was 1.2% to 93.67p, up from 92.77p. We had dividends for the period of 3.4375p per share, which is consistent with our full year dividend target of 6.78p per share, and the dividend was cash covered at 1.01x. We've maintained credit quality in the portfolio without a reduction in targeted yields. We finished the period with 57.2% of the portfolio in senior loans with low construction risk of just less than 12%, and that's well south of our 20% max on construction. We've made good progress on nonperforming loans. They now represent only 0.6% of the portfolio and that's down from 5.5% a year ago. We had an environment of stable or gradually declining interest rates during the period, and this has been supportive for SEQI. Our current pull-to-par upside is 3.1p per share, and that's through 30 September 2028. And by pull to par, what I'm talking about is just the upside effect of our loans maturing at par if they're currently trading at a small discount because of changes in interest rate movements. We finished the period with a strong pipeline of investment opportunities using our very selective and rigorous investment process. Size of that pipeline was GBP 350 million equivalent with an average gross yield of about 9%. I think as everybody knows, we have a very proactive and balanced approach to capital allocation. During the period, we bought back nearly 17 million shares, and we've been a leader in the buyback area, and our buyback has been going since July of 2022. We've seen a very -- we have now the potential for a very modest increase in fund leverage, where we can take advantage of our good pipeline of investment opportunities. Lastly, for the period, we had a sustained increase in our ESG score, finishing the period at 65.44, up from 64.65. And if we could move to the next slide now.

Thanks, Randy. This page provides a summary of some of the key financials for the half year. And we've just touched on some of them, but just to give a little bit more detail, we've seen total net assets fall very slightly to about GBP 1.4 billion. That's in the context of the net asset value per ordinary share increasing, but obviously also a very significant share buyback ongoing program, which has reduced the number of shares. So the net result is we've seen a very small reduction in the overall size of the portfolio. Having said that, many of the portfolio characteristics remain very similar. The portfolio yield to maturity is still holding up at a very good level, about 9.7%. That's in the context, obviously, of falling interest rates in many jurisdictions. We've seen a good solid total return for the period with the NAV per share of about 1.2% plus the dividend result in a total return for the half year of about 5%, which annualizes to 10.1%, which again, I think is a very good result in the current market environment. The dividend remains cash covered at 1.01x, which is a modest improvement versus the previous period. And as we touched on, the ESG score has slightly improved as well. If we can turn to the next page, please. Here, we have a NAV bridge for the period. I think it is very self-explanatory. The biggest driver is clearly interest income at 4.3p per share over the period. The largest offsetting reduction dividends at 3.44p. So you can immediately see that dividends are very well covered by interest income. Expenses include not just the operating expenses, but also the cost of leverage. That comes in at 0.66. That is pretty much entirely offset by positive market movements, and they arise from a number of things, including pull to par as a number of our loans get close to maturity. We've had some loans repay or sold where we have realized gains, and we've had continued good resolutions on things like bulb. So overall, a really good half year for market movements. And then smaller items include acquisition costs, which is the cost of marking loans down to the bid side. So it's not a cash cost. It's just a cost on the making of new loans. FX movements, which is a small positive adjustment that we have a fully hedged portfolio. We do get for accounting and mark-to-market reasons, small gains or losses. They tend to cancel out in this half year, it manifests itself as a small gain. And then finally, the share buybacks added about 0.17p per share, which clearly is positive. Thank you. Next slide, please.

Thanks, Steve. I'll now take you through the long-term SEQI performance updated for the 6 months. So as you can see on this chart, we've got 3 lines. We've got the dark -- the black line, which is the SEQI NAV total return. So that's NAV performance plus dividends. We've got the SEQI share price total return, so share price plus dividends and the comparable line, which is the light blue GBP hedged high-yield bond benchmark total return. Now as you can see, since IPO, and this goes back now 10.5 years, on a NAV total return basis with a steady stream of quarterly dividends, we continue to comfortably outperform the high-yield bond benchmark, and that's on average by over 300 basis points annually. This is after fees and expenses as well as losses, and it reflects the significant yield pickup that we can achieve by investing in private mid-market infrastructure loans using a highly selective approach and with a strong active portfolio management capability. Looking at the share price total return, even taking into account the prevailing market-wide discount for listed alternative income funds investing in relatively illiquid private assets, we are consistently at or above the long high-yield bond benchmark. I'd like to then hand back to Steve to take you through a bit more detail on our portfolio characteristics.

Thanks, Matt. If we go on to the next slide, you can see here a snapshot of the portfolio as of the 30 September of this year. The portfolio remains very highly diversified, as can be seen from the chart in the bottom half of this page where we're spread across a very wide range of different types of sectors. Digitalization remains the largest such sector, although you'll see actually that our exposures within that have been falling over time, followed by power and other sectors then such as transportation. I think there's a couple of very interesting things we can touch on here. One is we still have a very low exposure to projects in construction. It's currently only 11.7% of the portfolio. Our exposure is capped under the terms of the fund at 20% of our portfolio or to put it another way, 80% or more of the portfolio needs to be to projects that are operational and have a track record and are not exposed to all the risks of construction. As it stands at the moment, in fact, it's close to 90% of the portfolio that has got that characteristic. So a relatively low level of exposure to construction. The majority of our debt, about 57%, still consists of senior secured loans. That's the lowest risk points on a company's balance sheet. And the portfolio is predominantly private debt, about 95% of the portfolio is private debt. And we focus on that because it gives us an opportunity to outperform public credits such as high-yield bonds and leveraged loans. In fact, that's the analysis that Matt has just taken you through, right? The reason we can have this long-term outperformance is because of our focus in private debt. Geographically, we remain well diversified, about 30% of the portfolio within the U.K., 40% in North America, 28% in Europe, excluding the U.K. However, if we go to the next slide, please, I'm going to talk about some of the similarities and also some of the differences that have manifested itself over the last 12 months within the portfolio. So I think I think a few things that have stayed the same. As I said earlier, the portfolio remains highly diversified. We've got 53 different loans, only slightly less than 56 than a year ago, even though the fund size has got a little bit smaller. The average maturity and the average weighted average life of the loans is pretty similar, about 3.2 years. So relatively short-dated loans, and we -- we like that. It's a good way to manage risk, and it's also a good way to be able to redeploy capital into attractive sectors. The modified duration of the portfolio remains low, and that's, again, a measure of the interest rate sensitivity of the portfolio. It's 2.1% now compared to 2%. And the equity cushion. So the -- in other words, the weighted average amount of equity within the companies that we lend to has remained really very consistent, about 38% of the balance sheet. So one way to think about that is it's very similar to making a loan at 62% loan-to-value, right? The debt represents only a proportion of the value of the asset to the borrower. The equity cushions, the amount of excess assets or excess value is about 38%. All of that value needs to be lost before lenders suffer a loss. So those are all very similar. Just a couple of interesting differences on this page. One is our exposure to North America has declined substantially from about 47% a year ago to about 41% now. And that, I think, is a reflection of some of the policy changes that we've seen in the U.S. over time, which have made things like renewable energy much more difficult to invest in. Also, assets in the transport sector in the U.S. could well be affected by, for example, tariffs, if you think about things like container ports, aviation, shipping, all could suffer from downturns in trade. So the U.S. remains obviously a very large, growing important market, but perhaps a little bit less attractive than 12 months ago, and that's reflected in us increasing our exposure to the U.K. and Europe predominantly. The other thing that's changed is that our exposure to data centers continues to fall. A year ago, this is about 13%. We've brought it down now to a bit less than 10% I think the reason is that there has been, as everyone I'm sure will be aware, an enormous amount of capital raised for data centers. That has resulted in, we believe, lending terms getting a little bit less attractive over time. And we, therefore, have preferred to focus in other areas where we can see better value for money. One example would be financing the provision of power to data centers rather than data centers themselves. And then finally, the third big change, which Randy mentioned, is that our exposure to nonperforming loans has declined very, very materially from about 5.5% of the portfolio a year ago to about 0.6% now. And that's a reflection of resolutions on some cases, such as B and Clyde Street. And in other cases, we take always a view of marking things hopefully, very cautiously and conservatively, and that obviously reflects the fact that they now have a very low proportion of the loan book. I'll pass on now to Rahul, who will go through the next slide.

Thanks, Steve. Let me turn to Page 7. This is -- we talk about a transaction that we completed recently in SEQI. So SEQI made a senior secured loan of approximately EUR 55.5 million. And this is to finance construction CapEx on a portfolio of solar projects in Poland. CIMCO originated and negotiated this deal bilaterally with the ultimate parent company of the borrower, which is GoldenPeaks Capital. And GoldenPeaks Capital itself, it's a leading developer. It's a leading independent power producer in that region. It has a very substantial track record of developing, owning and operating assets in Poland. This deal also benefits from robust fundamentals of the jurisdiction itself. So if you look at Poland, it's the fifth largest population center in the EU. It is a large power consumer. It's got a fast-growing economy, and it relies heavily on coal for its electricity. And while it is making steady progress in moving its electricity system away from coal, they still have some way to go, and they have some stiff targets to achieve by 2030. Also for Poland, energy transition is as much about energy security and resilience as it is about decarbonization. This senior euro loan that we have made recently, it will mature in 3 years with yield to maturity of 8.9%, Turning to Page 8. Here, we show some stats on our deal sourcing. Our sourcing channels are very diverse. It's a pretty solid mix of bilateral relationships with corporates, with financial sponsors, but also banks and intermediaries. The solar deal that we've just talked about, we did in Poland, it's a good example of one of the things that we really like to do, which is lending in mid-market, core infrastructure, originating those deals bilaterally or in a small club where needed. And it is in this space where competition relatively is in lenders' favor, which typically tends to translate into better pricing and/or better downside protection for lenders. This sourcing strategy is reflected on the chart on the right. Nearly 45% of our deals have been bilateral. We are sole lender on those deals. And in total, nearly 75% of our deals have been either bilateral or a tight club, as I said. And this is where we're able to use the advantage of flexible capital, customize the debt solution for the borrower and in return, improve economics or lender protections, typically over and above what we may get in a broadly syndicated deal. The chart in the middle, it shows a diverse range of situations that we tend to get involved in. And as the chart shows, we clearly like situations where we are putting capital alongside fresh equity to finance new CapEx or finance acquisitions. I'll let my colleague, Matt Dimond, take you through the market opportunity for SEQI.

Thank you, Rahul. So on the next slide, we'll just address a little bit more about the broader market conditions in which we operate. One of the key features of infrastructure is the benefits the sector gets from the what we call the mega themes that are driving growth and appetite for investing. That's both in equity and credit. And you can see on the right-hand side, quite a dramatic increase in funds under management or assets under management in the sector. I'll come back to that in a minute. The key themes in particular, at the moment have been driven by digitalization and energy transition. So there are plenty of deals in those sectors. And as Steve has pointed out, we are able to be particularly selective in those sectors because in any industry, there's a risk of too much capital chasing deals or there being sort of more concentrated risk. So we're very cognizant of that, and we take that into account. Fortunately, infrastructure has a very broad range of other assets we can address that are also highly thematic. Some of these are longer term, such as urbanization and aging societies, which are key demographic shifts that continue, particularly in the mature jurisdictions where we invest. Now what does all this sort of add up to in terms of this deal growth? One measure is what you call the global infrastructure financing gap. This has been calculated by consultants and other organizations over the years, partly to encourage governments to allocate more capital and to plan better for investment. But it also has the impact of encouraging more private capital to assist. Now the gap that has been calculated, for example, in the United States alone, and this is by the American Society of Civil Engineers, for the decade ahead is about a $3.7 trillion gap between the identified infrastructure needs of the United States versus the capital that is expected to be available. So that's a gigantic gap. Similar gaps are being identified in other jurisdictions, not just in North America, but in Europe and Asia and elsewhere. Significant contributors to that gap include the replacement of aging or inadequate infrastructure, I would say, transportation, electric grids, utilities, water, waste and other such longer-term assets are included in that. Digitalization and kind of more sort of modern assets, it's much harder to calculate the needs going forward. So we believe that some of these numbers are probably underbaked and there's more likelihood that the gap will increase rather than decrease. Climate resilience, the requirement for low emissions and energy security add further impetus to this gap. In terms of geographies, Steve has mentioned that the U.S. allocation has been a little reduced recently in our portfolio as an active decision. Having said that, the United States does remain a major source of deals. It represents 50% or more of the broader credit market. One area, clearly, the U.S. is less attractive recently is the renewable space with the administration being negative on that sector. In Europe and in the U.K., these are currently very active markets for new deals with governments, particularly reliant on the private sector to step in and help finance assets. Asia Pacific is at a much earlier stage of market development, particularly outside the relatively mature capital markets of Australia and New Zealand, but there is certainly longer-term potential in areas such as energy transition and digitalization. Interest rates do remain relatively high, particularly in the U.K. and in the U.S., while euro rates have come down until the middle of this year from their peak. In mid-2024. They have somewhat stabilized and Europe continues to be a market that we look at actively. We've spoken already about the resilience of infrastructure credit, particularly compared to the broader private credit market and further updates in Moody's and other reports support that thesis with default and loss rates for infrastructure, particularly high-yield infrastructure being significantly lower than that of broader corporate credit, reflecting the nature of the underlying cash flows and assets in our sector. And then returning to the chart, this is actually just part of our market. This is the private equity infrastructure assets under management. But this is quite a key borrower segment. We do, do direct transactions. but this is the Preqin data that shows the strong growth in the private equity allocated to it. And you can see at the bottom right, there's a lighter blue segment that is the amount of private debt under management allocated to infrastructure. So there's a huge opportunity for debt to grow and meet the requirements of our equity borrowers. On that point, I will hand back to Randy to conclude our presentation today.

Yes. Thank you, Matt. And if we just turn to the closing remarks on Page 10, you see 3 points here: performance, agility and opportunity. And I'd like just to take a couple of minutes to discuss each of those. And we feel these are 3 important hallmarks of SEQI. On performance, the portfolio has had solid performance, and that's in the context of being a diversified portfolio, as you've heard, which is right across loans, sectors, subsectors and jurisdictions and also in the context of meeting all of our dividend targets and maintaining the long-term outperformance versus the high-yield bond benchmark, which Matt talked about earlier. For agility, what we mean here is that SEQI is very cash generative. And the reason for that is that we have a relatively short average life of right around 4 years. So we see a lot of principal coming back. We also have a fairly high yield on the portfolio. So there's a lot of interest income as well. And this does make the portfolio quite agile. What that means, practically speaking, is that we can buy back shares and fund that buyback, which we've been doing since July 2022. At the same time, we can still make selective new investments into loans to keep the portfolio fresh and keep it thematic and keep it well diversified. And then also at the same time, if necessary, we can pay off the RFC -- sorry, the revolving credit facility. That is paid down now. But the point is that because of the cash flow that comes into SEQI, we're able to do all 3 of those things at the same time, if necessary. Finally, we feel that SEQI does offer a really good opportunity in the sense that Investors can benefit from these favorable market conditions that Matt talked about by investing into a diverse theme, a diverse portfolio of infrastructure credit opportunities. And as I mentioned right at the beginning, right now, the current dividend yield is a strong 8.6%. The annualized NAV total return over the last 6 months was 10.1%. And again, this opportunity gives investors exposure to a fixed income portfolio in a defensive asset class backed by infrastructure assets. This ends the presentation portion of today's call, and we'll now open it up to Q&A.

[Operator Instructions]

Yes. Thank you very much. Okay. So just to look at the first question. Can you have a shorter delay between the x and the dividend payment?

Yes, I can take that one. I think the answer is broadly no. I believe the timetable is set by the stock exchange and the registrar. It just copes with the mechanical process of getting cash from the company and distributing it to all the different shareholders. But we can definitely have a look and see if there's any improvements we can build in that.

Thank you, Steve. And I think the next one is for you as well. The half yearly report says there was an exceptionally high level of loan prepayments. Can you describe the process of sourcing new loans and how long it takes to execute them? Are some loan agreements ready to go?

Yes. So we have a number of ways of sourcing new investment opportunities. The most important one is we have a very good ongoing dialogue with a lot of the funds, equity funds that invest in infrastructure, also developers and their advisers as well. And we proactively seek out lending opportunities really on a continual basis. Throughout the year, we're speaking to potential borrowers trying to understand their financing needs and see if we can be -- provide capital to them. That takes typically, I would say, 1 to 3 months from start to finish to make a new loan. We obviously do a very thorough job on due diligence. We do site visits. We'll commission technical studies and we'll have obviously lawyers and all kinds of people do a deep dive on the transaction. So it takes quite a while to deploy money. However, we do normally get pretty good visibility over prepayments. So we can actually start that work before a loan prepays, figuring out how to redeploy the money. And we can also use the funds revolving credit facility to manage the balance sheet. So something we did over the course of the half year was we knew we're going to get a lot of loans repaying. So we actually started working on replacement loans before that. We used a modest amount of leverage to make those loans. And that meant that when the cash came in from the loans that are repaying, we weren't then left with a lot of cash and then trying to deploy it. Actually, we use that cash to pay down the leverage. So it's a very efficient way of managing the balance sheet. We don't use structural leverage. It's not about gearing up the portfolio. It's about avoiding sitting on cash and being proactive and managing the balance sheet pretty well, I think.

Thank you, Steve. The next question is, given the growth in the private credit market, what effect is this having on credit risk premium? And I'll be happy to answer that one. We have seen growth in private credit, no doubt about that. That market, the entire private credit market is estimated to be just over $2 trillion equivalent. So it's a big market. Most estimates put the potential size of the private credit market at several trillion dollars. So we think over the long term, private credit has a lot of room to grow in terms of absolute market size and infrastructure debt is an important subset of that larger private credit market. And absolutely, spreads are tight, not because of the growth of the private credit market, but just where we are in the cycle right now. They're not -- they're not the tightest they've ever been, but they are absolutely at the tight end of historical spreads. But nonetheless, we are still seeing our target spreads, which are sort of 400 to 600 over risk-free rates. And one of the things that's underpinning that is that -- and Matt talked about this, there's a significant a significant more -- significantly higher demand for infrastructure capital than supply for infrastructure capital. Matt mentioned that the estimates in the U.S. are over $3 trillion. And if you look at various consultants worldwide, they put that estimate closer to several trillion dollars over the next 10 to 15 years. So that's helping to underpin the infrastructure spread market. The next question is in 2 parts. So Rahul, maybe you can take this first part, and I'll take the second part. The first part is, what percentage of your income is derived from borrowers whose revenue is derived from availability of their services? And what percentage of those borrowers for which demand for their services is key. So Rahul, maybe you can take that first part, and I'll read the second part.

Sure. Thanks, Randy. So in terms of our borrowers' revenue models, the majority of our borrowers have a long-term capital structure, which is underpinned by a revenue model, which is a mix of contracted revenues and revenues with some commercial risk. And the reason is borrowers with very long-term 25-, 30-year type contracts will typically get financing much cheaper at much cheaper rates. So they'll not be appropriate investments for us. The key -- amongst various tests that these deals have to pass, a few tests that they definitely have to pass is, one, the borrowers sell services, provide services, which are essential in nature. That is the underlying definition for economic infrastructure for us. But also on the commercial part of the revenue model, which has commercial risk built into it, we need to very clearly understand whether the market position of that business model reflects monopolistic in nature that there is stability of predictability of demand and supply in the near term, which helps us estimate range of outcomes for a particular business plan. And then we use those range of outcomes to appropriately size the debt. I think the answer in short is a majority of our borrowers will have a mix of those revenue models, and they will need to meet various tests for us to enter into those transactions.

Thank you, Rahul. Then the second part is how exposed might you be to a general economic slowdown, particularly in the U.S. over the next 2 to 3 years. And I think it's important to say on that question, one of the hallmarks of infrastructure is that it's a defensive asset class, certainly versus industrial corporate bonds and even financials like banks, which tend to be much more tied to either the business cycle or the credit cycle. So that makes infrastructure defensive, and it tends to outperform these other sectors even during periods of economic weakness. And just specifically on the U.S., some people feel the U.S. is at a turning point. If you look at most of the numbers, they're pretty good. Stock prices are obviously high. Spreads are tight. Business investment is strong, productivity is okay. Earnings growth is double digit for the S&P 500. So all of that looks good. But the investor is right. There are some concerns. The employment picture has been deteriorating in the U.S. If you remember going back from sort of late spring through summer, we saw 4 months, I think it was May through August of really weak economic growth in the U.S. Now September did bounce back. The nonfarm payroll number was about 120,000 versus about 50,000 that was expected. But because of that, I do think the Federal Reserve is extremely likely to decrease rates in December. And the question is, have they started the easing cycle soon enough. And I think most folks feel that they probably have. So we'll have to see how that plays out. But we would expect the Fed to cut rates in December and then probably take rates down to about 3% as far as the terminal rate, the expected federal funds rate versus its current target range of 3.75% to 4.0%.

If we go to the next question, and Matt, I think this is a good one for you. Given demand for higher-yielding private credit assets, why are successful publicly traded funds such as SEQI trading at such a discount?

Thanks, Randy. Yes, it's a good question, and we get -- we have this, as you can imagine, quite often with investors and other commentators. But we -- just to remind people, we are the largest listed infrastructure credit fund out there. So we're in a sort of small group of funds providing that to the liquid listed market, if you like. But our underlying assets are almost all private loans. So they are, to some degree, illiquid, but loans are, in general, more liquid than equity. And we do benchmark our portfolio on a monthly basis to market rates and to update the valuation. So we have a very, very strong belief in the appropriateness of our NAV, maybe on a relative basis compared to equity, much more so because obviously, there's going to be a higher degree of subjectivity in an equity valuation. There's just so many more externalities that you need to take into account. But for a loan portfolio, benchmarking is -- can be relatively accurate, and we have PwC working with us on a rolling basis to provide the monthly valuation. So we're very confident in the NAV. And as a result of that, we're very frustrated with the discount. I would then add to that, that we have been working incredibly hard to keep that discount as narrow as possible through this very transparent approach on the NAV through investor communication, through broader marketing to a wider range of investors, not just in the U.K. but elsewhere. I think one of the challenges we found is -- and this is not just us, but the entire private markets or listed alternative segment of the London Stock Exchange is that we've been highly geared, if you like, to U.K. retail and intermediary investors. And while we're very keen, obviously, to have lots of those investors, some of those investors have other choices that are not in the listed alternative segment, including gilts and because of tax rules and savings that can be made through the gilts market at the moment with the unusually high rates that have been experienced. A lot of capital has flown out of our broader segment, and that's covered sort of 30 or 40 different companies, I would say. And that has been frustrating. It's a structural anomaly for the U.K. And we certainly would expect that at some point to close as that alternative trade wears off and as more investors recognize the value in our sector. But I would reinforce the point we're continuing to work through the buyback, through the communications and through looking for further investors to close that gap. But equally, we would encourage investors to look at this as a great opportunity with the high dividend -- running dividend yield, the accuracy that we can support on the NAV as well as the potential upside of the share price. We obviously don't control the share price. There was certainly another question I saw coming through when is the share price going to go up. Although we pull as many levers as we can internally, we obviously cannot maneuver the share price. It is what people will pay for it. But we would certainly see that as an opportunity for investors.

Thank you, Matt. The next question, perhaps, Steve, you could clear this one up. Your interim statement gives a breakdown of fixed versus floating at circa 62% versus 38%. Your presentation states the breakdown at circa 65% versus 35%. What is the correct ratio?

Yes. So that's probably not as clearly put as it could be. So what is more relevant actually is the proportion of the portfolio that's in fixed rate investments plus the effect of our interest rate hedging book. So that's the 62% number. And just to give a little bit of color on that, we make loans that are both fixed rate and floating rate. And obviously, we have control over that, but then loans repay and they could be either fixed or floating rate. So we use hedging. We swap out some fixed rate loans into floating or vice versa to hit our target for the whole portfolio, right? Hedging gives us a scalpel-like tool to target the right interest rate profile for the fund as opposed to relying on making loans and which loans repay. So the 62% fixed, that includes the effect of hedging. The other number is just looking at the loan book. Apologies if that wasn't clear.

Thank you, Steve, for clearing that up. Next question, Steve, perhaps you could do this one and the next one as well. Are you concerned about the explosive growth in private equity and infrastructure while leads to debt financing opportunities also substantially increases the risk as not all of these projects are viable and a meaningful portion will inevitably be unsuccessful and written off?

Yes. So I think there's a few things in there. Look, in general, in any market, if you see demand going up and supply is constrained, that's helpful for pricing. And that's what we're seeing right now. So there's a tremendous demand for infrastructure debt, right? And that's being driven by the capital requirements of the sector, which are funded by both equity and debt. So actually, all this infrastructure equity will require leverage, right? That's the normal business model for infrastructure equity funds. Typically, it's GBP 2 to GBP 3 of debt for every pound of equity, sometimes more. So all this equity, therefore, creates demand for our product and like I said, supply is constrained. So it's good for pricing. Now having said that, you do need to keep an eye clearly on risks around bubbles on people chasing poor quality transactions. And that's a really important part of our due diligence. So to give people some comfort, we reject about 90% of the opportunities that we see. We're incredibly selective. We like working with good quality, reputable infrastructure investors. Oftentimes, we've done business with them in the past. We know the deal teams, and then we do -- actually, as I mentioned in my previous answer, a really deep dive on the project, right? This is not a market where you just take someone's word for it or you get a project or an asset value and you lend x percent of that. You really have to understand the nature of the lending opportunities. So in summary, I think demand for debt is positive, right? It supports pricing. But you do obviously need to look at things very, very closely and do a very, very good due diligence exercise. And I think actually probably our track record speaks to that, the ability to spot good opportunities and avoid benign skin.

Thank you, Steve. And the next question, can you please calibrate or can you please discuss the impact of further interest rate reductions on, for example, loan demand, potential yield to maturity on the portfolio and the dividend?

Yes. So there's quite a lot captured, I guess, in that question. So I think it's very likely that we're going to see short-term rates falling in dollars and sterling, perhaps in euros as well, but a lot of that has already happened, obviously. Those are the 3 main currencies in which we lend. So we do think a lot about what that means for the fund. One of the reasons why we have such a high proportion of fixed rate is to protect the fund, right? It's a form of insurance in a way. If rates fall, you've still got those fixed rate loans. We do a lot of careful modeling to sort of assess the impact of what's going to happen to rates and what that means for income into the portfolio and ultimately for dividend cover. And I think one really important thing to bear in mind is that most of our -- the majority of the fund's income doesn't come from, as it were risk-free rates, right? But it comes from lending margins and fees, and they remain pretty robust. In fact, there's some evidence that shows that margins tend to increase as rates fall, which actually, I think makes a lot of intuitive sense because there's a lot of total return lenders. But to put a long story short, we've done a lot of modeling. We've positioned the fund in light of expectations, and we think we are very well positioned going forward for falling interest rates. There's a little ancillary point I wanted to make as well, which I think is relevant, which is when interest rates rose following -- actually following COVID, so this is 2022 and 2023, we saw rates rise, that depressed the price of some of our fixed rate loans, right? In other words, rising interest rates, talking about long-term rates, especially going up means the average price of fixed rate loans falls. Now that will reverse itself due to what's called the pull to par. In other words, these are timing effects, right? The market adjustments, the price of the loan falling doesn't affect the amount of cash you're going to collect on it on a fixed rate loan by definition actually. If we do see long-term rates falling and they're relatively elevated right now, for example, in the U.K. That will reverse the effect of those discounts. In other words, it will speed up the pull to par. So falling long-term rates will have a positive effect on NAV. And it's quite material, right? We estimate about 3p per share, so a bit more than 3%. And that obviously is quite a meaningful gain in the context of a fixed income portfolio. So there's definite upside to long-term rates falling in terms of NAV effect on the portfolio.

Thank you, Steve. That brings us to the end of the questions. And just to give a little closing, we just want to thank everybody for joining us this morning. And we want to remind investors that SEQI offers a current dividend yield of just about 8.6%. The dividend is covered, and we expect dividend coverage to increase in the second half. Our annualized first half NAV total return was 10.1% for the reporting period, and our loans are secured on infrastructure assets.

Perfect, guys. That's great. And thank you very much indeed for updating investors this morning. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order that the management team can really better understand your views and expectations. This may take a few moments to complete, but I'm sure it will be greatly valued by the company. On behalf of the management team of SEQI, we would like to thank you for attending today's presentation. That now concludes today's session. So good morning.