Morgan Creek Infrastructure's Premium to NAV: A "Hold" Amid Rate Cuts?

Morgan Creek Infrastructure (MCI), a closed-end fund focused on high-yield corporate debt and infrastructure assets, has traded at a premium to its net asset value (NAV) for much of the past five years. As of August 28, 2025, the fund's share price of $21.76 reflects a 27.25% premium to its NAV of $17.10, significantly above its 52-week average of 20.51% and far exceeding its three-year average of 3.23%, according to CEF Connect. This valuation raises critical questions for investors: Is the premium justified amid expectations of declining interest rates? And does it warrant a "Hold" rating as the Federal Reserve signals rate cuts?

Historical Premium Trends and Interest Rate Dynamics

MCI's premium to NAV has historically been volatile, ranging from a 7.37% discount in 2023 to a 48.46% premium in 2024, as CEF Connect shows. This volatility aligns with broader interest rate trends. For instance, during 2024, as the federal funds rate climbed to 5.33%, MCI's premium widened to 27.25%, driven by investor demand for high-yield income in a rising-rate environment. The fund's portfolio, weighted toward floating-rate bank loans and below-investment-grade corporate debt, benefits from higher rates by generating increased income, which supports its premium valuation per InfraRed Capital's 2025 outlook.

Conversely, in 2020, when rates plummeted to 0.05%, MCI's NAV appreciated by 5.51% while its share price fell by 15.76%, highlighting the disconnect between NAV performance and market price during periods of extreme monetary easing, as noted in the InfraRed outlook. This suggests that MCI's premium is inversely correlated with interest rate cuts-a dynamic that could pressure its valuation as the Fed begins to reduce rates in 2025.

Infrastructure Megatrends and Valuation Resilience

Infrastructure investments, including MCI's focus areas like distributed generation and battery storage, have shown resilience in higher-rate environments. A 2025 report by InfraRed Capital notes that core infrastructure assets offer attractive entry yields and potential upside if rates decline, as their cash flows are often inflation-linked or long-dated. Additionally, decarbonization and digitalization trends-such as surging demand for data centers-have bolstered infrastructure valuations, with U.S. data center power consumption projected to rise from 3% to 8% of total demand by 2030, according to CEF Connect.

However, MCI's current premium of 27.25% appears stretched relative to these fundamentals. The fund's five-year average premium is negative (-1.52%), and its 52-week high of 48.46% occurred during a period of peak rate hikes. With the Fed now cutting rates-reducing the federal funds rate to 4.33% by August 2025-investors may reassess the fund's valuation. Historically, rate cuts have led to bond price appreciation, which could narrow MCI's premium as its NAV gains outpace market price gains, as explained in a fasterCapital analysis.

Strategic Considerations for a "Hold" Rating

The case for a "Hold" rating hinges on balancing MCI's structural advantages with valuation risks. On the positive side, the fund's focus on infrastructure and high-yield debt positions it to benefit from long-term trends like energy transition and AI-driven digitalization. Its floating-rate exposure also provides a buffer against moderate rate cuts.

Yet, the current premium implies significant confidence in future income growth and NAV appreciation. With the fund trading at a 27.25% premium-well above its 52-week average-investors face the risk of a correction if rate cuts fail to materialize or if infrastructure valuations stabilize. Analysts at Barings note that MCI's premium valuation as of May 2025 occurred amid an "uncertain outlook," with rate cuts on the horizon. This uncertainty underscores the need for caution.

Conclusion

MCI's premium to NAV reflects its appeal as a high-yield income generator in a rising-rate environment, but its current valuation appears overextended amid expectations of rate cuts. While the fund's infrastructure focus and floating-rate portfolio offer resilience, the risk of a premium contraction in a lower-rate scenario justifies a "Hold" rating. Investors should monitor the fund's NAV performance relative to its share price and the trajectory of the federal funds rate before committing capital.