- VH Global Sustainable Energy Opportunities is one of the latest renewables trusts to hit the UK market
- It will invest globally rather than focusing on the UK
- It did not raise as much as it wanted in its IPO but hopes to do another issue this year
Renewable energy infrastructure investment trusts are currently riding a wave of demand that few other sectors can match.
At a time when investment trust initial public offerings (IPOs) look increasingly difficult to get off the ground, trusts from the sector continue to launch while shares in existing ones tend to trade at large premiums to net asset value (NAV). Advocates of the sector argue that such premiums are justified: these trusts have generally continued to reward investor loyalty with a steady stream of dividends that show limited correlation to recent turmoil in the broader economy.
But challenges have prompted changes in the sector. As fund managers in the space will attest, valuations on some of these assets look pretty elevated on the back of high demand, prompting investment teams to look further afield for attractively priced investments.
This search is reflected in the geographical reach of the trusts: having focused entirely or mainly on the UK, many have been widening their remit to overseas markets. Although doing this sometimes introduces an element of currency risk into a portfolio, it can also introduce new opportunities and extra diversification.
If a global approach is the best way forward, one recent launch in this space may be of interest. VH Global Sustainable Energy Opportunities (GSEO) recently entered the market, having raised £242.6m in its IPO earlier this year.
The trust’s investment team is investing the proceeds of the IPO, and Victory Hill Capital Management’s chief executive officer, Anthony Catachanas, expects that the majority will be put to work by the summer.
This investment trust should stand out in two respects. As its name suggests, it will invest across a variety of geographies, with a 40 per cent limit on investment in any individual country. At a time when some renewable energy infrastructure trusts are looking to lessen their reliance on the UK market, this could set VH Global Sustainable Energy Opportunities apart from the competition. Catachanas notes that the portfolio will have “a natural skew” to Australia, the US and parts of Europe.
Perhaps more interesting are the themes and technologies that will drive the portfolio: the trust's investment team will focus on imbalances that have emerged in the renewable energy sector, with a focus on technologies less commonly seen in some generalist renewable infrastructure portfolios. The trust should have some diversification here due to a 20 per cent limit on its exposure to a single technology.
Filling the gaps
Catachanas notes that while more traditional sources of renewable energy such as wind and solar have become cost effective and commercially viable, they have shortcomings that become evident in specific regions.
“Solar is great when you can predict how much sun you get in a country like Spain, whereas in the UK, good luck with that,” he explains. “The UK as a result bets on wind – offshore wind in particular. Wind, unlike solar, is actually less predictable. The wind either blows or it doesn’t.”
Such operational issues drive some of the thinking behind the portfolio. Catachanas notes that the team will focus on dealing with intermittency problems – including when power demand spikes – because renewable sources cannot currently accommodate this, leading to a continued reliance on fossil fuels.
“In the UK we had a cold snap and higher use of power, and the wind stopped blowing, so we used coal plants,” he says. “We want to stop that. We want to concentrate on complementing renewable energy generation with battery storage or flexible power sources that are net zero carbon emitting.”
The team is focusing on similar problems in Australia, where a mismatch between when power is generated and when it is actually used can create a continued reliance on dirtier forms of energy.
“Electricity consumption spikes in evenings and drops in the day, but the sun shines in off-peak hours in the day when people aren’t calling on more power,” he notes. “When people switch on coal power plants [to meet that extra demand] they can’t turn it on and off as quickly. When you switch it on, you have to leave it on.”
As such, the team is focusing on battery storage including installing equipment on solar farms.
The portfolio should more generally consist of investments looking to capitalise on what the team describes as “micro trends” in different countries, including the production of biogas from agricultural waste, something that could offer opportunities in Italy and the Netherlands. Catachanas notes that this relates to the increased desire for a circular economy where wastage of materials is limited or eliminated.
While the trust did not achieve its £400m IPO target, an “enhanced pipeline” of prospective investments detailed before the fundraising hints at some of the allocations the team want to make. The originally envisioned £305m pipeline includes a 30 per cent allocation to the UK, with 21 per cent in the US, 10 per cent in each of Australia, Italy and Bulgaria, 9 per cent in Brazil, and 5 per cent in each of the Netherlands and Latvia. The technological mix of the pipeline includes carbon capture and reuse, assets that convert waste to energy, solar, and onshore wind.
Fight the hype
As noted, the excitement about renewable energy has fed not just into the share prices of investment trusts focused on it, but also into the prices of the assets they buy. The Victory Hill team hopes to avoid areas where investing has become too expensive.
“We think some markets are too saturated,” Catachanas notes. “Solar in Spain is saturated – half of the UK trusts are now flowing into Spain for low yields and returns. That’s not our thing at all. When we hear saturated, mature and flow of money, we go the other way. We’re more interested in the structural gap. You need to create the origination yourself and see the gap. We’re not being pitched at – we’re solutions guys – we go to fix the problem.”
This extends to assets that come with subsidies – only around a fifth of the portfolio should be exposed to forms of state support. While subsidies can be a valuable support to revenue streams, the Victory Hill team is wary of the pitfalls involved – including governments looking to repeal them later on.
“We don’t like that subsidy approach – it has failed in Spain, Italy and France,” says Catachanas. “You have secured your contracts based on subsidy, but the government can repeal it retroactively. “There’s a perception by these governments that developers are making too much money so they want to teach them a lesson. They make examples of people, to act as a deterrent to the industry. There’s a perception of too much profit being driven and people relying on a subsidy. When they feel that’s shifting and the flow of capital has reached its peak, that’s when governments tend to react.”
Avoiding the hot money also means focusing on more niche technologies while taking certain risks not present in all rival funds. One of these is construction risk, whereby the team focuses on renewable assets that are still being built rather than buying operational ones. This should add a “pick-up” for returns, although the trust’s exposure to construction risk is capped at 30 per cent of its assets.
Like other renewable energy infrastructure trusts, VH Global Sustainable Energy Opportunities aims to generate a stable and reasonably high dividend, and will target a net asset value (NAV) total return of 10 per cent a year, after costs and expenses, once it is fully invested.
Pricing of the trust’s shares reflects the high demand for names in this sector. Even with the team still working to get the money fully invested, VH Global Sustainable Energy Opportunities’ shares recently traded on a 4 per cent premium to NAV. But VH Global Sustainable Energy Opportunities might come back to the market in the not too distant future, potentially giving investors convinced by its approach a cheaper way in.
“The game plan for us is to go back to market by the end of the year, by popular demand,” says Catachanas. “Investors said they’re keen – one big shareholder wants to know when we’re going to come back to market.”