After a summer lull, the investment company fundraising machine has roared back into life in recent weeks. Many decent existing funds that have already proved themselves are looking for more cash. For example, just in the last few days, we have seen an oversubscribed issue from Target Healthcare REIT (THRL ) and a substantial fundraise by Aquila European Renewables Income (AERI ).
There is also an interesting clutch of new trusts to consider, including a new forestry fund – Foresight Sustainable Forestry – and Responsible Housing Reit, a new BMO-managed competitor to Civitas Social Housing (CSH ), Triple Point Social Housing Reit (SOHO ), and to a lesser extent, Home Reit (HOME ). This week though, I will focus on Blackfinch Renewable European Income Trust (BRET).
Blackfinch is looking for £300m to invest in a portfolio of renewable energy assets. BRET has a £232m seed portfolio lined up and thinks it can generate dividend yields (based on the issue price) of 1%-3% for its first financial year to 30 June 2022, 5% to 5.5% for the second financial year, 6% in year three, and progressive dividend growth thereafter.
It is looking to enter a crowded market. Many of the 19 existing constituents of the Association of Investment Companies’ Renewable Energy Infrastructure sector are themselves recent new issues and quite a few of them are trying to expand. It helps that just one of these is trading on a discount, Aquila Energy Efficiency (AEET ), which underlines the demand for these assets.
As I have said before, the potential investment pool is vast. BRET’s prospectus quotes a figure from Bloomberg New Energy Finance of $967bn (£699bn) that needs to be invested in renewable energy in Europe, part of more than $5tn globally, to meet agreed climate change goals.
BRET’s dividend targets would make it competitive within the sector, where yields for established funds range from 4.6% up to 7.3%. However, I think that to justify its existence the trust needs to offer something different.
Like Downing Renewables and Infrastructure (DORE ), with its significant Swedish exposure, part of BRET’s pitch is its geographical remit. Its target markets are Italy – which has some overlap with the likes of NextEnergy Solar (NESF ) and JLEN Environmental Assets (JLEN ) – Poland, Central and Eastern Europe, potentially some UK (it’s in the seed portfolio but isn’t an area that they are seeking to prioritise in the long term), Portugal and maybe Spain.
That contrasts with Aquila European Renewables Income, which currently is invested across Denmark, Finland, Greece, Norway and the Iberian Peninsula.
BRET also plans to have a sizeable allocation to assets at the construction stage – a policy that VH Global Sustainable Energy Opportunities (GSEO ) has adopted. Buying assets at the construction stage should also add to returns but comes with a little more risk. Although, to be fair, much of this is absorbed by the developer in the first instance.
While in the short-term, GSEO’s net asset value looks to be falling, once its projects are completed, it should increase.
A recent example of GSEO’s dealmaking is an interesting £78m deal to back the construction of two gas-powered combined heat and power plants in the UK with carbon-capture facilities. GSEO raised £250m at launch, below its target of £400m. With this UK deal, it has now committed 92% of its IPO proceeds and could also be looking to raise money soon.
Blackfinch has good relationships with three developers and is looking to partner with more of them. Sourcing as many deals as possible in this way, rather than competing with other investors in auction situations, should help them buy assets at more attractive prices.
BRET thinks its target markets offer higher yields than UK-based assets. Since many of the assets will also be subsidy-free, making them more sensitive to power price fluctuations, Blackfinch intends to avoid using gearing. The trust may change its stance on this in the future, once projects are operational, or it could look to sell completed assets onto investors who are prepared to use debt finance, crystallising some capital gains.
I think BRET is sufficiently differentiated and would make an interesting addition to the sector, but it remains to be seen whether demand for a new fund is greater than the desire to expand some of the existing ones. It is interesting to note in this context that the €90m AERI just raised was €10m less than it had hoped for.
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