VH Global Sustainable Energy Opportunities (GSEO) hopes the prospect of higher returns and a wider approach to renewable energy will enable it to raise up to £400m from investors when it looks to list on the London Stock Exchange early next month.
That may be a tall order given the three most recent renewable fund initial public offers (IPOs) - Triple Point Energy Efficiency Infrastructure (TEEC ), Downing Renewables & Infrastructure (DORE ) and Ecofin US Renewables Infrastructure (RNEW) - all fell short of their fund-raising targets.
RNEW squeezed on to the exchange just before Christmas, becoming the eighth investment company launch in 2020, when it raised $125m (£93m) compared to its $250m target.
GSEO’s fund manager, Victory Hill, was set up last year by a coterie of former employees from Mizuho, a Japanese bank, where they had worked financing and managing renewable and non-renewable energy projects in more than 30 countries.
Chief executive Tony Catachanas told Investment Trust Insider the new trust would address the lack of a global option for renewables investors. Another reason for listing in London is that they noticed many would-be rivals remained tied to single markets or technologies.
‘The way we look at the world from the start is the other way round. We tend to look at the globe first and then focus on specific jurisdictions that are of interest. Our playing field is naturally larger,’ said Catachanas.
‘So when we saw those constraints, we felt investors were being deprived [of] opportunities where the real opportunities actually were, and were being constrained to markets that were far too mature to provide adequate returns, in particular in renewable power generation.’
Catachanas formerly led the creation and development of the real asset investment division of Asset Management One, the asset management arm of his former employer. The trust’s co-chief investment officers will be Richard Lum, previously head of global energy origination for the Japanese bank, and Eduardo Monteiro, head of the EMEA region for its Natural Resources Corporate Finance Advisory Unit.
Targeting global imbalances
The backers of technologies like wind power in Europe, which are relatively advanced in terms of their penetration of the energy market, have seen the returns on their investments compressed in recent years as those markets have matured. Forecasts of declining long term power prices have added to the issue, forcing a slew of renewables infrastructure trusts to cut their net asset values (NAV), on the expectation that their assets’ long-terming earning potential has declined.
VH Global Sustainable Energy Opportunities hopes to follow a different path. Just over half the target portfolio spans the US and UK, but about 10% apiece is also earmarked for projects in Australia, Brazil and Bulgaria, according to the prospectus. The core technologies of solar and wind are expected to account for less than a quarter of assets after the listing, which is subject to a minimum raise of £200m.
Catachanas argued that investors needed to target those regions or technologies where there are structural imbalances to generate higher returns.
‘And it turns out that in energy, because of the energy transition, when do you that you also have a disproportionately high impact,’ he added.
The Victory Hill boss explained that where they will invest in Europe is around the issue of ‘intermittency’. The offshore wind frenzy in the UK, for example, means that as we become more reliant on wind energy, there is a correspondingly larger shortfall when the wind does not blow.
‘The way for us to tackle Europe in energy is not to invest in yet another wind farm. It’s to deal with the intermittency issues that those wind farms are creating on the grid,’ he said.
The 10% of the identified pipeline in battery storage addresses and profits from that side effect.
‘Elegant’ carbon capture
Peaking power plants, or peakers, are another way to address fluctuating energy supply. They are typically powered by natural gas and, somewhat perversely, the need for them is being reinforced by the proliferation of intermittent renewables. This energy also generates a very high price, because they are only switched on when demand outstrips supply.
The trust plans to invest in natural gas peakers in the UK but strictly combined with carbon capture and storage technology. That prevents the ultimate emission of any greenhouse gases, turning this into a form of sustainable energy generation. In fact, the CO2 has potential commercial uses in consumable form. If treated, it can be sold on for the carbonation of beer or soft drinks or is used in some printing.
Catachanas described it as a ‘very elegant’ solution contributing to the circular economy, adding that the UK is highly dependent on continental Europe for consumable CO2, meaning this should become a more attractive market post-Brexit.
He also emphasised that the technology was entirely proven and established. At 30% of UK-based assets, it will be the largest single area of the initial portfolio.
‘Waste-to-energy’ projects, involving anaerobic digestion, are targeted for about a fifth of investments. 15% in terminal storage has also been identified, effectively, storage tankers involved in cleaning up extremely polluting high-sulphur fuels produced in Mexico.
Catachanas said they would be fairly open to construction projects in the long-run, which generate higher returns as the owner assumes greater risk than buying operating assets. This would be limited to 30% long term of investments, but he argued the team’s banking background meant they had extensive experience financing such projects.
At launch about half of the assets will be in the construction stage, projected to fall to around a fifth after 12 months.
The trust is targeting a 1p dividend in its first year and a 5p annual dividend thereafter as part of a 10% annual total return.
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