Gresham House Energy Storage (GRID ) is testing bruised investor appetite for renewable funds with an £80m share issue to pay for the construction of its first overseas project.

GRID, the best-performing listed renewable energy fund over three years with a total shareholder return of 78.7%, wants the money to go towards the £135m cost of ‘Project Iliad’, its first construction in the US.

The company has agreed to buy the rights to two projects in southern California that combine 160MW of solar generation with four-hour battery storage units. It believes these could generate ‘significant NAV per share gains’ once fully commissioned at the end of next year and could open a big pipeline of further investment opportunities in the US, whose renewables sector is expanding after the passing of the Inflation Reduction Act last year. 

It follows rival Gore Street Energy (GSF ) which recently bought a 200MW/400MWh battery storage project in California, and before that acquired assets in Texas.

GRID said Iliad’s revenues would be split equally between a 20-year contract, other fixed price power purchase agreements and trading in the wholesale market. US tax credits would cover at least 30% of the construction cost. 

Higher rating

It is one of the few investment trusts in the sector that can issue new shares at the moment as its stock trades close to ‘par’ or net asset value (NAV).

Most renewable closed-end funds stand on average discounts of 7%-11% below NAV after derating in response to last year’s surge in interest rates. 

GRID’s higher rating reflects its performance with a 95.1% total return on net assets from flotation in November 2018 to 31 March this year. This has been achieved by growing its power capacity from 70MW to 590MW, which it said generated £48.8m in earnings last year.

It hopes to drive its capacity to over 1GW (1027MW) this year with 437MW of fully funded projects under construction in Great Britain being commissioned. ‘These projects contributed meaningfully to NAV per share growth in 2022 and will do so further as they are commissioned,’ it said.

In addition, GRID has a fully-funded 230MW pipeline of UK two-hour duration battery storage projects it wants to launch next year to further scale up the business. 

The £858m investment company is pricing the new shares in its placing and retail offer at 155.5p. This is a set at a narrow 1.1% premium to the 31 March NAV of 153.77p, adjusted for the first quarter dividend, and offers a 2% discount to yesterday’s closing price. 

Private investors can buy up to £7m of shares through the retail offer provided by REX, a Peel Hunt technology platform. Brokers AJ Bell, Hargreaves Lansdown and Interactive Investor are participating. The offer is being run by GRID’s corporate broker Jefferies and closes at 3pm on 24 May.

Ben Guest (above), GRID’s fund manager at Gresham House who intends to subscribe for at least 150,000 new shares, said: ‘The US is seeing a rapid increase in renewable generation and is expected to see rapid electrification of energy consumption, both of which are boosted by incentives under the recently passed Inflation Reduction Act. We look forward to capturing the opportunity for shareholders and establishing a foothold in an attractive new market.’

US diversification

Analysts mostly welcomed the fund raise, saying Iliad offered good diversification and was in line with a broadening of the remit last year.

However, there is a risk of ‘cash drag’ should GRID decide not to proceed with the project after doing due diligence and has nowhere to invest the money.

Winterflood’s Emma Bird said: ‘We believe the fund’s diversification into the US is a positive development and enhances the fund’s appeal.’

Numis analysts Gavin Trodd and Colette Ord said: ‘Management had flagged its intention to invest overseas and given GRID’s already notable market share of the UK battery market we can understand the logic. It will be interesting to see if investors are happy to support the new assets with additional equity.’

Stifel’s Sachin Saggar was concerned at the timing of the fund raise a wholesale revenues in the UK were falling. He suggested GRID should pause all developments in UK until rates of return improved. ‘Until there is better visibility on how GB assets achieve a sustainable revenue stream, we think requesting additional capital is fraught with risk. In our view, there is a better way.’ 

Christopher Brown of JPMorgan Cazenove said the issue was effectively capped at £84m by the trust’s annual 10% limit for new share capital. He said the £80m target left a £55m funding gap that could be filled by the project taking on debt, which given the long-term contracted cash flows might be easier to do than in the UK. 

If successful, GRID’s fund raise will be the third largest this year after BH Macro (BHMG ) raised £315m and 3i Infrastructure (3IN ) drew in £100m in February. Investment company share issuance has been sparse this year with infrastructure and property funds forced to the sidelines by their discounted share prices.

Defensive and value-style funds have proved popular, though, with Ruffer (RICA ) attracting 352m and City of London (CTY ), Merchants (MRCH ) and Law Debenture (LWDB ) raising £109m in total. The fund launch market has reopened too with Ashoka Whiteoak Emerging Markets (AWEM) and Onward Opportunities (ONWD ) listing with £30m and £13m respectively

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