Industrial investors are pumping capital into burgeoning hydrogen projects that could deliver much-needed opportunities this year for HydrogenOne Capital Growth (HGEN ) to exit some of its investments at a profit.

Speaking to Citywire off the back of fourth-quarter results, which showed that net asset value (NAV) increased 1.6% to 101.42p as of the end of December, portfolio managers Richard Hulf and JJ Traynor were bullish about the direction the sector was moving in, noting that everything ‘is on track’, even though the shares have plunged to a 50% discount to NAV in the growth selloff.

Investment growth saw the NAV gain 5.8% last year, driven by revenues of £74m across the private portfolio, a 125% increase on the previous year, reflecting the build-out of capacity to meet demand for hydrogen supply chain equipment.  

The company said new investment into clean hydrogen totalled $17bn (£13.5bn) in 2023, more than 400% higher than in 2022, with 1.2 gigawatts of green hydrogen production online globally at the end of the year, a 50% increase.

The pair pointed to developments within the £68m Europe-focused portfolio of private companies that reflected increased industrial interest in the sector.

Portfolio holding Elcogen, a manufacturer of fuel cells that makes up 18.4% of assets, attracted €45m (£38m) of investment from HD Hyundai Group member Korea Shipbuilding & Offshore Engineering, funding the construction of a new factory in Estonia to scale up production. The fuel cells will largely be used in shipping.

HiiROC, a UK company that splits methane into carbon and hydrogen, saw venture capital group Cemex increase their investment over the quarter, while former British Gas parent Centrica has continued its trial period. The trial saw the first use of hydrogen in a gas-fired power plant connected to the national grid in the UK.

‘Watch the way industry moves in on hydrogen and starts to scale up,’ said Hulf (pictured below left, next to Traynor). ‘It’s always been the story. The fund’s focus is how green hydrogen makes its way into the industrial complex, not retail, and we’re on track.’   

‘We’re moving into the exits window to prove our NAV,’ the pair said. ‘There’s lots of industrial interest – headlines tend to reflect financial markets, but this is very much an industrial story and industrial investors don’t shout these things from the rooftops.’

The managers were not discouraged by the UK’s government delaying the phasing out of combustion engines from 2030 to 2035, which has reduced the pace of deployment of clean hydrogen in the UK into transport, noting that it continues to support the development of clean hydrogen supply.

In light of this and weak financial markets, HGEN took control of UK hydrogen refuelling provider NanoSun earlier this year and plans to slim down the workforce and rebuild the Lancaster-based business around a lease model rather than sales.

The renamed Swift Hydrogen will be fit for the German market, where it sees good demand, the pair said, adding that they could share more accounting details at the end of the current quarter.

While more than half the holdings are in the UK, the fund is focused on Europe, particularly Germany, the Netherlands and Scandinavia, and the managers plan to expand into the US over the course of the year as they receive more cash from realisations.

Investments in the quarter totalled £1m in two existing portfolio companies, Dutch supply company Strohm and Norwegian green hydrogen project developer Gen2 Energy.

Cash and cash equivalents were £4.7m, with additionally £2.3m of listed hydrogen companies at the end of the quarter, giving a runway of two years, said Traynor.

The shares slipped from 50p to 49.2p yesterday after the update but are up 1.6% to 50.8p this morning. They have halved since their launch near the top of the market in July 2021, but have gained 10% in the past three months as investors were cheered by the prospect of cuts in interest rates this year.

The managers said the recent rally showed that investors were looking at beaten-up growth stocks for a potential recovery. That made it critical they made some exits at a premium this year to prove the model works. ‘Now’s the time to start delivering and we plan to do that this year,’ Hulf said.