One of the weirdest things about the investment companies market currently is the lack of read across from M&A activity in the sector to similar trusts.

For example, two bidders compete to acquire Harmony Energy Income Trust (HEIT ), with the winner willing to pay the full net asset value (NAV) for the company. Meanwhile, Gresham House Energy Storage (GRID ) and Gore Street Energy Storage (GSF ) languish on discounts of 42.6% and 39.6%, respectively.

In the infrastructure sector, how can 3i Infrastructure (3IN ) and Pantheon Infrastructure (PINT ) trade on 16% plus discounts when they have proven they can deliver higher long-term returns than BBGI Global Infrastructure (BBGI ), which is being taken out at a premium to NAV?

In the case of the battery storage funds, the more obvious fit for the HEIT underbidder, Drax, would be GRID, given that it is focused on the UK and, on average, has longer duration batteries than GSF does. GRID is planning to sell a slice of its portfolio as a way of demonstrating the validity of its NAV and says an announcement on this should come this quarter.

It will be interesting to see who the buyer is, but I did wonder: when GRID did a deal with Octopus Energy, effectively renting out half of its portfolio to the firm for two years, why Octopus didn’t just acquire the whole company? It could be another interested party.

Infrastructure targets

In the case of the infrastructure funds, British Columbia Investment Management Corporation, which is acquiring BBGI, has gone for the most conservative option available. However, that doesn’t mean that another large pension fund wouldn’t be interested in one of BBGI’s peers.

PINT and 3IN focus on generating strong total returns by taking on more risk. That might make them less of a target. The closer comparators to BBGI’s approach would be International Public Partnerships (INPP ) and HICL Infrastructure (HICL ). The discounts on these two are wider again, 21.6% and 26.5%, respectively. However, BBGI does have a better track record than those two funds.

I have never been a fan of HICL’s investment in Affinity Water, which was its largest position at the end of September and one of the reasons that its returns have lagged peers. However, the outlook for that investment does seem to have improved a bit, with a positive regulatory outcome. This is good news, as HICL has committed to investing another £50m in the business. To an acquiror, INPP might be the more palatable of the two.

Going back to the renewable energy sector, Foresight Solar (FSFL ) told investors that it was considering a range of strategic options on 18 February, yet it is still trading on the same share price, which equates to a 30% discount. The most likely option here is a merger.

The sector would probably benefit from having fewer, larger companies in it, but size in itself is no guarantee of a narrower discount as The Renewables Infrastructure Group (TRIG ) and Greencoat UK Wind (UKW ) demonstrate (on discounts of 31% and 24% respectively).

Having said that, I would not rule out a bid. The newly enlarged local authority pension schemes would make ideal owners of operational UK wind and solar assets. They might even outsource the day-to-day management of these to the existing teams. To my mind though, in an ideal world, the pension schemes would buy operational assets through special purpose vehicles and the funds could then choose to reinvest the proceeds and/or return cash to shareholders.

Or how about Life Science REIT (LABS ), which effectively put itself up for sale on 14 March but still trades on a 43% discount to its NAV at the end of 2024? The chair recently said she is confident the assets would be attractive to a number of bidders.

Devil is in the detail

Of course, even when a bid does emerge, there is always a danger that something crops up to derail it. Warehouse REIT (WHR ), for example, is the subject of a possible offer from Blackstone. On 7 May, Blackstone wrote to WHR’s board to flag some findings from its due diligence activities. In particular, it feels that a development site at Radway Green in Crewe may be overvalued.

For the moment, negotiations continue. Blackstone’s bid was at a 9.8% discount to NAV anyway, and that NAV is more than 25% off its peak (thanks to higher interest rates). It might be worth WHR walking away, but my guess is that the two sides will come to a new agreement.

The investment company property sectors have been shrinking fast, with Urban Logistics (SHED ) the latest target. However, there is no guarantee that a bid for one company means that more will follow in the same sector.

I thought that the bid for Civitas Social Housing in 2023 might have prompted a takeover approach for Social Housing REIT (SOHO ) but that did not come to pass. Pleasingly, SOHO is in better shape than it was, with the dividend rising again. SOHO’s discount is about 40%, but the takeout valuation for Civitas was at a 27% discount – far too wide in my opinion.

Similarly, after the bid for GCP Student Living on a 9.3% premium in 2021, I figured Empiric Student Property (ESP ) might be a target. That did not happen and today ESP is trading on a 22% discount, despite delivering some decent rental growth last year (10.5% like-for-like).

ESP did raise £56m at a discount to NAV last year on the premise that it would be deployed in acquisitions and refurbishments that would be NAV-accretive over time. I hold both SOHO and ESP, but importantly, not just for the bid potential.

Bargains abound in these sectors. The most likely explanation for this is the buyers’ strike created by the misleading cost disclosure issue. A resolution to this cannot come soon enough.

James Carthew is head of investment company research at QuotedData

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