Last week I talked to the management team of Triple Point Energy Transition (TENT ). The investment trust is less than three years old, but investors seem to have lost patience with progress and the shares trade 39% below net asset value (NAV), the second-widest discount of any listed renewable energy fund after HydrogenOne Capital Growth (HGEN ), which has deflated to an extremely wide 53% discount.

I last wrote about TENT in January 2022 when it was called Triple Point Energy Efficiency and had a different mandate. Having launched in October 2020 when it raised £98m of a £200m target to invest in projects that improved energy efficiency, it gave an impression of struggling to find suitable investments to fit the brief but was at least in a better position than Aquila Energy Efficiency (AEET ) in deploying its money.

AEET’s troubles no doubt affected TENT as the shares moved to a modest discount early last year. The trust continued to announce new investments, but in areas such as battery storage, and in June 2022 it announced that it would adopt a new name and a broader remit. The increased flexibility to invest across the energy transition sector, hold both debt and equity, and invest in mainland Europe as well as the UK, gave Triple Point more flexibility and rubber stamped some of the investments already made outside a narrow definition of energy efficiency. Shareholders voted through the proposals unanimously in August 2022.

Jonathan Hick, TENT’s lead manager, says his team’s job is to identify areas of mispriced risk within the energy transition sector. For that reason, the closed-end fund eschews more popular areas such as onshore wind and solar and looks for more overlooked areas offering higher rates of return.

TENT has not really put a foot wrong since. NAV has been fairly flat and stood at 99.5p per share at 31 December. It has fully committed shareholders’ capital following a recent £5m loan to a developer of solar power projects. The 5.5p annual dividend, paid in quarterly instalments, is now expected to be fully covered by earnings. However, the share price has slid 23% this year to the point where the yield now exceeds 9%.

There is one obvious problem: with assets just shy of £100m and a market value of around £60m, TENT is not very big.

Worryingly, it is not much bigger than AEET which, with net assets of £96m, is the smallest fund in the sector. It lost a continuation vote in February and its future is uncertain. The board has rejected a liquidation, which I agree would be unlikely to provide best value for investors, and instead plans a managed wind down of its portfolio.

The trouble is that it has some illiquid investments that could take years to turn into cash. A much better solution would be to merge with a larger fund, but the whole sector is out of favour and its eclectic portfolio would not be a good fit for most investment companies.

TENT’s wide discount cannot be just about its size, or even some ‘read across’ from AEET, which to be fair has not been a disaster in NAV terms either.

Within TENT’s portfolio, there are two facilities to fund energy-efficient lighting projects. These are a relatively small part of the portfolio, worth about £2m.

There are £29m of loans to three gas-powered combined heat and power (CHP) plants that are being used to provide heat, electricity and carbon dioxide to a tomato-grower, APS Salads. One of these CHP plants also sells power directly to another food manufacturer. As natural gas prices rose, I was nervous about the credit risk. However, we seem to be through the worst of this.

Then there is a £46m portfolio of small, run-of-the-river hydroelectric schemes in Scotland. These come with attractive levels of inflation-linked subsidy, although I do not get the sense that TENT is achieving the economies of scale and operational improvements that Downing Renewables and Infrastructure (DORE ) is getting from its much larger portfolio of Swedish hydropower plants. Nevertheless, this part of the portfolio has performed well.

The exposure to battery storage comes via another loan, this time £46m to provide funding to a company building four battery storage assets with a capacity of 110MW. We have seen from the successes of the three dedicated energy storage funds that these are attractive investments. However, Hick thinks that returns may be falling as more batteries are energised, which is why he prefers to have debt with quite a big equity cushion at 55% loan to value, rather than equity exposure.

About 45% of the portfolio’s income has some inflation linkage, which is obviously helpful in the current environment. Hick reckons that on average the portfolio should also be less sensitive if power prices continue to fall. He says that 9%-10% returns are available currently from the assets in the team’s pipeline. Areas being looked at include biomass and projects in eastern Europe, but there is a limit to what is achievable without new equity finance.

Overall, while TENT is not without risk, the discount feels too wide.

James Carthew is head of research at QuotedData.

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