Renewable energy and investment companies

Whatever your views about climate change, one thing is for certain – the move towards renewable energy production will create financial opportunities for businesses in sectors such as wind and solar, as well as investors in those businesses.

So how do financial advisers give their investors access to these opportunities? Well, investing direct is rarely an option. There are listed companies active in the renewables sector, but typically only as an adjunct to more traditional energy generation businesses. Pure-play renewables companies, particularly in the UK, tend to be small specialists. And even where bigger businesses are managing very large projects, they tend to look to institutional investors for the sizeable chunks of capital they need.

The solution could be one of the growing number of investment companies active in the renewables sector – around seven such closed-ended funds have launched over the past couple of years.

These investment companies are long-term investors in operational wind and solar assets, as well as in projects currently in the pipeline. Some of them also offer exposure to other types of renewable energy – tidal power projects, for example, as well as energy produced from geothermal heat.

This sort of portfolio holding is rarely available via an open-ended fund. The structure of these vehicles is poorly suited to the demands of renewable energy investment, which typically requires investors to lock in their money for an extended period. When open-ended fund investors want to make withdrawal, the manager may have to sell assets in order to fund the redemptions – that may simply not be possible, other than at a firesale price.

By contrast, in a closed-ended fund, this isn’t a consideration – there are no ebbs and flows in the size of the fund to deal with. With no redemptions to fund in the event of investor share sales, the manager can make confident commitments to the projects they want to back.

Renewables funds are increasingly popular. The Renewables Infrastructure Group, for example, has just completed a £69m fund-raising that was heavily over-subscribed. “Investor demand for the capital raise significantly exceeded the maximum available size,” reports Mick Gilligan, head of fund research at stockbroker Killik & Co in a note published this week.

In part, this may reflect the fact that these specialist funds are now the only option for most investors looking for renewables exposure. From the beginning of the 2015-16 tax year, renewables will no longer be permissible investments for venture capital trusts (VCTs) and the Enterprise Investment Scheme (EIS), the tax-incentivised schemes that are designed to boost the funding of smaller growth businesses.

It may well be that other funds in the sector choose to follow the lead of Renewables Infrastructure, raising new cash from investors. Demand is clearly strong – shares in most of these funds trade at a premium to the underlying assets.

Part of the allure is the generous yields renewables funds often offer. The energy producers in which many of the funds invest often have long-term contracts guaranteeing the sale of their energy at a certain price – the guarantee may even be State-backed. This income should fund a reliable dividend stream for investors, which infrastructure funds are then able to pass on to their own investors.