How to generate an income by investing in the backbone of the new energy economy.
The building blocks of a new energy economy are slowly slotting into place. The foundation stones were laid many years ago with the huge wave of investment in renewable-energy production technologies – notably on- and offshore wind power and solar-panel farms. This has resulted in an explosion of output from green energy sources. Next came the reinvention of the lithium-ion battery as a source of power not only for phones, but also for new cars. This has turbo-charged investment in all manner of battery technologies, with Tesla’s home storage units just one example.
But the new energy grid has also created increased volatility of power output – wind and solar don’t always produce the right amount of energy at the right time. Somehow, we need to build a more robust, decentralised grid where power can be turned on and off in a matter of seconds, and we’ll need a system that could cope with a potential sixfold surge in peak grid demand.
Cue the rise of energy storage. The business idea isn’t complicated. Pack lots of lithium-ion batteries into a container, hook it up to a source of power at one end and to an output that ends up with the grid on the other. As renewables provide intermittent and unpredictable power, these new battery units can be used as one small part of a robust “base load” system.
There’s a policy objective at work too. If we want a cleaner, greener grid, we’ll need this distributed back-up power, with attractive market pricing for the right operators who can get the right sites, now. What’s needed is a source of finance with the right contracts in place to build or buy these units, dotted around the country.
An income play on batteries
Enter a new fund that has just gone live with its initial public offering. The Gore Street Energy Storage fund aims to raise up to £100m to fund a UK-wide roll out. This is another “yield co” play – the targeted yield is around 7% of net asset value (NAV) after year one, with proposed dividend cover of 2.95 times cash earnings. According to the managers, the internal rate of return on these projects should be around 10%-12% a year. The main counterparty will be National Grid. The fund’s managers are keen to emphasise that their revenue projections aren’t reliant on public subsidies or exposed to power-price fluctuations.
Two trade-based strategic investors are pumping money into the fund – NEC, a lead supplier of batteries, is investing either 10% of the proceeds or £8m, and engineer Nippon Koei is investing £6m. Three seed assets have been identified, including one in Yorkshire, which is located next to an industrial mining group – industrial businesses need their own back-up source of uninterruptable power.
The first of many
This is the first of its kind as a fund, but there are others looking to list with similar propositions in the next few months. By the end of this year we could have as many as three different battery funds. Competition will centre on the robustness of the cash flow behind the yield, and the ability to deploy new battery units across the UK over the next 12 to 18 months – rapid deployment is key.
Overall my guess is that this Gore ST fund – and its imminent competition – will have a receptive audience, especially among investors who want a source of dividends that isn’t overly reliant on subsidies. If the existing renewable funds are any measure, this new fund might even trade at a modest (5%) discount to NAV, although its size will matter – if it only raises, say, £50m to £80m, it might be viewed as too small. But I suspect that won’t happen, and that the fund will be seen as a useful diversifier for renewables investors. You can learn more at GSEnergyStorageFund.com.
Activist watch
Struggling beauty company Avon Products plans to give a seat on its board to activist investor Barington Capital Group in exchange for an agreement to support its management, says Cara Lombardo in The Wall Street Journal. Activist fund Barington and allies Shah Capital and NuOrion Partners, which together own 3.4% of Avon, have been pushing the company to consider selling part or all of itself, and have been frustrated with a “slow-moving search” for a replacement for former boss Sheri McCoy, who staged “several unsuccessful turnaround efforts” while in charge.
Short positions… Virgin’s laggardly tracker
• Virgin Money’s £2.8bn UK Index Tracking Trust is both the most expensive and worst-performing of the ten largest passive funds that track the FTSE All-Share, says Chris Flood in the Financial Times. Between January 2013 and February 2018 the fund returned 47.1%, including dividends and after its annual ongoing charges of 1%, according to data provider Morningstar. This compares with Standard Life Aberdeen’s (SLA) FTSE All-Share tracker, for example, which charges just 0.09% a year and has returned 53.2% over the past five years. SLA has agreed to buy a 50% stake in Virgin Money’s investment business, it announced last week, in a move that will give Virgin Money’s investment customers access to SLA’s fund services. Virgin customers might well ask why they are paying so much for their fund when there are so many cheaper, better alternatives that do the same thing.
• In an effort to move the US pricing model over to Europe, Lyxor has launched four new low-cost exchange-traded funds (ETFs) and cut the fees on 12 existing ETFs, says Tom Eckett in Investment Week. Its new UK and US ETFs will track Morningstar indices and will charge just 0.04%, while its World and Japan ETFs will track MSCI benchmarks and cost 0.12%. The UK, US and world products are 0.03% cheaper than their closest rivals in Europe, notes Eckett.
• Investors pulled nearly $11bn from BlackRock’s iShares Core S&P 500 ETF last week, in its largest weekly outflow since its launch in 2000, reports Bloomberg. The activity “mirrored last week’s defensive trading, as new US tariffs on Chinese goods ignited trade-war concerns”. Although some of the $11bn could be spooked individuals, it’s thought that institutional investors have been using the BlackRock fund as a “placeholder” for their money, says Bloomberg.