SMALL CAP IDEA: Bidders eye bargains in renewable energy and infrastructure trusts

The saying goes that it’s darkest before the dawn.

And for investors in renewable energy and infrastructure trusts, the past two or three years have been gloomy to say the least.

But developments in the past month have provided more than just a hint that the sun may be about to rise and the warm winds blow on these solar energy and wind-power funds.

Among recent events giving hope to investors was the takeover of infrastructure fund BBGI by a Canadian pension fund manager, followed quickly by reports in the serious financial press that another North American heavyweight was on the hunt for big game among UK sustainable energy producers.

In the past month, two solar trusts, Bluefield Solar Income Fund and Foresight Solar Fund, have launched strategic reviews.

What brought the boards of these investment companies to such a decision was the frustration investors have felt about the extended discounts that share prices have been trading at compared to company net asset values, a problem across several listed fund sectors despite activities pursued by many of them, such as share buyback, capital recycling and other efforts.

Why has it been happening?

The origins of these discounts are found if you rewind the clock a few years to when the Bank of England and other central banks began hiking interest rates sharply in 2022.

This pushed up the cost of capital, while rising government bond yields in the US and in the UK made the income from these trusts less attractive for investors, leading to capital starting to drip out the sector in 2023 and 2024.

The falls in share prices has led to infrastructure and renewable investment trusts seeing their discounts to net asset value (NAV) widen as bond yields have been pushed higher in recent months due to wider economic worries.

The Association of Investment Companies’ infrastructure sector’s average discount hit 18 per cent in November, while for renewable energy infrastructure trusts was above 27 per cent, these have since risen to 21.3 per cent and 35.2 per cent respectively.

Trusts such as Bluefield Solar Income, NextEnergy Solar Fund and Foresight Solar Fund all traded at some of the highest premiums to NAV the market for many years after they floated just over a decade ago, until interest rates began to be hiked.

Along with wind energy funds like The Renewables Infrastructure Group and Greencoat UK Wind like, sustainability has always been key for investors, in both senses of the word – strong dividend records and green energy credentials.

Dividends have kept being nudged up and yields have grown in the past couple of years as the shares have dwindled and discounts have widened.

Hope springs from recent activity

But hopes of corporate activity have started to tempt some investors, with the aggressive activism of Boaz Weinstein’s Saba Capital shining a spotlight on the potential for shake-ups at some corners of listed investment company sector.

This was further intensified when infrastructure fund BBGI agreed to be bought by Canadian pension fund manager British Columbia Investment Management (BCI).

That bid, said broker Panmure Liberum, was ‘the most significant single news item in several years within renewable and infrastructure funds’.

Days later, news came that another Canadian heavyweight, Brookfield Asset Management, was looking to buy ‘big listed sustainable energy producers to buy’, the Financial Times reported.

The CEO of Brookfield, which manages around $126 billion in renewables, was quoted as saying: ‘The [difference] between public market valuations and private market valuations in this space is very large right now [meaning] we expect there will be investment opportunities [among listed companies].’

Brookfield bought a number of UK windfarms from Orsted last year and also a majority stake in French renewable power producer Neoen, while UK investment trust Atrato Onsite Energy sold its entire portfolio of solar assets lock, stock and barrel to a vehicle jointly owned by Brookfield for £219 million in October. (Link)

Following this build-up of activity, broker Stifel said it suspects other infrastructure and renewables funds ‘may be on the radars of bidders’, adding that Brookfield ‘may potentially have interest in portfolios owned by both small and large listed funds’.

Not waiting on their heels, Bluefield Solar and Foresight Solar said in the past two weeks that they has decided to review options, following meetings with large investors.

Bluefield chair John Scott said the board ‘concluded that it is the right time to explore strategic initiatives’, aiming to address the discount and to seek to maximise value for shareholders, with the board committed to reviewing ‘all options available’.

Analysts at Stifel said they ‘would not rule out a takeover bid’ given the board will look at all options.

The reviews at both Bluefield and Foresight highlight the value available, with recent bids indicating that there are deep-pocketed potential buyers circling the sector.

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