Gresham House Energy Storage Fund plc (LON:GRID) Managing Director Rupert Robinson caught up with DirectorsTalk for an exclusive interview to discuss what the fund does, the new fundraise, performance, what it provides that other investments doesn’t and meeting dividend targets.
Q1: First off, can you explain for us what the Gresham House Energy Storage Fund is?
A1: The company, GRID as it’s popularly referred to, is a London Stock Exchange listed fund. Today, it has a current fund size of circa £250 million, it owns a valuable and powerful portfolio of large scale energy storage systems across the country, giving it a circa 25% market share. Importantly, these assets have been built to address the growing supply and demand imbalances caused by the intermittency characteristics of renewable power generation so, examples solar and wind.
Q2: Now, you’re looking to raise new funds for this, can you just talk us through the placing programme and explain what the money raised will be used for?
A2: Yes, we announced earlier this week an offer for subscription and placing programme that will run over 12 months to issue up to 250 million ordinary shares in the fund. The initial fundraising will seek to raise between £75-£95 million pounds to fund 195 megawatts of exclusive pipeline that the team have been working on.
Q3: Can you just talk to us about the timetable surrounding the new raise? How long does it expect it to take?
A3: So, the timetable, the initial tranche of the fundraising I’ve just referred to, runs up until November the 24th, where we’ll close the offer and then those funds will be used to finance the 195 megawatts of pipeline that we’ve been working on. The intention will be to satisfy the remaining pipeline which is up to 485 megawatts during 2021.
Q4: How will investors measure performance in this fund and how has performance been so far?
A4: So, the fund has a target NAV total return of 8% per annum including a7p dividend which is paid to shareholders quarterly. The longer term objective for the fund, with the introduction of gearing plus other asset management enhancements, be that increasing grid capacity at existing projects or lease extensions, will be comfortably in double digits.
If you look at the performance since IPO back in November 2018, the shares have performed strongly, the period from November ‘18, up until 30th of September 2020, the total return on the share price has been around 21% and that compares very favourably with the FTSE All-Share index over the same period, which has actually fallen nearly 10%.
In terms of the future outlook, we would continue to expect to deliver that twin objective of paying a 7p dividend to shareholders as well as the prospect for long-term capital appreciation in the net asset value, driven by asset management enhancements. Also, we’d expect some yield compression in terms of the weighted average discount rate that’s applied to the future cashflows driven off the projects.
I often use the analogy of solar, if you go back to 2011/12, the discount rate applied to solar was around the sort of 12% and today, solar is valued at around 5-6% and wind at probably at 6-7%, whereas energy storage is at 10.75%.
So, plenty of opportunity for yield compression over time as the industry grows.
Q5: For people who are looking at this fund, thinking of investing, what does it provide that other investments may not?
A5: So, if you look at the fund, first and foremost, it’s an infrastructure fund and seeking to generate cash flows from real assets so your investment is underpinned by strong asset value, first and foremost.
Secondly it provides access to a growing sector that is providing, essentially, the infrastructure to enable a cost effective transition to the higher penetration of renewables so really providing the long-term infrastructure to allow this energy transition.
If you look at the correlation of returns, history of the first two years would suggest that it’s fairly uncorrelated with the market, I’m often a little nervous about talking about that but certainly, it has suggested that it is fairly uncorrelated with traditional asset classes.
Looking forward, as I said, we would expect that this will provide an attractive and sustainable dividend at 7p, effectively just shy of 7%, obviously highly attractive relative to cash yields at virtually nothing and 10-year government Gilt yields at less than half percent today.
Q6: We can see that the Gresham House Energy Storage Fund met its dividend target for the last year and has increased its target for this year. Could you elaborate on the income growth story and how you plan to have the dividend fully cash covered in 2021?
A6: So, with any fund, as you scale up or ramp up, which we’ve successfully done since IPO, at IPO we raised a hundred million back in November ‘18 and that was to acquire an initial seed assets of 70 megawatts. By the end of 2019, we had 175 megawatts, by the end of 2020, we’d expect to have 350 megawatts and by the end of 2021, we’ll have expected to have doubled the size of the fund to somewhere near 800 megawatts.
In 2019, we promised investors a 4.5p dividend and we delivered that and that was fully cash covered. In 2020, that dividend has not been fully cash covered as we scaled up the portfolio and obviously you had to deal with some of the challenges around COVID 19 pandemic.
With recent acquisitions, we’d expect the dividend of 7p to be fully cash covered.