Having spent some time looking at the recently listed renewable energy companies, it seems slightly odd these companies have been raking in hundreds of millions of pounds from investors but the pre-existing environmental/green/renewable sector is not so well loved.
This year has seen the demise of Impax Asian Environmental and the shrinking (through buy-backs) of Jupiter Green and the larger Impax fund. This is despite decent performance this year from the latter two funds, Premier Energy & Water and BlackRock New Energy. The fund that I wanted to have a look at this week though is Leaf Clean Energy (Leaf).
Leaf was launched in June 2007. It started as a £200 million fund but, like many funds of that time, fell out of favour in the credit crunch. Leaf bought back quite a few shares and held a tender in 2010 that shrunk the fund further; the market cap is now £64 million. The share price has fallen from 100p to less than 50p today but seems largely a discount problem; the discount is around 47% on the last published net asset value (NAV).
At the end of June, the NAV was 93.8p (the next update is in March 2014 with the figures as at the end-2013). A weak US dollar should have had a negative impact as most of Leaf’s assets are based in the US, but there could have been compensating moves in the valuation of its investments.
Leaf provides venture and growth capital to renewable energy companies. Instinctively I am in favour of venture/growth capital funds. Enabling businesses to grow by giving them money to help them expand is much more socially useful than trading shares in established companies.
However, with a few exceptions, the venture and growth capital industry has been a disappointment for investors since the collapse of the tech boom. The recent news from Ashmore Global illustrates this. Its largest holding, Brazilian bioethanol company Odebrecht Agroindustrial (which I mentioned in June might be in trouble), has just been written down by 90%. This has a potential read-across for Leaf as one of its holdings, Vital Renewable Energy Company, is involved with Brazilian sugar cane ethanol production and electricity generation and infrastructure projects.
Leaf has invested $23 million in Vital Renewable but does not tell us what it thinks it is worth today (it publishes aggregate NAV). Perhaps it thinks this is justifiable on the grounds it might affect any potential sale price but if I were invested in Leaf, I would want to know.
Overall, Leaf has invested $181.5 million into its portfolio, which was estimated to be worth $162.6 million at the end of June. It also had $21 million in cash at that date. The management was internalised in 2010 in exchange for a payment of $7 million to the former manager and the fund is now managed from Boston (though domiciled in Cayman).
The overheads last year were, I think, too high, at $5.2 million. I appreciate private equity investments, especially in early-stage companies, require more looking after than listed companies but my biggest gripe is the directors’ fees: $566,000 for three non-executives (and this is after reducing the fees in 2011) and $900,000 for the executive director.
The bigger issue is: what is the potential for the portfolio? The largest holdings, by amount invested, are Johnstown Regional Energy (landfill gas projects in Pennsylvania); Skyfuel (a solar thermal power equipment company whose technology is being used for a project in Canada); Invenergy Wind (a developer of wind and solar projects with 3,400 megawatts completed and 700 MW planned); MaxWest Environmental Systems (wastewater biosolids gasification technology); Vital Renewable and some smaller investments in wood-fuelled biomass power plants in Georgia and Florida, a Mexican developer of hydroelectric schemes and a company that has the technology to convert reclaimed rubber into industrial chemicals. All are interesting.
To some extent, the fortunes of the renewable power generation businesses depend on US electricity prices, which have been on a gently rising trend. Leaf’s annual report suggests US demand for renewable energy should be underpinned by falling production from coal-fired plants, as shale gas-powered plants will not fully replace this capacity.
The dramatic increase in shale gas production did depress natural gas prices. These are up on last year but, in any case, Leaf is selling this gas in California, where its green credentials mean it attracts higher prices. It was pointing to planned Saudi Arabian investment in solar as potential good news for Skyfuel this year. There is little news around on the company other than it has raised $5.25 million of debt over 2013.
Invenergy certainly seems to be busy with new wind projects in the US, Poland and Japan and solar farms in the US. I could not find any news about contract wins by MaxWest but the technology has great potential and there is not much I can add to the Vital Renewable picture either.
I believe Leaf’s discount is largely a reflection of the market’s uncertainty about the outlook for and the valuation of its investments. In theory, it is operating in the higher risk/higher reward part of the renewable energy industry. I suggest if you are interested, you get the managers to talk you through the portfolio and the likely exit routes from each investment before piling in.
James Carthew is director of Sapient Research