Menhaden Capital published its first set of results on 31 March 2016. these cover the period from its incorporation, through its listing on 31 July 2015 and up to 31 December 2015. Menhaden’s net asset value decreased from 97.7p (post IPO expenses of 2.3p) to 83.9p, representing a decline of 14.1% for the five months from launch to 31 December 2015. During the same period the MSCI World Total Return Index (in Sterling) increased by 0.8% and the AIC Environmental Sector fell 6.2%. The WilderHill New Energy Global Innovation Index rose 3.0% in Sterling, but declined 17.8% in US Dollar terms. As at 31 December 2015, the discount of the share price to the Company’s NAV per share stood at 8.2%.
The Board has not recommended a dividend for the period, but in line with the prospectus, will target an annual dividend yield of 2% of the average NAV. It is anticipated that this policy will be implemented for the year ending 31
December 2017, subject to performance and prevailing market conditions.
The manager’s report mentions problems at SunEdison. This has performed poorly as the market has seriously questioned the sustainability of that company’s business model. They say, though they are confident in SunEdison’s long-term market opportunity (developing solar and wind products for customers that ultimately purchase the power through long-term contracts) and believe that the underlying assets and cash flow capability of the business have significant value, the capital consumptive nature of the business requires management to execute at a high level. They believe that they overestimated management’s capital allocation and execution capabilities and the stewardship of investors’ capital has been poor. The passage of time and numerous developments over the last few months have made them reconsider their conviction and they have transferred the fund’s exposure to the two associated yield companies.
The biggest hit to the portfolio came from their “yield investments” – these took 9.3% off the NAV. SunEdison’s two associated yield companies, Terraform Power and Terraform Global, buy (largely from SunEdison) and operate solar and wind assets and pay out a substantial portion of the underlying cash flow from the projects. Like the parent company, SunEdison, both of the subsidiaries suffered substantial share price falls in the last half of 2015. The market has heavily discounted the ability of these companies to grow their distributions over time and is concerned that their embattled parent, SunEdison, will use their balance sheets for its own gain. This has led to Terraform Power trading at a price below replacement value and with a cash yield in the double digits. These events have certainly not been good news for Menhaden and they have adjusted their own expectations; however they believe that the market has oversold these two yield companies and so they will continue to hold the positions until such a point that their expectations are matched by the market.
The Private Investments portfolio contributed -3.6% to the loss. At launch they acquired Limited Partner interests in the two private equity funds managed by Alpina Partners (formerly WHEB Capital Partners). These funds invest
in private businesses across Europe which have proven technology (within their theme of focus) and revenues of EUR10 million or more. This is an area of the market that they are not set up to access directly ourselves, and which in any case requires specific skills and a diversified portfolio of investments – hence the allocation to a specialist private equity firm operating in this area.
Since acquiring stakes in Alpina’s two funds the underlying portfolios have suffered from mark-to-market losses on the back of weaker comparable company valuations and in certain instances operational setbacks. The team at Alpina Partners are working towards profitable exits from the earlier of the two funds during the course of 2016 which should, if successful, reverse the markdowns Menhaden has experienced on this fund.
Update 4 April 2016
The wall Street Journal reported on Friday (1/4) that SunEdison is planning to file for bankruptcy protection in coming weeks. The same article said this could be problematic for the tow Terraform companies who depend on SunEdison for many services. You can read the article here
MHN : Not a great start for Menhaden