There seems to be a bit more activity in the new issue market for investment companies. We have seen the announcement of intentions to float from Taylor Maritime, Liontrust ESG and Aquila Energy Efficiency. This week, I got to meet the people behind the Aquila fund.
£150m target
Aquila is aiming to raise £150m from investors to invest in a diversified portfolio of energy efficiency investments. They’ll be backing projects with proven technology. Examples include commercial and industrial rooftop solar, combined heat and power plants and projects that support the electrification of transport.
The target total return is between 7.5% and 9.5% over the medium term. The aim is to pay a dividend of 3.5p in respect of the financial year ended 31 December 2022 and 5p for 2023. Beyond that, the aim is to grow the dividend progressively. The dividends would be paid quarterly and the first is planned for May 2022.
The new fund would be the third of these funds to launch, following on from SDCL Energy Efficiency Trust and Triple Point Energy Efficiency. Of these, SDCL, which launched in December 2018, is by far the largest, with a market cap of £782m. The Triple Point fund, which launched in October 2020 with £100m of funds, is still busy investing that.
High single digit returns
The Aquila team see themselves as a provider of finance to energy efficiency projects, working sometimes in conjunction with project developers and technology providers. A crucial consideration, therefore, is that the client has a good credit rating. Contracts reflect the energy savings achievable over the life of a project. Typically, the finance amortises (is gradually repaid) over five to 15 years. These investments can provide high single digit returns.
Like its sister fund, Aquila European Renewables Income, the geographic focus of the fund would be Europe (including the UK). That differentiates it from SDCL which is a global fund and Triple Point which is UK centric. The manager is headquartered in Hamburg but has a network of offices across Europe for sourcing deals.
Diversification of the portfolio would be achieved by spreading it across a fairly large number of investments. Mostly these would be in the €0.5m to €10m range, although the advanced pipeline (see below) includes some larger deals. The managers say that there is less competition for assets in their price range.
Not much exposure to power prices
Relative to many other funds in the renewable energy sector, the fund would have low exposure to power prices. This is good news given the way that long term power price forecasts have been coming down. For example, NextEnergy Solar announced on Thursday that it had taken 2.1p off its 100.7p end December 2020 NAV to reflect new power price estimates. The Aquila team said that where it invested in power generating assets, this would be on the basis of long-term fixed prices for the energy generated. That still leaves some risk associated with energy output, but this would be factored into the return on the investment.
The manager has identified an advanced pipeline of 60 potential investments worth an estimated €210m. Beyond that, it has a further €300m of projects that could be available a year or so after the fund’s launch.
Once the IPO proceeds have been substantially deployed, the managers will look to introduce some debt into the company as a way of enhancing returns. The gearing limit is set at 50% of gross asset value, but the target is to have debt equivalent to 35%-40% of gross asset value.
Read the prospectus if you’re interested
We put a link to the prospectus on the QuotedData site earlier this week. Pages 51-53 have some information on the advanced pipeline and there is an extensive section from page 43 on the European energy efficiency opportunity that you might find interesting.
As always, we are not recommending that you buy the shares. In fact, we are not acting in any capacity with respect to the IPO. The prospectus is just provided for your convenience. There are geographic restrictions on who can invest in the fund at IPO – these are listed in the prospectus. There is also a raft of risk warnings. We suggest that you read the prospectus before making an investment.