VH Global Energy Infrastructure (ENRG) has announced a significant shift in strategy, with plans to begin an orderly realisation of its portfolio and return capital to shareholders over the next three years. The decision follows extensive shareholder consultation and comes amid sustained pressure from ENRG’s wide share price discount to NAV, currently around 44%.
The proposed asset realisation strategy will involve the sale of the trust’s diverse energy infrastructure portfolio, with the goal of maximising value and distributing proceeds to shareholders as assets are sold. The board anticipates the entire portfolio will be exited by 2028, at which point the trust will be de-listed and liquidated.
To implement the strategy, the company’s investment objective and policy will be amended, ceasing new investments. This material change is subject to shareholder approval and regulatory consent. A general meeting is expected to be held in August, following the publication of a shareholder circular in July.
Victory Hill Capital Partners, the current investment manager, will be retained to oversee the realisation process. To reflect the new mandate, the fee structure will be significantly revised. The existing NAV-linked fee will be replaced with a fixed base fee of £4.25m per annum and a performance fee tied to the level and speed of returns achieved.
The performance fee will only be payable if 100% of the portfolio (excluding any temporary holdings) is sold and shareholders receive at least 85% of the reference NAV. Depending on the total return achieved, the fee could range from 15% to 20% of returns above the hurdle, with higher rewards for realisations closer to or exceeding NAV. The fee will be uncapped to incentivise optimal outcomes.
The board stressed that the revised structure balances the need for timely realisations without compromising asset value. The three-year timeframe aims to avoid fire-sale conditions, giving Victory Hill the opportunity to realise assets thoughtfully and at favourable terms.
The dividend policy will be maintained during the realisation period, supported by income from remaining assets, though the board notes the level may fluctuate depending on portfolio cash flow.
ENRG’s board believes the proposed strategy offers the best route to closing the share price discount and returning value to shareholders, acknowledging that while a minority preferred continuation, the majority favour a managed wind-down.
[QD comment MR: In light of the substantial discounts that we have seen enduring within the renewable energy infrastructure sector for the last three years, it is not surprising to see funds like ENRG throwing in the towel and returning cash to shareholders, particularly when asset sales are frequently achieving modest premiums to NAV. We have long said that, with private investors placing much higher valuations on these assets than public markets are prepared to, investors should expect to see more assets taken private and consolidation in the space.
As such, while it is pleasing that ENRG’s board has listened to shareholders and taken decisive action in the face of said persistently wide discount, it is disappointing that investors will cease to have access to these assets in listed markets as a result of a hefty discount that looks unjustified.
The proposed realisation strategy offers a clear route to value recovery, particularly if Victory Hill can execute disposals efficiently and at reasonable valuations, which seems highly likely if current trends prevail. However, we think there are significant issues with the way the manager’s incentives are being structured during the realisation phase.
Ordinarily, we would argue that the revised fee structure should helpful given the shift in strategy. Swapping out the NAV-based fee for a fixed fee element with a performance-based incentive based on the speed and level of returns should help focus the manager’s efforts on achieving good exits for shareholders. However, it looks overly generous to us.
For a start, the fixed fee element of $4.25m per annum is higher than the current fee of £3.985m. Then, it appears to us that the total return hurdles include income, which will occur naturally, and so they are not as high as they first appear. Adjusting for this, we think the hurdles are effectively 79% in year 1, 78% in year 2 and 82% in year three. Given that these assets are frequently achieving sale prices close to NAV and even at modest premiums, these do not look like hard hurdles to hit and, in light of this, the performance fee rates look generous.]
