Investment Trust Insider on new IPOs – James Carthew: Riverstone, Aquila energise IPO market
After an extended period where investment company flotations have been thin on the ground we have signs of life with two funds, Riverstone Credit Opportunities Income (RCOI) and Aquila European Renewables Income (AERS), announcing plans to raise money with initial public offers (IPOs).
RCOI wants $200 million (£157 million) to invest in loans made to entities in the energy sector. It would be a sister fund to Riverstone Energy (RSE). Riverstone is a significant investor in the energy sector and has lent through its credit platform since 2014.
The new company is applying for a listing on the specialist fund segment of the London Stock Exchange and, as such, is not offering its shares to private investors. Nevertheless, with a target dividend yield of 8%-10% for next year, I would expect many individuals to be eyeing it up in the secondary market.
Fund managers Christopher Abbate and Jamie Brodsky believe there is an opportunity to lend to lower and middle-market companies that don’t suit traditional lenders – hence the ability to achieve high yields.
Generally, investing in debt rather than equity is a less risky place to be in the capital structure. However, it is not risk free. The collapse of the oil price in the second half of 2014 sparked a big rise in bad debts to energy companies. S&P Global Ratings reckoned that the energy and natural resources sector accounted for 39% of all non-performing loans in 2015 and 50% of defaults in 2016.
Gyrations in the oil price are not the only thing to worry about. RSE has suffered of late, despite the recovery in the oil price from its end-of-December lows. There has been a big reduction in the valuation of its two largest investments, Hammerhead and Centennial, which fell by by $143 million and $34 million in the first quarter, knocking about 173p per share or 12% off RSE’s net asset value. Even after these falls, the two account for around 40% of RSE’s assets.
By contrast, RCOI aims to diversify its portfolio with a maximum 15% exposure to any borrower. It will aim to take security over assets so that it has a better chance of recovering its money in the event of a default. Notably, the prospectus says that the Riverstone credit team has no realised losses to date across the $2.1 billion it has lent and it has made an annualised return of 12%.
While this fund focuses on hydrocarbons Aquila European Renewables Income (AERS) will invest in solar, wind and hydropower.
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