The proposed initial public offering of a Downing investment trust investing in renewable energy has been heralded as a good opportunity to access the asset class at a time when most competitor trusts are trading on large premiums.
Downing is seeking to raise £200m through an IPO on the London Stock Exchange which it aims to get away before Christmas.
The Downing Renewables & Infrastructure Trust (DORE) will invest in a diversified portfolio of renewable energy assets including wind, solar, hydro and geothermal. It will also invest in other infrastructure assets in the UK, Ireland and Northern Europe.
It has secured £30m of cornerstone investment, with Downing and Downing managed funds committing about £20m and existing Downing clients fronting up £10m.
Downing identifies £1.5bn pipeline of renewable assets
Downing head of energy and infrastructure Tom Williams told Portfolio Adviser he is confident the IPO will hit its target despite the volatile economic backdrop that has claimed the scalps of two planned investment trust IPOs in the past month: Tellworth British Recovery and Growth Trust and the Buffettology Smaller Companies Investment Trust.
Nevertheless, in mid-October the Triple Point Energy Efficiency Infrastructure Company (TEEC) announced it had raised £100m.
Williams said the opportunity has “never been larger”, noting the firm has identified a £1.5bn pipeline of renewable assets.
“We’re seeing enormous amounts of deals in the market,” he said. “We picked a strategy that really allows us to access a wide pipeline of opportunities.”
He added: “We’re obviously very confident otherwise we won’t be doing this and I think there is still the market out there and we need to we need to respect that it’s not just us that can deliver this, we need investors to agree with us. But the early indications are that is the case; people like the proposition, they like our track record, they like our strategy and so I think we’re really well placed.”
Fairview Investing director Ben Yearsley thinks the Downing trust has a decent chance of getting off the ground but it will be an “interesting test” in the current environment.
“Obviously you’ve had two failures in the past month, Tellworth and Buffettology, and you’ve got Schroders which probably has more chance than those two of getting away,” he said. “While they were looking at very undervalued areas of the market, UK small cap and mid cap, you can buy loads of trusts already existing on big discounts so why would you go into one of those?”
Rivals renewable investment trusts trading on premiums upwards of 17%
Yearsley said a new launch in the renewables space is a good opportunity for investors to effectively buy at par because most of the big trusts investing in renewable infrastructure assets are trading at large premiums.
According to the Association of Investment Companies, Bluefield Solar Income is trading at a 17.1% Greencoat Wind UK is at 14% and Foresight Solar is at 9.7%.
Yearsley said: “You’ve got a six to nine-month period where they’re not going to be fully invested, so you’re going to be practically out the market for that period, but I’d take that over having to buy at 10-15% premiums which most of them trade at, so I think it is a good opportunity.”
Williams also noted the peer group trading at significant premiums. He said this indicated a strong demand for yield driven by operational performance, as well as the counter cyclical nature of these kinds of assets.
“I think demand for that is only going to get stronger as we as we move forward into next year,” he added.
In the press release announcing the IPO, Downing said the trust aims to deliver a sustainable income and capital growth by investing in assets that are diversified by technology, geography, project stage and revenue.
Yearsley said another attraction of the Downing trust is the geographical diversification, particularly in the Nordic countries.
“They’re looking at investing quite a big proportion in the Nordics which differentiates it from things like Foresight Solar, Bluefield Solar Income, Greencoat Wind,” he said.
The trust is targeting an annual NAV total return of 6.5% to 7.5% over the medium to long term. The target dividend yield by reference to the issue price for the calendar year to 31 December 2021 is 3%, rising to a target of 5% for 2022.
