VH Global Sustainable Energy Opportunities 14 November 2023

VH Global Sustainable Energy Opportunities (GSEO) is invested in infrastructure assets relating to the global energy transition across several different countries including the US, UK, Australia and Brazil. The trust is managed by Victory Hill’s co-chief investment officers Richard Lum and Eduardo Monteiro, who have worked together for many years before founding Victory Hill. They lead a team of eight experienced investment professionals.

The team aim to identify and acquire stakes in private assets involved in different stages of energy transition, such as fuel storage, flexible generation or co-located solar and battery storage assets where there is an additional angle such as further development or optimisation of the assets. The current portfolio is concentrated, with the largest three assets valued at over 50% of NAV, but this is expected to reduce as assets under construction become operational and, one would hope, increase in value. GSEO’s target return of over 10% is higher than average for a renewable infrastructure trust, which is a reflection of the fact that it may take on projects at the construction phase as well as operational assets.

GSEO is net geared c. 2% with debt secured against a single asset. This means GSEO has very low direct exposure to rising interest rates and does not rely very much on gearing to enhance its dividend cover.

GSEO yields 7.1%, and has a progressive dividend policy, supported by the fact that 90% of cashflows have some form of inflation link. The trust trades at a c. 27% discount, following a trend of widening discounts across the AIC renewable infrastructure peer group. GSEO’s board recently announced a share buyback programme for up to £10m. This will enhance net asset value and dividend cover, as well as providing additional liquidity to the shares and, potentially, help narrow the discount.

There are many moving parts to the global energy network, and we received a big dose of pragmatism in 2022 as energy prices spiked and gave us a reminder of how important fossil fuels remain as part of the energy transition. As a result, perhaps it seems more obvious now than it would have done five years ago why, for example, GSEO’s fuel storage facility could be seen as a transition asset. GSEO invests in proven technology with a commercial track record, but seeks to find areas of the energy transition sector that are underappreciated and have greater scope for active management to make a difference.

This year we’ve been looking at how alternative assets, often originally owned by investors as ‘bond proxies’ during the zero-interest rate era, really need to be considered as a hybrid of bonds and equities, with the potential to generate real returns. In our view, GSEO is closer to the equity than the bond end of the spectrum, which is expressed through its higher target return, but this doesn’t mean it doesn’t have a strong backing of cashflows. The team have refrained from introducing gearing to all but one of the assets, and then only modestly. This means there is little risk from rising debt costs to GSEO’s progressive dividend policy, and, when the interest rate outlook becomes clearer, gives it real options over whether to employ gearing against some of its maturing assets.