Realising NAV

23rd Dec '23 by Martin VT

7 comments 393 reads

Edmund Shing identified Triple Point Energy Transition (LON:TENT) as a good income investment in May 2022 as it had a 6% dividend income and a 4% discount to NAV.

In 2023 this discount widened to 40% and so dividend income became a higher %. I was happy with my holding on the basis that the income had a lot of guarantees behind it, and that at some point, at least some of the discount to NAV would reduce. The situation has now changed as the company announced this month that a strategic review had led to the conclusion that the discount undermined any ability of the IT to grow, and in the meantime there was no obvious route to achieving shareholder value (ie unwinding the huge discount). Consequently Triple Point Energy Transition (LON:TENT) announced its intention to sell off its assets and wind up the trust. This has led to a welcome spike in the price, but as of today the SP is 66.5p against a NAV of 95p, ie still a discount of 30%, alongside the existing 8% dividend.

On this basis I intend to increase my holding as the chance of a 20%+ return in 2024 look exceptionally strong to me, given these special situation circumstances.

Simon Thompson has already highlighted this share in the IC, and I suspect he will continue to follow it closely, as this is the sort of locked in value that he tends to highlight in his columns.

As ever, this is my opinion about a share, which I already own. Do your own research.

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BnB

23rd Dec '23

Can you be sure of the valuation of the underlying assets? I don’t know the name but that would be my concern if I was thinking of investing. It’s a failed fund so risks are elevated.

Rusty2

This is ex dividend now, will there be anymore dividends after this one?

rpannell

One unknown is how TENT will do the distribution once the assets are sold. If one is holding the share outside an ISA or SIPP and the distribution is done through large dividends, it will not be tax efficient for most investors.

I've been increasing my ISA holding of TENT in the belief of potential free money.

donald pond

BnB asks about the valuation of the underlying assets. I was, until late 2021, a director of GCP Infrastructure Investments (LON:GCP) which is a not totally dissimilar type of fund. All of these funds are valued on the basis of similar transactions going through the market, coupled with the application of an appropriate discount rate. So in the case of Triple Point Energy Transition (LON:TENT) they own assets like hydro plants in Scotland. There are a surprising number of such plants, generally pretty small in size, and the valuation agent will know the going rate for them. This is a little bit more difficult at the moment, as the volume of transactions for alternative assets is relatively low at the moment, but there is always a market.

The model for all of these alternative trusts was to issued shares at a premium to NAV and buy up assets. Those launched late have struggled to gain critical mass: you really want to be above £500m. As a result, there is not a huge amount of money coming into this sector to either bid up the price of assets or confirm the valuations. If you are a GCP Infrastructure Investments (LON:GCP) yielding 10% and trading at a 30%+ discount to NAV, you are not going to be able to identify any asset that gives a return as good as paying down your debt and buying back your shares. There are many funds in that position.

The other valuation metric is of course yield. If you are generating a predictable XMw a year in electricity from your hydro plant, you know that has to be worth something. The valuation agent's job is to know how much people are willing to pay for it. Twenty years ago, a public market in these assets didn't exist: they were all held by pension funds who wanted that predictable yield. It looks like we are drifting back to that model. So the NAV will be based on estimations of future electricity prices, life of asset, appetite of buyers etc.

I would be relatively confident about the valuation of these sort of assets. This isn't like Digital 9 Infrastructure (LON:DGI9) where the financial engineering around the main asset is so complex that nobody know what is going on, or Hipgnosis Songs Fund (LON:SONG) which seems a soap opera, or like private equity, where you only really know the valuation when you find a buyer (though in PE performance fees are based on exits rather than valuations, so there is no motivation to inflate NAV). This is simply the case of a whole range of asset classes being launched (alternatives) on the basis that the market was hungry for yield, and then after 15 years of interest rates being near zero, yield suddenly being available everywhere.

The prices in the area are a simple product of supply and demand. Many income funds bought into these alternative funds and have lost 30-40% of the capital value in 18 months. That is an embarrassment for managers that sold their product based on capital protection and maybe 5/6% dividends. So they have been selling out and buying gilts: easier to explain. I guess a few have replaced managers and again, that gives the opportunity to rebalance the portfolio. The result: asset prices completely out of whack with the fundamentals.

Right now, I think the risk v reward across the whole sector is remarkable. If inflation continues to come down and stay low, and/or if we have a recession, there are a whole array of funds yielding 8-10% and sitting at discounts to NAV of 20-40%. That just looks too cheap, as long as you avoid the clunkers (and tbf, Triple Point seem to only be involved in utter rubbish). To take GCP as an example, the NAV is 109 and will be stable (many of the debt is inflation linked, and so as inflation drops, the decrease in interest payable is cancelled out by the decrease in the discount rate applied to the loan itself). SP is 70p, dividend has been 7p for years. This time next year I could see SP at 90p, dividend still at 7p and you'd have made 27p in 12 months for a 40% return. If you look Gore Street Energy Storage Fund (LON:GSF) you'll see exactly how quickly these things move once the sellers leave.

Andy Sav

They have proposed a wind down of the fund due to liquidity issues and the discount to NAV is hampering investment opportunities https://www.investmentweek.co....

Ah! The AIC is saying they are changing investment strategy rather than winding down https://www.theaic.co.uk/aic/n...

Zipmanpeter

24th Dec '23

Re Triple Point Energy Transition (LON:TENT) - The incentives for existing mgt Must be difficult here. As the fund gets steadily smaller (ie failing) the best people will leave and the best assets are most easily sold. So let's say 70% gets sold at a good price and the rest gets dumped by the last people left who want to move on with their lives - or who drag it out if no other job! I would rather it was all sold as a block, quickly and cleanly to another fund. What are chances of that? Am I mis-characterising the way it works in human terms?

Realising NAV

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Martin VT

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