Ross Driver, managing director of FSFL, gave an executive interview with Edison in August 2023, which covered FSFL as well as his views on the current state of the renewable energy investment trust market. Ross joined Foresight Group in 2021 to oversee the delivery of all aspects of FSFL’s investment mandate as part of the company’s advisory team. He has 18 years of infrastructure and renewable energy investment experience, covering deal structuring and execution, debt financing and asset management across multiple asset classes.
Ross explains that the comparatively cheap nature of solar PV in comparison to alternative renewable energy generation technologies, the speed at which solar can be deployed as well as the reliability factor are major factors for why solar PV has seen such a great period of growth in recent years, especially in the drive to net zero.
FSFL’s investment strategy has evolved over the last 10 years. This is because there has been a significant inflow of funds into the renewable energy sector, especially with the shift in focus to net zero, which has reduced valuations as well as returns on traditional renewable assets. This change resulted in FSFL investing into assets that were in the construction phase, examples being its Australian and Spanish portfolio of solar assets as well as its UK BESS portfolio. Entering in the construction phase allows FSFL to be more involved in the complete process of each asset and allows greater uplift and returns once each project gets through to completion. A mandate change in 2022 also allowed FSFL to acquire projects in the development stage. Although these assets have greater risk attached to them (ie no grid connection at the point of purchase), they can be significantly cheaper than operational assets, which means that the projects that progress through development produce greater returns.
For FSFL, 50% of revenue has historically come from government-backed subsidies and 50% from electricity sales through framework agreements over multiple years. These electricity sale agreements allow FSFL to fix prices, in six-month blocks, at values that support the level FSFL expects its progressive dividend to reach, for up to five years ahead. However, they depend on the liquidity levels available, with higher liquidity in the near term and lower liquidity in the mid-term. FSFL is not an energy trader, and the fund is not trying to second guess the market, but is actively looking to continue growing its revenue stack to provide its progressive dividend.
Ross believes there is a disconnect between the implied discount rates the market is valuing FSFL’s assets at and where FSFL sees fair value. This disconnect partly originates from one of the fastest increases in base rates seen in the UK for decades, which has provided investors with an apparently attractive alternative to real asset listed investment trusts (eg UK 20-year gilts, which are currently yielding c 5%). FSFL is seeing assets continue to change hands at far lower discount rates to what the market is currently valuing them at, and Ross believes the turning point in the market will be when gilt yields peak and there is a sign that they will decrease, in turn improving investor sentiment towards higher-yielding trusts such as FSFL.
Ross and the board feel strongly that the current disconnect in the market is resulting in the share price greatly undervaluing FSFL’s portfolio of assets. The board announced on 14 September 2023 that it was doubling its share buyback programme to £20m, believing that investing cash into FSFL, especially while it is trading at a 26% discount to NAV, is a highly competitive use of cash.