Gresham House Energy Storage Fund — Rising revenues and big plans for the future

Gresham House Energy Storage Fund (LSE: GRID)

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Research: Investment Companies

Gresham House Energy Storage Fund — Rising revenues and big plans for the future

Gresham House Energy Storage Fund (GRID) invests in utility-scale battery energy storage systems (BESS) in Great Britain. The sector had a tough start to the year, due to a deterioration in revenue conditions, but GRID’s efforts to stabilise revenues and increase capacity are paying off. The manager, Ben Guest, is looking forward to a significant improvement in revenue in 2025, underpinned by a large, contracted earnings base, and plans for new pipeline projects, further augmentations to GRID’s existing projects and associated revenue increases over 2025–27 will be revealed in November 2024. In a recent analyst call to discuss the release of GRID’s H124 results, the manager confirmed that he is also eyeing opportunities in foreign markets. Some investors may see value in GRID’s shares, which are trading at what is arguably an excessively wide discount to NAV.

Joanne Collins

Written by

Joanne Collins

Analyst, Investment Trusts

Investment Companies

Gresham House Energy Storage Fund

Rising revenues and big plans for the future

Investment trusts
Renewable energy infrastructure

2 October 2024

Price

53.1p

Market cap

£302.2m

AUM

£621.2m

NAV*

109.16p

Discount to NAV

51.4%

*Including income. As at 30 June 2024.

Yield*

0.0%

*No FY24 dividend expected.

Ordinary shares in issue

569.1m

Code/ISIN

GRID/GB00BFX3K770

Primary exchange

LSE

AIC sector

Renewable Energy Infrastructure

52-week high/low

111.4p

38.2p

NAV* high/low

146.7p

95.6p

*Including income.

Net gearing at 30 June 2024

1.4%

Fund objective

Gresham House Energy Storage Fund seeks to provide investors with an attractive and sustainable dividend over the long term, by investing in a diversified portfolio of utility-scale battery energy storage systems located in the UK and Ireland. In addition, the company seeks to provide investors with capital growth through the reinvestment of net cash generated in excess of the target dividend.

Bull points

Efforts during H124 have stabilised revenues and increased operational capacity.

The company’s forthcoming capital markets day will reveal plans for further growth.

With the share price discount still at an extreme and arguably unjustified level, now may be a particularly good time to acquire or top-up exposure.

Bear points

The upgrade to NESO’s trading platform is taking longer than expected, and this is adversely affecting access to trading revenues.

Future expansion plans are dependent on the availability of funding.

A lack of infrastructure to support the generation and distribution of solar and wind power may slow the UK’s transition to renewable energy.

Analyst

Joanne Collins

+44 (0)20 3077 5700

Gresham House Energy Storage Fund is a research client of Edison Investment Research Limited

Gresham House Energy Storage Fund (GRID) invests in utility-scale battery energy storage systems (BESS) in Great Britain. The sector had a tough start to the year, due to a deterioration in revenue conditions, but GRID’s efforts to stabilise revenues and increase capacity are paying off. The manager, Ben Guest, is looking forward to a significant improvement in revenue in 2025, underpinned by a large, contracted earnings base, and plans for new pipeline projects, further augmentations to GRID’s existing projects and associated revenue increases over 2025–27 will be revealed in November 2024. In a recent analyst call to discuss the release of GRID’s H124 results, the manager confirmed that he is also eyeing opportunities in foreign markets. Some investors may see value in GRID’s shares, which are trading at what is arguably an excessively wide discount to NAV.

Premium/discount to NAV since inception (%)

Source: LSEG Data & Analytics, Edison Investment Research

The analyst’s view

GRID remains the UK’s largest owner and operator of BESS, with an operational portfolio that represents 20% of the market, significantly greater than the next largest owner, which holds 7.4% of operational projects (according to Modo Energy’s Q224 GB BESS Index).

The investment case for BESS rests on the integral role they play in the global transition to renewable energy. Despite the glitch in Q124, industry fundamentals remain supportive. Intermittent renewable energy generation is still increasing and will continue to do so as the UK and other nations strive to reach net zero emissions. This will underpin demand for BESS in Great Britain and around the world. It will also increase energy price volatility due to the intermittent nature of renewable energy generation, and hence trading opportunities, especially once the National Energy System Operator’s (NESO’s) trading platform is fully operational and able to utilise BESS more fully.

Efforts by the manager and the board to stabilise the company have left GRID well-placed to benefit from these favourable developments, and to resume dividend payments in 2025 (see our last note for details).

GRID: Looking ahead with confidence

Company’s stabilisation strategy is working

The BESS sector faced a challenging period during the first half of 2024 (H124), due to a sharp deterioration in the revenue environment in Q124 and the slower than expected implementation of NESO’s Open Balancing Platform (OBP), which is intended to automate National Grid’s control room and thus improve access to trading opportunities for battery operators. As reported in a recent trading update (see our last note for details), GRID’s NAV per share declined to 109.16p at end June 2024, down 19.91p since 31 December 2023. Third-party revenue forecasts contributed 19.47p of this decline, principally due to a general reduction in revenue assumptions by third-party forecasters, combined with the introduction of a new, more conservative third-party provider. The adverse impact of this and other more minor factors on GRID’s NAV was partially offset by the favourable influence of the revaluation of several pipeline projects as they came on-line, and share buybacks, which are accretive to NAV.

During H124, GRID’s manager, Ben Guest, and its board implemented a strategy to stabilise the company and see it through this difficult period. This strategy focused on near-term cash flow generation and completing GRID’s 2024 construction pipeline projects. This strategy has yielded positive results, assisted by an improvement in the market environment since its nadir in Q124.

Revenue prospects improving

GRID’s operational portfolio revenues decreased 12.8% year-on-year to £17.9m in H124 (H123: £20.5m), and EBITDA declined 23.9% to £10.4m (H123: £13.8m), due to the poor market conditions during Q124. However, revenues have since begun to rise. Net revenues in July and August averaged their highest levels of the year so far and were c 25% higher than average net revenues in H124.

GRID’s revenue outlook has been further enhanced by a landmark tolling arrangement with Octopus Energy, which was agreed in May 2024. This deal ensures a significant improvement in revenues in 2025, as it contracts over half of GRID’s portfolio (568MW) for two years, starting in H224, at a level above current merchant revenue levels. It thus gives the company significant certainty on more than half of its revenues over this two-year period. Since the end of H124, 170MW of assets have been onboarded by Octopus under this tolling arrangement, with the remaining projects expected to transfer by the end of 2024. GRID’s manager estimates that using merchant revenue levels as at August 2024 (based on Modo Energy estimates), earnings should more than double from their current (H124) annualised rate of £20.8m to £45.7m during the tolling arrangement, due purely to this deal and the expected increase in operational capacity over the remainder of 2024. This is a conservative estimate given that merchant levels are forecast to rise over this period.

2024 project pipeline, and augmentations, nearing completion

The second half of 2024 is expected to see the conclusion of GRID’s current construction programme of new projects and augmentations to several already operational projects, which are a very profitable way of increasing capacity, as they take only two to three months to implement and cost relatively little (see Exhibit 1). Once complete, the capacity of GRID’s operational portfolio will increase from its current level of 790MW (up 14.5% from end December 2023) to over 1GW for the first time, with an average battery duration of 1.6 hours.

However, despite this push to expand capacity, as previously announced, the manager is seeking to sell some existing projects to reduce leverage. The company is in discussions with several interested parties, but no deals have yet been concluded.

Exhibit 1: Investment portfolio (as at 30 September 2024)

Existing assets

Location

Capacity*
(MW)

Capacity post augmentation
(MW)

Site type

Commissioning status

Ownership status

1. Staunch

Staffordshire

20

20

Battery & generators, 0.5MW import

Operational

100% owned

2. Rufford

Nottinghamshire

7

7

Battery & generators, symmetrical

Operational

100% owned

3. Lockleaze

Bristol

15

15

Battery, symmetrical

Operational

100% owned

4. Littlebrook

Kent

8

8

Battery, symmetrical

Operational

100% owned

5. Roundponds

Wiltshire

20

20

Battery & generators, 16MW import

Operational

100% owned

6. Wolverhampton

West Midlands

5

5

Battery, symmetrical

Operational

100% owned

7. Glassenbury

Kent

40

40

Battery, symmetrical

Operational

100% owned

8. Cleator

Cumbria

10

10

Battery, symmetrical

Operational

100% owned

9. Red Scar

Lancashire

49

49

Battery, symmetrical

Operational

100% owned

10. Bloxwich

West Midlands

41

41

Battery, symmetrical

Operational

100% owned

11. Thurcroft

South Yorkshire

50

50

Battery, symmetrical

Operational

100% owned

12. Wickham Market

Suffolk

50

50

Battery, 40MW import

Operational

100% owned

13. Tynemouth

Tyne & Wear

25

25

Battery, symmetrical

Operational

100% owned

14. Glassenbury Extension

Kent

10

10

Battery, symmetrical

Operational

100% owned

15. Nevendon

Basildon

10

15

Battery, symmetrical

Operational; augmentation Nov 24

100% owned

16. South Shields

Tyne & Wear

35

35

Battery, symmetrical

Operational

100% owned

17. Byers Brae

West Lothian

30

30

Battery, symmetrical

Operational

100% owned

18. Arbroath

Scotland

35

35

Battery, symmetrical

Operational; augmentation complete

100% owned

19. Enderby

Leicestershire

50

50

Battery, symmetrical

Operational; augmentation complete

100% owned

20. Stairfoot

North Yorkshire

40

40

Battery, symmetrical

Operational

100% owned

21. Coupar Angus

Scotland

40

40

Battery, symmetrical

Operational; augmentation Dec 24

100% owned

22. Grendon 1

Northamptonshire

50

50

Battery, symmetrical

Commissioned July 2023

100% owned

23. West Didsbury

Manchester

50

50

Battery, symmetrical

Operational; augmentation complete

100% owned

24. York

York

50

50

Battery, symmetrical

Commissioned Jan 2024

100% owned

25. Penworthham

Preston

50

50

Battery, symmetrical

Operational; augmentation Oct 24

100% owned

Operational portfolio (A)

790

795

Pipeline summary

Pipeline projects

26. Melksham

Wiltshire

100

100

Battery, symmetrical

Target Oct 24; augmentation Dec 24

100% owned

27. Bradford West

West Yorkshire

87

87

Battery, symmetrical

Target Dec 24

100% owned

28. Elland 1

West Yorkshire

50

50

Battery, symmetrical

Target Oct 24

100% owned

29. Shilton Lane

Scotland

40

40

Target Oct 24

100% owned

Total operational or under construction

1,067

1,072

31. Walpole

Norfolk

100

100

2026

100% owned

Total portfolio owned by the company
(pre potential disposals)

1,167

1,172

Source: Gresham House Energy Storage Fund. Note: *Capacity in MW is the flow rate of energy, while MWh is battery size (ie storage capacity). A 1MW connection with a 1MWh battery takes one hour to discharge.

And more upgrades and projects are in the pipeline for 2025–27

Looking beyond 2024, the company’s H124 results revealed that subject to the availability of fresh funding, the manager is considering opportunities to augment more of GRID’s existing portfolio in 2025, and also to resume work on the company’s long-term construction pipeline. Increasing the portfolio’s capacity from 1.6 hours duration to 2.0 hours during 2025, as Guest proposes, would add 300–400MWh to existing capacity of 1,701MWh, and generate ‘considerable potential revenue upside’. These augmentations and new project plans, and possible solutions to the company’s current capital constraints, will be the subject of a three-year plan to be revealed at a capital markets day in November this year. The plan is intended to maximise capacity, revenues and cashflow from 2025 to 2027, while reducing the volatility of earnings. Details of this event will be released in due course.

In the analyst update following the release of GRID’s half year results, Guest noted the current low level of battery prices and stressed that even taking a conservative view on revenue uplifts from duration extensions, such augmentations represent an exciting returns opportunity for the company. Given this, he indicated that he would consider further augmentation of existing assets up to three or four hours, once the immediate plans to increase portfolio duration to two hours have been realised. He also confirmed that he and his team are closely monitoring investment opportunities in foreign markets. The events of Q124 prompted them to indefinitely defer plans for GRID’s first foreign investment, in the US-based Project Iliad, but Guest sees opportunities for future investments not only in the US, but also in Europe, Australia, Japan and Canada. As Guest notes, ‘everyone needs batteries’, and he seems determined to resume GRID’s expansion into foreign markets as soon as circumstances and financing allow.

Industry fundamentals also supportive

With revenues set to rise significantly during 2025, and capacity also likely to rise over time, subject to funding, GRID is in a stronger, more stable position than it was in Q124, well-positioned to benefit as market conditions continue to improve. Guest argues that ‘fundamentals are on our side’. Battery prices are falling, increasing the ability of new pipeline projects to achieve attractive returns. In addition, the penetration of renewable energy sources is rising, as expected, and will continue to do so. The last of the UK’s coal-fired power plants was retired on 30 September 2024, and nuclear power plants are being phased out over the rest of this decade. Greater reliance on renewable energy will increase power price volatility, especially for longer duration batteries. Furthermore, while the transition to NESO’s new platform has been slower than expected, it is still progressing and, with time, should improve trading conditions and revenues for GRID and its BESS competitors.

Board prioritising resumption of dividend payments in 2025

GRID suspended dividend payments in February this year to preserve cash as the revenue environment worsened. However, GRID’s chairman noted in the company’s half-yearly report that efforts this year to increase revenues provide ‘a supportive backdrop for the recommencement of dividend distributions’. The board expects to revisit the dividend policy in 2025, and has indicated that the resumption of dividend payments remains ‘a key priority’, subject to discussions with shareholders.

Very wide discount may be an attractive investment opportunity

Until a year ago, GRID’s shares usually traded at a premium to cum-income NAV (see chart at the start of this note), but a sharp share price decline over the past year has seen the share price enter discount territory. The company initiated a programme of share buybacks in February 2024, repurchasing a total of 4.4m shares before buybacks ceased in April 2024, to focus capital allocation to the construction of new projects and augmentations. The discount exceeded 60% at this point but has since narrowed to closer to 50%. This is likely to be due at least in part to the improvement in GRID’s revenue outlook over recent months, especially since the agreement of the tolling arrangement with Octopus Energy.

In addition, investors may be beginning to see value in the shares. Alternative valuation estimates released by GRID for the first time in its H124 results show that at current merchant revenue levels and based on current operational capacity and the tolling arrangement discussed above, the company is valued at 9x EV/EBITDA, with a P/E ratio of 5.7x, on a forward basis. However, capacity is set to rise by end 2024, and medium- to long-term revenues are forecast to increase significantly based on third-party revenue curves, so both the EV/EBITDA and P/E ratios are likely to fall over time. This suggests the company’s shares offer potential value at their current level.

The current wide and arguably unjustified discount may represent an opportunity for those investors who share the confidence of GRID’s manager and board in the long-term viability of the battery storage industry and in the company’s prospects. It will take more time for conditions in the sector to improve, and for GRID’s revenues to fully reflect recent developments, but as and when they do, the company’s share price discount has significant scope to narrow back towards its historical levels.


General disclaimer and copyright

This report has been commissioned by Gresham House Energy Storage Fund and prepared and issued by Edison, in consideration of a fee payable by Gresham House Energy Storage Fund. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

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London │ New York │ Frankfurt

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London, WC1R 4PS

United Kingdom

General disclaimer and copyright

This report has been commissioned by Gresham House Energy Storage Fund and prepared and issued by Edison, in consideration of a fee payable by Gresham House Energy Storage Fund. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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