Review - Foresight Solar & Infrastructure VCT
This £20 million offer is a new share class to the recently renamed Foresight Solar VCT. It will seek to invest in a mix of smart meters in the UK and overseas solar power projects. As of April 6 2016 new investment into solar via VCTs and EIS has been banned, hence only money raised prior to then (approximately £2 million) can be invested in that way.
- Portfolio predominantly investing in energy meters (with the ability to do other investments with similar infrastructure characteristics) plus a smaller proportion of overseas solar underlying businesses
- Modest target return of £1.10-£1.15 reflects lower risk profile of this VCT
- Gives exposure to the last opportunity to invest in renewable energy in a VCT
The Foresight Group has almost £1.8 billion of funds under management with infrastructure investment, including renewable energy and smart meters, topping £1.1 billion. The infrastructure team at Foresight is led by Jamie Richards.
Target return and strategy
This asset-backed limited life VCT generates profits from predictable revenue streams and as such the target return is modest. A return of between £1.10-£1.15 per £1 invested is targeted. This VCT intends to invest in energy infrastructure, predominantly smart energy meters in the UK and with the money raised before April 6 2016, in overseas solar. Funds raised will be split approximately 20/80 between solar and smart meters, but actual percentages may change.
The Chancellor's announcement, made last year, means that renewable energy, even without government subsidies, is now excluded for new VCT investment. However investors can still get access to this sector by investing in this VCT today as any money raised by Foresight prior to 6 April 2016 still qualifies.
Smart energy meters
The last Government legislated for the installation of smart energy meters across the UK in over 50 million households. These smart meters relay energy usage data back to the utility companies every 30 minutes. In theory this enables households to understand better how and when power is used, and helps utility companies find out when more power is needed.
Buying and installing meters costs around £200-£300. Unsurprisingly utility companies don’t want to foot the bill. The legislation states every household has to be offered one, but can decline. Assuming the full amount is raised and £10 million is invested in smart meters, this VCT would own approximately 40,000.
A third party meter provider installs them. Foresight takes over after installation and makes money by selling the data to providers, who have to use the data generated. Although new to household meters, Foresight has been investing in smart meters in the corporate sector for the last three years.
Foresight was one of the first groups to launch and also successfully exit renewable energy investments for tax efficient investors. The income stream from renewable energy is largely predictable and often inflation linked. This is an attractive feature for many, including insurance companies and pension funds.
A further exit route is a sale of the assets to IHT investors as renewable energy is an allowable investment for Business Property Relief (BPR) purposes. The smart meter businesses will also provide an attractive investment with predictable revenue streams. The utility companies need them installed but don’t want to own them. However, there are many infrastructure investors who want a predictable, lower-risk (in their eyes) revenue stream and, in Foresight’s view, would be willing to purchase them.
There are three parts to this VCT each with different risks: US Solar, Italian Solar and Smart meters. With both the overseas portions, there is currency risk. Foresight is not intending to hedge this risk at the outset, but may do so later; this will incur additional costs. The US solar market is complicated and there is a risk the tax credits aren’t received. In addition, the electricity generated is being sold directly to utility companies, therefore if that company had financial problems there might be a risk to the revenue stream. In Italian solar, the electricity is being sold directly to utility companies. Again this involves credit risk.
In our view the biggest risk for smart meters is a potential change in legislation and households refusing to have them installed. Currently it is legislated smart meters have to be offered and rolled out to all 50 million households in the UK, but this could change in future.
The initial fee is 5.5% (before any Wealth Club saving). Annually Foresight receive 1.75%, however they also benefit from the 0.3% per annum secretarial fee. The total expenses are expected to be at 2.9% per annum with a cap of 3.6%. The performance fee is linked to investors receiving their initial investment back in full. For returns of £1-£1.15, Foresight receives 20%. So for example if the total return pre performance fee was £1.12, Foresight would receive 2p in performance fee and investors would receive £1.10. For returns above £1.15, Foresight receives 30% of the excess.
For those seeking to invest in the more stable end of VCT, the Foresight Solar & Infrastructure VCT is worthy of consideration. Foresight has been at the forefront of renewable energy investing in the UK, and crucially for this offer, overseas. In addition, they were one of the first to spot the opportunity with smart energy meters and have been investing in this market for the last three years. The returns are limited, and for a six-year investment a target of £1.15 per £1 invested is fairly low, however there should be a degree of predictability involved.