I’ve recently included Riverstone Energy (RSE) in my alternative funds trading list. The shares have ticked up nicely since then, partly off the back of rising energy prices. The other key driver is that the managers are trying a clever switcheroo: they are trying to refocus away from ‘bad’ oil and gas to ‘good’ renewables. The jury is still out on this transformation but if they pull it off the shares will materially re-rate. The caveat is that many in the City remain deeply cynical about the fund managers fees and incentive structure.

The other good bit of news is that after a long period of terrible performance, recent results from this week show grounds for optimism. Headlines from the numbers this week include:

  • quarterly NAV at 30 September was $10.93 or 813p, up 16% in US$ (19 in Sterling) over the quarter.
  • The main drivers of performance were Hammerhead (+$32m, 49%), and Carrier II (+$11, 30%)
  • In the reneables bucket of investments, GoodLeap (formerly Loanpal, +$38m, 158%) – GoodLeap, the lending platform for residential solar systems, was moved from a 1.0 to a 2.5x multiple on capital invested (MOIC) after being held at cost for the first two quarters following investment. Analysts at Numisexpect the valuation reflects the $800m funding round completed on 13 October, reflecting a $12bn post-money valuation
  • The total invested in energy transition investments is now $95m and the book value of the investments is $158m (24% of NAV).
  • Q3, $40.6m was invested in three new energy transition and decarbonisation investments: Samsung Ventures ($30m, exposure to Solid Power – all-solid-state rechargeable batteries for electric vehicles), Hyzon Motors ($10m) and Decarbonization Plus Acquisition Corp IV ($0.6m), via sponsor equity and warrants (at $1 per warrant).
  • Realisations totalled $169m, being predominately ILX III.
  • According to analysts at Jefferies “Cash was $169m as at 30/09/21, with an additional c.$141m held in freely marketable securities, predominately CDEV and Pipestone Energy (formerly CNOR). Based on mark to market movements of the listeds, this liquidity represents 47% of NAV, and 78% of the current market cap. As such, share buybacks will now resume, with $30m of stock due to be repurchased. Commitments total $69m, excluding the remaining commitments to Carrier II and Hammerhead of $36m in aggregate, which are not expected to be funded. Consequently, there is clear capacity for futher extensions of the share buyback programme”.

Numis View:” …. oil & gas prices will remain a key factor for performance of the legacy holdings and it may be a while before it ticks ESG boxes for many investors. It is promising to see some early successes in the recent investments, with a funding round for GoodLeap and a significant increase in valuation. There may be some additional catalysts for performance with Solid Power (held through Samsung Ventures) being the target of a SPAC transaction which is expected to close in Q4 and the portfolio also have exposure sponsor equity and warrants to Riverstone’s decarbonisation SPACs. …     We estimate that the NAV is up a further 3.4% since September to $11.30/821p, based on share prices moves of Centennial and Pipestone Energy. The shares closed last night at 484p, which represents a 41% discount to the estimated NAV. We believe this is cheap, particularly with the share buyback programme restarting, although the concentrated shareholder register may be a drawback for some.

Liberum view: ….”NAV performance has picked up considerably this year with a YTD increase of 76% compared to an increase of 68% for the S&P Oil & Gas Index over the same period. We note the S&P Oil & Gas Index has risen by a further 14% post-September. Most of the uplift in 2021 has come from a recovery in positions that were heavily written down in prior periods (Centennial, Hammerhead, Carrier II). The uplift from GoodLeap is the first meaningful NAV increase from one of the decarbonisation investments. The shares should re-rate following today’s update, supported by the buyback programme. Approximately £30m of capacity remains under the existing buyback programme. In our view, the company also needs to improve the structure and elements of the investment management agreement (such as the five year termination fee) and the discount is likely to remain wide until this happens. Changes were made to the performance fee structure previously and the company has agreed to distribute 20% of net profits but the board needs to be more proactive in trying to address the discount.”

I stick by my bullish view and think the shares have much further to run, especially as oil prices threaten to go past $100 a barrel.

RTW Ventures

My favourite biotech fund also released numbers this week. Highlights included:

  • NAV per share at 30 September 2021 was $1.78 – a 6.8% decline over Q3 2021.
  • The decline over the period was largely the result of a decline in Rocket Pharma’s share price of c.32.5% (-17% NAV impact) as small-cap biotech stocks have continued to significantly lag large-cap peers.
  • Positive share price performance from recent IPOs Landos (+3% impact), Immunocore (+2% impact) and Prometheus (+2% impact) were the primary positive contributors to NAV.
  • The Russell 2000 Biotech Index and the Nasdaq Biotech Index declined 12% and 1% over Q3, with the Russell 2000 Biotech Index down 17% YTD.
  • During Q3, RTW Venture Fund added five new investments to the portfolio. New additions included Artios, Magnolia, InBrace, Lycia and CinCor.
  • The company also participated in a follow-on Series C financing in existing portfolio company Ji Xing.
  • 15 portfolio companies have successfully completed IPOs since RTW’s inception, with an average step-up in valuation to IPO of c.1.9x and an additional average +24% stock performance on the first day of trading.
  • As of 30 September 2021, c.65% of NAV is invested in core portfolio holdings, 34% is in non-core public holdings and 1% remains in cash. Following the IPO activity this year, 75% of the portfolio exposure is now to public companies, with the remaining 25% in private companies.

Liberum view:

IPO momentum has continued with nine IPOs YTD in 2021, including two since the end of Q3. This has been a key driver of NAV performance for RTW since IPO and we expect this to continue over the long term. The company’s ability to hold on to its investments post IPO allows it to capture more of the potential upside. The success of IPOs to date in 2021, together with a decline in the Rocket share price (-45.5% YTD), has meant that exposure to Rocket has reduced significantly to 17.5% of NAV at the end of September, compared to 41.1% at the end of 2020. The follow-on investment in Ji Xing during Q3 means this is now the third-largest holding at 4.4% of NAV. Ji Xing is a prime example of the RTW business model, with the manager forming and providing the initial seed capital to the company. The Shanghai-based business focuses on acquiring licensing rights to innovative therapies developed in the West for distribution to the Chinese market.”

Although I remain a long-term fan of RTW and rate its model highly, I’m not completely convinced that the current share price is an ideal entry point for anyone new – although I have no intention of trimming my position. I have a sense that the IPO window will become a lot tougher over the next six months and that will crimp RTW’s main USP.

I also happen to think that its premium to NAV has got slightly ahead of itself and that Arix represents better value at this stage in the cycle. But I also think investors should keep a beady eye on the growing investment in Chinese biotech which could be a huge driver of long term returns.

VPC Specialty Lending Investments

I’m starting to look in a bit more detail at VPC Investments, the £252m lending fund cum fintech funder which trades at 25% discount and offers a yield of 8.8%.  That yield is useful of course but one can’t help but observe that its fintech equity investments have really excelled. This week brought more positive news on that front, focussed this time on Bakkt. Here’s the report from fund analysts at Liberum:

Bakkt’s share price rose by 234% following its partnership agreement with Mastercard. Under the agreement, businesses and banks will be able to buy and hold cryptocurrency and issue branded crypto debit and credit cards. Bakkt is a digital asset marketplace launched in 2018 by Intercontinental Exchange. It will provide custodial services under the agreement with Mastercard. Bakkt launched three years ago enabling institutions and consumers to buy, sell, store and spend digital assets. VSL invested $2.7m in a SPAC that acquired the business and the book value of VSL’s investment was $21.5m at 30 June 2021 (5% of NAV).  “

According to analysts at Liberum this event translates through to “a NAV increase of c.17% for VSL based on the latest share price for Bakkt and assuming a c.20% discount to account for the lock-up period”. I suspect we might hear more good news about the fintech portfolio at VPC, thus making that discount look a tad anomalous, especially given the 8.8% yield.