This article reflects the opinions of its author and not necessarily those of ShareSoc.
Opaque Accounts of Alternative Asset Trusts
Traditionally, investment trusts invested in highly liquid, listed, operating businesses. The accounts for such trusts are straightforward. The balance sheet simply reflects the market value of the trust’s investments and profit/loss is determined by the change in valuation of assets and liabilities plus any income generated by the investments.
In recent years, however (and some not so recently), a number of “alternative” investment trusts have been launched. These Trusts often invest in illiquid assets that are not so easily valued, such as private companies or energy infrastructure assets. In the case of private equity trusts, there is little alternative except to use a similar accounting principle but with asset valuations based on estimates of the market value of the Trust’s assets. I question, however, whether this methodology is appropriate for several other “alternative” Trusts. Some examples are: Gore Street Energy Storage Fund (GSF), Greencoat UK Wind (UKW) and Bluefield Solar Income Fund (BSIF), there are many other examples.
In all these cases, the companies’ assets (battery storage sites, wind farms and solar installations) are held through SPVs (Special Purpose Vehicles). These are treated like private equity investments in the accounts, i.e. the SPVs are revalued periodically, the balance sheet reflects their latest value and profit/loss is computed based on changes in the valuations plus income received from them into the Trust. Often there is narrative, preceding the statutory accounts, that provides further information on income generated by the underlying assets and their profitability. In my opinion, this falls short of the information investors need to judge the true profitability and returns on capital of these investments.
In reality, quite a few of these trusts are actually operating businesses, dressed up as Trusts, in my opinion. The SPVs are usually wholly owned subsidiaries of the Trust and what investors really need to see are consolidated accounts for the whole business that could be properly scrutinised. Such accounts would be transparent and show:
- Income generated and operating costs of the underlying assets.
- Capital invested in the assets (together, these items allow investors to calculate return on capital).
- Cashflows from the assets.
Rather than relying on management estimates of asset valuations, investors could form their own views and the market would determine a fair value. Currently, many of these trusts are trading at substantial discounts to quoted NAVs, implying that investors do not trust the asset values that the Trusts ascribe. More transparency in the accounts should lead to more realistic market values.
ShareSoc will meet the AIC (Association of Investment Companies, the trade body for investment trusts) this month. We intend to raise this important issue at that meeting.
Mark Bentley, Director, ShareSoc
DISCLOSURE: The author holds shares in Gore Street Energy Storage Fund