Heating up - A 'sunshine' bond is the latest asset raising concerns over the market’s risk appetite


Ian Kelly

Ian Kelly

Fund Manager, Equity Value

Here on The Value Perspective we may occasionally come across as a little dogmatic on the subject of investing but that is very much on the ‘how’ rather than the ‘what’ – in other words, providing you adhere to the tenets of value investment, we are happy for you to spend your money where you like.That said, the following observation from a recent Financial Times article offers pause for thought.

“There is a pool of capital that wants to invest in these types of assets,” the FT quoted an anonymous source from “a large US investment bank” as saying. “People love to talk about clean technology and renewables, because at some level most institutional investors want to invest in things they can put in their annual report with glossy pictures.”

Investing for a sustainable income? You have our blessing. Investing for capital growth? Be our guest. Investing so you have something pretty to go alongside the chairman’s statement?  That feels closer to the cavalier approach to investing we flagged up in Fever pitch combined with the niche appeal of a chance to secure a piece of an American footballer’s future earnings noted in Foster care.

The deal to which our unnamed banker was referring was US energy services provider Solarcity’s small private placement of what the FT described as a “sunshine-backed bond”. Essentially this is an asset that enables large, qualified investors to buy into future cashflow streams generated via US government tax breaks on the rooftop solar panels leased to homeowners by Solarcity.

The banker’s quote suggests these sorts of investments are not always being bought for the soundest financial reasons – at best some people appear motivated by environmental considerations, at worst by glamour. Certainly the underlying assets are very difficult to value – not least because of the limited availability of data on how the solar panels actually perform.

Then there is ‘obsolescence risk’ – in other words, innovations happen in the energy sector all the time, so what happens when a new and better technology appears further down the line? Also, while the present owners of the buildings are clearly happy with their solar panels, an uninterrupted cashflow stream would depend on any future owners being similarly minded.

It is of course entirely possible that these and other concerns are satisfactorily addressed in the bond’s prospectus, which is not a public document. Nevertheless, any buyer needs to be entirely comfortable the risks associated with this new asset class and its short data series are more than compensated for by the potential rewards.

As we also noted in Fever pitch, while nobody is able to predict the future, it is possible for investors to take the market’s temperature. With all sorts of new assets, from litigation and intellectual property receivables to rental properties, now being securitised – that is, packaged together, sliced up and then sold back to investors – it may not just be the solar panels that are hotting up.


Ian Kelly

Ian Kelly

Fund Manager, Equity Value

I joined Schroders European equity research team in 2007 as an analyst specialising in automobiles. After two years I added the insurance sector to my coverage. In early 2010 I moved into a fund management role, and then took over management of two offshore funds investing in European and Global companies seeking to offer income and capital growth. 

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