Gresham House: London quote proves unsustainable for green funds

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Specialists in private investment boast about its advantages over public markets. For the bosses of Gresham House, those advantages now have a powerful personal illustration. US buyout group Searchlight is acquiring the UK renewables fund manager for a healthy premium after years when its Aim-listed shares moved sideways.

Searchlight has agreed to pay £470mn or £11.05 per share in cash. That is more than a 47 per cent premium higher than the three-month average price.

Bosses, such as chief executive Tony Dalwood whose stake at that price would be worth £10.3mn, are making a paper gain of 300 per cent from the 2014 management buyout. They took a sleepy investment trust and focused it on forestry and other renewable assets. Assets under management have tripled to £7.8bn in the three years to December 2022.

Critics who say UK public markets routinely undervalue equities would have a case here. As Gresham’s client asset pile has climbed, so have the group’s earnings per share, this year swelling more than 18 times since the end of 2020. The earnings multiple has halved to 11 times, meanwhile.

With UK gilt yields at decade highs, small fry asset managers, no matter their focus, get short shrift from the London market.

Searchlight, which is aiming to keep Gresham managers on board, is keener on Gresham’s long-duration assets, the majority of which are in forestry. It will pay roughly 17 times this year’s earnings. That still looks like a steal compared with Schroder’s December 2021 acquisition of Greencoat Capital at about 30 times, on Numis estimates.

Gresham’s largest shareholders, including Berkshire county’s pension fund and Liontrust Asset Management, have one less sustainable fund to steward their money. Listed pure-play sustainable investors, such as Foresight and Impax, will no doubt watch enviously.

The UK market is losing another growth company, albeit small, in a sector the government is keen to promote. Higher interest rates are taking a lot of the air out of the bubble in ESG-related investment.