How quickly the world changes. Only 15 months ago, SSE was trumpeting a £3 billion plan to merge its household energy supply business with Npower in a move that was going to bring an end to the traditional Big Six model as we knew it. Not only would the separately listed combine supposedly be able to give consumers a good deal, but it also would enable the former Scottish & Southern Energy to get out of a retail energy market under fire from all sides — from consumers, from the government and from Ofgem, the regulator.
Three profit warnings later and the proposed merger is a thing of the past, presenting SSE with a headache about how to get rid of a business it so clearly doesn’t want. For SSE’s investors watching their company try to battle its way through a marketplace that is transforming, it has meant watching the share price tumble and fretting about the long-term security of their dividends.
SSE was formed in 1998 through the merger of Scottish Hydro Electric and Southern Electric. Based in Perth with a staff of about 20,000, it is the third largest household energy supplier in Britain with more than four million customers.
The group is involved in every aspect of the energy market: it owns and operates plants that generate and produce electricity; it operates the pylons and substations that transmit power from those generators; and it sells energy to homes and businesses. It also has interests in gas production and supply and is increasingly preoccupied with renewable power.
Ofgem sets the level of the prices that SSE can charge suppliers to use its transmission network and clears its investment and costing plans for connecting new customers and increasing its capacity. The regulator also holds the company to account for its customer service. And, as of January, SSE is limited in how much it can charge customers on standard variable tariffs, although the cap has already been increased once and stands at £1,254 for a typical user paying by direct debit.
It feels as if SSE is under pressure everywhere. The group warned about its profits twice last year, blaming rising wholesale prices, only some of which can be passed on to customers — who anyway felt the need to use less gas and electricity because of the warm weather. Dry and still weather also hindered output at its hydro and wind power stations. That blew a hole in operating profits at its wholesale business. Then along came a third warning this month, this time linked with the forced suspension of the government’s capacity market auctions, effectively payments to power providers to stand ready to flick on the switches if there is a surge in demand during the winter months. For the moment at least, that meant the absence of a due payment of £60 million.
SSE’s network’s business is also facing tighter controls by Ofgem, which last year said that it was aiming to limit returns in an effort to save consumers more than £5 billion over the next five years.
Offloading its retail unit, which the company still plans to sell or list separately, would get rid of the headache of the price cap and a sharp increase in competition from start-up suppliers, often online-only and therefore low-cost. There is, however, no obvious buyer and in the present market demand for the shares is unlikely to be strong.
SSE has stuck determinedly to its five-year dividend plan, but, given the direction of travel — and a heavy investment in renewables — there are real questions about its ability to sustain it. The shares, down 1p at £12.01, trade on 15.3 times Bernstein’s forecast earnings and yield a whopping 8.1 per cent. Still, for this observer, it’s not enough.
ADVICE Sell
WHY The shares may be cheap but the risks are high in a market that feels broken
Harbourvest
It’s tempting to feel sceptical about private equity. Hard-bitten and unaccountable investors take the best out of unlisted businesses before passing them on to unsuspecting public markets just as the company or its markets start to go downhill. At least, that’s according to the cynics and although this isn’t always the case, the track record is mixed.
Yet there is another way: listed vehicles that enable share-owners to take conventional exposure to private equity investments without having to pay handsome fees to invest in the funds directly.
Harbourvest Global Private Equity is quite an esoteric version of one of these vehicles. Listed since 2010, it is a quoted way to invest in a collection of private equity funds, managed by Harbourvest Partners, which was set up in 1978 and took its first direct position in 1983.
Harbourvest invests in private equity in three ways: at the initial fundraising stage, when existing funds’ interests are sold and, last, by directly buying stakes in operating companies. Harbourvest Global Private Equity invests almost exclusively by taking stakes in the partnership’s funds. Underneath all this are about 8,000 companies, a little more than half in America, a fifth in Europe and the remainder in Asia and the rest of the world. No single company accounts for more than 1.3 per cent of the portfolio.
The vast majority of the top 25 names will be unfamiliar because they are private, but they include insurance brokers, a private hospital operator and a security firm. In the past they have included Facebook, Alibaba and Snap, the latter generating a return on flotation of 300 times its initial outlay.
The Harbourvest vehicle pays no dividends, so shareholders are reliant on capital appreciation, which it seems to be delivering, comfortably outperforming the FTSE All-Share and modestly beating the MSCI AC World index over the nine years since its London listing.
The shares, down 14p, 1 per cent, at £14.60 yesterday, have risen in value by 250 per cent since 2010, but trade at a yawning discount to its net asset value of about 25 per cent. This feels harsh and a possible opportunity for gains over the long term.
ADVICE Buy long term
WHY Richly diverse portfolio that has consistently beaten its benchmark
