Investments in Triodos Renewables Europe Fund are subject to several risks, which are described in detail in the sub-fund’s particular of the prospectus of Triodos SICAV II. Some of the risks are highlighted below.
Triodos Renewables Europe Fund invests in assets that are not listed on a stock exchange or traded on a regulated market. The investments are relatively illiquid. In view of the fund’s semi open-end structure (enabling subscription and redemption of shares on a weekly basis) this could potentially lead to a situation in which the fund needs to temporarily close for redemptions. There is also a risk that the fund may be unable to obtain sufficient liquidity to fulfil its financial obligations. The fund performs quarterly stress tests to assess this risk. On December 31, 2015, the fund held 14.0%1 of its net assets in cash and cash equivalents. Additionally, the fund is allowed to borrow up to 20% of its net assets and has a EUR 2.5 million stand-by credit facility available on demand. When including this standby facility, the available cash and cash equivalents add up to 17.9% of the net assets.
1 Investment restrictions are presented against total assets. The liquidity ratio is presented against net assets.
Regulatory risk and country risk
Many of the project company related contracts, such as the Power Purchase Agreements, subsidy agreements, green and/or renewable energy certificates, carbon offset arrangements, etc., are subject to government regulation and may change over time. Fluctuations in global energy and oil prices may influence the Power Purchase Agreements and project revenues. The value of the investments may also be affected by other uncertainties in the form of abrupt changes in domestic tax policies and other legislation and regulations. Triodos Renewables Europe Fund mitigates regulatory risks by means of geographical and technological diversification.
A long-term risk is constituted by the fact that the amount of electricity produced is determined by various uncertain factors, such as wind speed, rainfall and sunlight. Added to that, there is a technology risk (e.g. actual performance of turbines and solar panels) that could affect the amount of electricity produced. Where the fund invests in projects that are not yet operational, it is also exposed to a construction risk at the project level. The performance of the project also depends on the quality of the plant management. This risk is mitigated by working with experienced developers and by using knowledgeable advisors to determine the expected electricity production and plant performance.
Another risk is the potential volatility in income from the electricity that is produced. In cases where a project is partly or entirely dependent on market electricity prices and is not fully eligible for fixed feed-in tariffs and subsidies, the expected income and valuation of projects could fluctuate along with changes in market electricity prices. This risk is partly mitigated by diversification across regions and technologies.
Valuation risk refers to the risk that the value of assets does not reflect the fair market value, since valuations are based on infrequent market-based data, assumptions and peer group comparisons. As Triodos Renewable Europe Fund invests almost exclusively in assets that are not listed on any stock exchange, or traded on a regulated market, its investments may not have readily available prices and may be difficult to value. In order to determine the value of these investments, the fund employs a consistent, transparent and appropriate valuation methodology, based on the International Private Equity and Venture Capital Valuation Guidelines (IPEV), as published by the IPEV Board and endorsed by the European Private Equity and Venture Capital Association (EVCA). To the extent that this methodology relies on assumptions, periodic market-based data and peer group comparisons, the valuation of the assets may fluctuate with the variations in such data.
Interest rate risk
The performance of Triodos Renewables Europe Fund is susceptible to capital market interest rates. This is partly due to the interest cost paid by the fund on its standby credit facility, interest cost paid by the projects in its portfolio and due to the applied valuation method, which involves calculating the net present value of expected cash flows, using a discount factor that incorporates the one-year rolling average market interest rate. Depending on the composition of the portfolio, a change in the interest rates in the capital markets can either have a positive or a negative effect on the results. The valuation of the portfolio can also change due to a change capital market interest rates, impacting the discount factor used for the net present value calculation. In such a case, rising interest rates in principle will have a negative impact and falling interest rates will have a positive impact on the valuation of underlying investments. The positive impact of decreasing interest rates is capped, however, as the valuation method incorporates a minimum discount rate.
The fund aims to diversify its assets across regulatory regimes, different forms of technology and macro-economic factors that vary in terms of their impact on energy prices and the long-term value of assets. The fund may take measures to hedge such currency risk, where possible and feasible, to reduce such risks. The fund does not apply a hedging policy at this time on its long-term equity investments. The risk is partly mitigated by currency diversification and a maximum of 20% of its total assets exposure to a single non-euro currency. Per year-end 2015, the non-euro currency exposure is 4.0% of the fund’s total assets (UK pound sterling).