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TEAF: A Unique Approach To Infrastructure And Attractively Discounted

TEAF: A Unique Approach To Infrastructure And Attractively Discounted

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Ecofin Sustainable and Social Impact Term Fund (NYSE:TEAF) offers investors a unique portfolio that takes a comprehensive approach to infrastructure investing. Unlike most infrastructure closed-end funds that focus on utilities and energy, TEAF incorporates “social” infrastructure such as private schools and senior living buildings. This diversified approach sets TEAF apart from its peers and offers investors a different investment opportunity in the infrastructure sector.

One key advantage that TEAF presents is its attractive discount compared to its net asset value (NAV). Despite the discount narrowing slightly in recent times, TEAF is still trading at a deep discount, making it potentially a compelling investment option for longer-term investors. It should be noted that the involvement of TEAF with private investments may contribute to the persistence of the discount for an extended period.

The goal of TEAF is to provide attractive total return potential with an emphasis on current income and uncorrelated assets. The fund focuses on investing in essential assets that have a positive social and economic impact. It is important to note that unique exposure and a significant allocation to private investments often result in higher expense ratios. TEAF’s expense ratio stands at 1.85%, which increases to 2.66% when factoring in leverage expenses.

TEAF’s involvement in private investments carries additional risks, including volatility and potential illiquidity. Investors should also consider the fund’s smaller size, which may limit the ease of buying or selling a substantial position.

TEAF has consistently traded at a deep discount since its inception, with the discount widening during the Covid crash. Currently, the fund’s discount is wider than its historical average. Despite market-wide discounts widening, this presents a potential long-term opportunity, considering TEAF’s term structure that extends until 2031. It is important to note that the fund’s termination date can be extended at the board’s discretion, and it may even transition to a perpetual structure.

One important consideration is the fund’s significant allocation to illiquid private investments, accounting for approximately 50% of its managed assets. These level 3 securities are valued based on the fund’s own assumptions, adding a degree of uncertainty to their valuation.

TEAF offers an attractive monthly distribution, with a distribution yield of 8.73%. The fund’s strong distribution is supported by solid coverage of net investment income (NII) and distributable cash flow (DCF). In the first six months of the fiscal year, TEAF’s NII coverage stands at 29.19%, and including return of capital distributions, the DCF coverage reaches nearly 46%. It is worth noting that TEAF also writes options to potentially enhance capital gains.

TEAF has actively managed its portfolio in the first half of the fiscal year, with a turnover rate of 16.51%. The fund’s focus remains on sustainable infrastructure, with a meaningful allocation to social impact projects and energy infrastructure. Private investments continue to play a significant role in the portfolio, although the public-to-private weighting has shifted over time. Notable investments include schools and renewable energy assets.

TEAF’s top holdings comprise subsidiaries such as Renewable Holdco, LLC and Renewable Holdco II, LLC, which collectively own renewable energy assets. The portfolio remains fairly concentrated, with limited changes to the top holdings over time.

Given TEAF’s unique investment approach, its deep discount, and the potential for long-term growth, it presents an opportunity for investors willing to take on the associated risks. The attractive monthly distributions further enhance its appeal as an investment option within the infrastructure sector.