TEAF: History of underperformance, but turnaround may be on the horizon (NYSE:TEAF)

Exposure to private equity can produce the potential for greater long-term rewards, but they just haven’t been able to seem to capitalize on this. This generally meant that the best reason to own TEAF was the considerable discount at which the fund frequently traded. The opportunity to capitalize on this discount for potentially higher growth potential could come in the future as they have made a number of moves so far in their CEF lineup.

Last month, they announced that they would seek to merge Tortoise Power and Energy Infrastructure Fund (TPZ), Tortoise Pipeline & Energy Fund (TTP) and Tortoise Energy Independence Fund (NDP) into an ETF structure. I even noted that this might be something the NDP would have happened shortly before it was announced.

This would be similar to what we’ve seen First Trust do to several energy-focused CEFs. TPZ will be the surviving fund if the merger is approved.

Even more recently, we saw the announcement that Tortoise Midstream Energy Fund (NTG) and Tortoise Energy Infrastructure Corp (TYG) have also been approved by the board to merge, but remain a closed-end fund structure. This transaction will still require shareholder approval, as will the merger between TPZ, TTP and NDP to merge and convert into an ETF structure. If the grant of NTG and TYG is approved, the fund will also switch to a monthly distribution schedule and increase its distribution by 40%.

Only the black sheep of the family, TEAF, remains, which they have yet to make a move on. However, it has not been forgotten as they mentioned in NTG and TYG announcements that they are still looking at their options for the fund.

In addition, Tortoise Capital plans to carry out a strategic review of the investment strategy of its closed-end fund Ecofin Sustainable and Social Impact Term Fund (NYSE: TEA), including the impact of combining private and public investments in a closed-end fund. TEAF provides investors with access to a mix of public and private investments in key assets. TEAF had total assets, including leverage, of $229.0 million as of August 31, 2024.

“As part of our product restructuring, we are evaluating our entire fund line and making changes that are in the best interest of fund shareholders,” said Tom Florence, CEO of Tortoise Capital Advisors. “We were disappointed with TEAF’s performance and its reduction to NAV and aim to correct the issue.”

Not only does TEAF focus on renewable energy in their business, which Tortoise is now pulling out of, but it has a term structure – meaning the fund is expected to liquidate in the future, regardless of the NPV per share. time. The anticipated liquidation date in this case is March 27, 2031. There are always ways that the fund can extend this or become perpetual, but that’s another consideration, since these other funds are already perpetual.

That said, the main line that caught my eye here is “conducting a strategic review of the investment strategy…” That to me suggests that they are looking to change the investment policy to be more in line with the other funds sisters, who are more invested in traditional infrastructure investments. At that point, with a considerable portion of private investment, it would take some time to convert the fund. However, just the idea of ​​the fund switching strategy might attract more interest.

In the future, as it is a smaller fund, it could also be merged into what would likely be a larger TYG. The combination of NTG and TYG, if completed, would create a total fund of assets under management of approximately $900 million. With TEAF at about $229 million in total assets under management, shedding some private equity and reducing its exposure to renewables would ultimately make it a better fit for TYG.

At that point, TYG’s fund would not change dramatically either due to TYG’s significantly larger size – and TYG’s investment policy leaves the door open for private investment as well as exposure to renewable infrastructure.

In this potential future development, investors should consider and approve the elimination of the term structure of the fund. At a sizable discount, and if TYG can narrow its discount more significantly based on increased distribution and move to monthly, then it would make sense for TEAF investors to take the offer.

Seeing TEAF change its investment policy wouldn’t be that big of a shock either. This is because Saba Capital Management, an activist group, is in this fund with a stake of more than 9% – it should also be noted that all these changes in CEFs were probably driven by activists.

Saba holds a nearly 10% stake in NTG. An increased distribution and monthly payment could result in the discount being significantly reduced where it would benefit from a merger. Saba also owned a 9.6% stake in the NDP, along with other prominent activist Bulldog Investors. Saba owns nearly 9% of TTP, TPZ is largely owned by Relative Value Partners Group at ~13% and Bulldog Investors holds a 6.19% stake.

So Saba is looking to profit handsomely from all these moves which are efforts to make cuts to these funds. No doubt they are in active discussions for TEAF to turn things around with the fund, as they previously did with PIMCO. This is how the PIMCO Dynamic Income Strategy Fund (PDX) became what it is today because it was previously an energy-focused fund called the PIMCO Energy and Tactical Credit Opportunities Fund under the symbol “NRGX.”

They announced a transition to the new name and investment policy that made PDX a similar fund to the rest of PIMCO’s suite of multi-sector bond funds. That said, PDX has its own “issues,” with its largest holding being a private, restricted equity position in Venture Global Holdings. This is the fund’s largest position at around 19%, which has become such a large holding due to significant appreciation in market value.

Even more, after they announced their transition, they withdrew their allocation for C-corp positions, but simply moved most of them into the holding positions in the limited partnership (” MLP”). This left the fund largely still an energy-focused fund, which of course left the door open to do just that. In their policy, they note that it “normally invests at least 25% of its total assets in the energy industry.”

Whether it was just the optics of the policy and the name change or the change in distribution policy, the reduction narrowed for PDX quite materially. Of course, I’m also a proponent of advocating to capitalize on this move, as I’ve taken a stand on the bottom line as well.

In the case of TEAF, a change in investment policy alone is likely to be insufficient. After all, the other turtle CEFs are also trading at pretty big discounts. As of their last semi-annual report, ~40% of the fund was invested in restricted securities. So trying to get approval to convert to an ETF at this point is simply not an option. This means it could be interesting to see what they could come up with in this scenario to attract investors.

Conclusion

TEAF finds itself in an odd position as its fund sponsor appears to be shying away from the renewable energy business it previously tried to build. Historically, the fund has produced mixed results, but with some activist pressure, the fund could look to turn things around soon. What it ultimately looks like for TEAF could be different from its sister funds due to its unique characteristics of sizeable private investments and term structure. However it is announced, if it gets the Saba stamp of approval, it will more than likely result in the reduction in discount.

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