Hi,
When I create the transformation, and then assign the transformation to the repeater I get the following error
How exactly have you created the transformation?
The error you described could mean that virtual path provider is not running. It is typical for pre-compiled site or site running in the medium trust environment.
The location you pasted does not exist by default. In case of medium trust environment you need to Deploy objects to the disk, then the folders are created.
You have not mention if you are running in the medium trust environment or not. Here is a appropriate documentation which could help you to deploy site (new transformations, templates):
Medium trust deploymentBest regards,
Ivana Tomanickova