Cleaning up

For reasons of scale, investors in European infrastructure have so far found it difficult to access the undoubtedly attractive renewable energy space. But with small assets being rolled up into big portfolios and utilities shedding sizeable renewable interests from their balance sheets, this appears to be changing. Andy Thomson and Bruno Alves report on the opportunities and challenges of going green.

Renewable energy produced from wind, solar, biomass, hydropower and other sources is increasingly on the agenda of infrastructure investors. That much is clear from recent developments. In a European context, sister website has recently reported, for example, on a €100 million co-investment by two Danish pension funds – PensionDanmark and PBU – in a new green fund being run by a third Danish pension, AP. And while this feature focuses primarily on European themes, there’s no doubting the significance of Macquarie Capital Funds’ decision to appoint the appropriately named Bill Green with a remit to build a team to invest in North American renewable energy infrastructure assets.

Renewable energy investing is becoming increasingly popular for a variety of reasons, the most compelling of which is the level of government support for the sector as Europe strives to meet a European Union target of 20 percent of energy use being derived from renewable sources by 2020. This support, in the form of generous incentives, means that returns are potentially higher and more predictable than those delivered by traditional infrastructure, often subject to volatile market forces. Wind farms, solar plants and the like are among the infrastructure asset class’s most fashionable and desirable investment options today.

For limited partners with an infrastructure allocation, this sounds like unalloyed good news. The problem, however, is that up until now access to this bounty of opportunity has been frustratingly out of reach for larger investors. Most of the renewable energy projects seeing infrastructure fund involvement to date have been small scale – too small for the majority of institutional investors to be able to put meaningful allocations to work. Says Michael Powell, head of alternative assets at USS, the UK’s second-largest pension fund: “We have a couple of wind farm investments dating from 2006 but funds have typically been small and there have been some financing issues in the aftermath of the financial crisis. In short, there are capacity constraints.”

However, Powell acknowledges that green infrastructure investment may now be on the cusp of a significant evolution – due in no small part to the aggregation of assets. “Some small-scale projects are now being aggregated and that means deal sizes are increasing significantly,” says Powell. He also points out that some utilities which have been active in the renewable space have been reassessing their exposures, occasionally sloughing off sizeable assets in the process.

The fundraising market provides hints that larger investor cheques are now being accommodated. Christopher Gill, deputy chief executive of HSBC Specialist Investments, concedes that his firm couldn’t have launched its environmental infrastructure fund – which has a target of €250 million – at a worse time in March 2008 and that the market was “horrible” in late 2008 and early 2009. Nonetheless, at the time of going to press, it had received commitments totalling €182 million from a range of investors including pension funds, European institutions and ultra-high-net-worth individuals. The fund has so far invested in a UK wind farm, an Australian desalination PPP and a Spanish solar project.

Consider solar

Gill is not the only one confident of attracting investor capital. “Institutions should consider solar assets,” asserts Jamie Richards. His firm, the UK-based Foresight Group, is also markedly scaling up. The firm’s first dedicated solar fund closed on €35 million in 2008 and was backed solely by high-net-worth individuals. Two years on, the fund is 80 percent invested and – bolstered by having established a track record and built a team that has spread its presence from the UK to Spain and Italy – a new second fund not only has a reported target of €250 million but also has institutional investors in its sights.

Richards might be termed an aggregating enthusiast. He explains: “[Solar] asset sizes have tended to be 10 megawatts maximum and that implies a deal size of around €60 million for operating assets. If it’s geared, the equity requirement is only about €10 million. That’s tiny for institutional investors. So we’re aggregating our assets into portfolios of 20 or so plants that can generate 200 megawatts – which means a €1 billion asset value including debt. And that’s something a big infrastructure fund might be interested in acquiring.”

One such is Antin Infrastructure Partners, a Paris-based fund that has so far raised €515 million towards a target of €1 billion. After three successive transport deals, the fund recently made its first energy investment in Pisto, France’s largest independent oil storage company. But Antin chief executive Alain Rauscher insists that renewable assets have also arrived on Antin’s radar screen.

Says Rauscher: “A lot of entrepreneurs went into renewable energy and did all the hard work, got all the consents and built some critical mass. Then you had a wave of activity where the utilities wanted to build renewable energy platforms and bought from the entrepreneurs at very high prices. Now the utilities have got the platforms and are not interested any more. And some, which have experienced difficulties, are selling at sensible prices.”

As fund interest in renewable energy grows, it means good news for limited partners keen on the space such as Switzerland’s Partners Group. Aside from its strong returns and predictability, Partners’ head of private infrastructure Michael Barben points to diversification as a compelling trait for firms such as his. “The good thing from a portfolio point of view is that renewable energy is much less correlated to the economy than other forms of infrastructure and that makes it powerful from a diversification point of view.”

Barben adds that the different regulatory frameworks applied to different types of renewable energy – and, indeed, different geographies – also aids diversification. In the following pages, we shall be analyzing these regulatory frameworks – as well as pros, cons and key recent deals – within the four vitally important renewable energy sub-sectors of wind, solar, biomass and hydropower. As the accompanying table shows, these areas account for the bulk of capita invested in renewable energy.