When Foresight Group recently raised its £22 million (€29 million; $44 million) UK Sustainable Fund, the firm appeared to have achieved a notable landmark. After all, the fund – which was oversubscribed – was one of the largest raised to date under the Enterprise Investment Scheme (EIS), which was established by the UK Government to offer tax advantages to investors in smaller companies. But all along, Foresight was planning to pull a bigger rabbit from its hat in the form of an institutional fund that was due to be launched imminently at the time of going to press – and which will aim to raise £100 million.
“Investors like … ownership of hard assets, they like running yield, and they like the predictable income streams.”
The idea is that the EIS scheme will demonstrate ‘proof of concept’ for sustainable infrastructure projects that will then be rolled out to numerous other sites, effectively using the limited partnership as a large pool of expansion capital. For example, the EIS scheme may provide around £2-3 million of equity for the construction of a single waste-to-energy plant. The LP will then help finance the build-out of a series of similar plants in the UK – backed by around £400 million in debt, which will give the fund £500 million of total firepower.
Bernard Fairman, managing partner of Sevenoaks, Kent-based Foresight, anticipates strong appetite for the new fund, not least because the existence of the EIS fund means investors will know exactly what they are buying into. “It's very high visibility. Investors will effectively be able to see the investments they will be making,” he says. He also takes the view that by targeting both cleantech and infrastructure, Foresight is combining two hot investment themes. “Investors like the fact that infrastructure means ownership of hard assets, they like running yield, and they like the predictable income streams from, for example, a series of recycling plants.”
The aforementioned “series of recycling plants” is precisely what Foresight has in mind at Dagenham, Essex-based Closed Loop, one of its investee companies. In February 2007, Foresight invested £3 million equity in the firm as part of a total financing package that comprised £4.6 million equity, £2 million in government grants and £5.5 million in bank debt. Closed Loop is one of the first companies in the UK to turn used mineral water and soft drinks bottles – which would normally be sent to landfill sites – into food packaging.
Fairman says investments like Closed Loop are attractive partly because they have a number of predictable characteristics. The technology, the level of demand for that technology, and the costs involved are all established from the outset, he says. The biggest potential risk, he adds, is securing the supply of waste. “You need a long-term contract to reduce that supply risk,” he says. In the case of Closed Loop, this was achieved when waste management firm Veolia Environmental Services agreed to be sole supplier to the firm of 35,000 tonnes of bottles every year. According to Fairman, this gives Closed Loop “control of half the plastic bottles in the country”.
Other sustainable infrastructure investments made by Foresight include Iskra, a manufacturer of tree-sized wind turbines, and O-Gen, which generates renewable electricity from biomass. The latter involves the build out of 15 plants around the country to help the UK achieve its stated target of 20 percent of energy needs being provided by renewable sources by 2020.
Summing up the opportunity, Fairman says: “There is a huge demand for infrastructure, clean energy and recycling, and projects like these are very scalable”.
Environmental projects are not the only area where Foresight is looking to scale up. An established manager of venture capital trusts, the firm is currently taking over the investment mandate for the £22 million Noble VCT – the third new mandate the firm has won in less than four years. This puts Foresight at the forefront of consolidation in the UK VCT sector, which has been predicted since the UK Government's 2006 Budget modified tax reliefs and placed restrictions on the type of companies VCTs can invest in.