Australian superannuation fund Christian Super has about 6 percent of its $1 billion assets in private equity, with about 30 percent in energy. The investments, which are exclusively in renewables, are all made through funds of funds, as its CIO Tim Macready explains.
Tell us about Christian Super’s energy investment strategy
We made our first energy private equity investment through a fund of funds in 2006 and made further investments in 2014. At that point we articulated a specific shift in our energy private equity strategy from developed to developing markets. But it was always focused on renewables, given the values of our fund.
How was it to source managers focused only on renewable energy?
It was interesting. We have made three private equity investments into energy: in 2006, 2014 and 2015, and all three were through funds of funds, which is unusual for us. As a $1 billion fund, we tend to avoid funds of funds and make commitments directly in funds and occasionally make direct investments in private equity. But for the energy space, we felt the additional layer of fees was justified by the extensive diversification you get through a fund of fund structure.
What are you looking for in fund of funds managers?
We are looking for people with reasonably sized teams including people on the ground in the markets we’re looking at. One of our funds of funds is the IFC [Washington-based International Finance Corporation], who is drawing on not just the expertise of manager selection and internal capacity but also on 150 field offices around the world.
When they’re looking at East Asian funds, they can say what something means for China or Korea. We also look for someone with sufficient technical understanding, for example, to know solar well enough to tell apart a good and bad solar manager. We have invested in funds with around $500 million. We don’t want funds that are too much smaller or bigger than that.
How has your portfolio changed since the fall in oil prices?
We have a few individual investments left from the 2006 fund, and they have not held well through the significant decline and changes in the oil price. But in frontier emerging markets, because you are focused on new generations in communities that lack access to energy at present, the performance has done quite well. Because in some cases there’s no alternative fuel source, these investments are holding up despite oil price changes. For example, in a sector sense we’re invested in hydro, winds and solar energy, and in a geographic sense we’re in Guatemala, Kenya and China looking for wide diversification.
Also, it’s about the entire premise of moving towards frontier markets that are resilient to volatility. A lot of volatility is from policy dependency. As public policy shifts, it’s been favourable towards renewables and we want to maintain a commitment to the sector but be less policy-dependent. In doing that, we accept we’re taking idiosyncratic geopolitical risk, but we feel we’d prefer that to policy and tech risk.
Which subsectors are attractive and which do you avoid?
We’re looking at solar, wind, hydro, geothermal and others, because we’re trying to be tech-agnostic and not deliberately trying to target one subsector over another. We don’t have a view on whether wind is moving in a more favourable direction than solar. We try to be tech-agnostic in terms of how the energy generation occurs. In Western markets, people brought out a range of new products that could significantly change the generation. But we don’t want to be exposed to the risk that one company comes out with a solution and dominates.
What about geographic regions?
Our highest exposures are in South-East and East Asia and Latin America, which does reflect those emerging frontier markets in terms of infrastructure and energy demand compared with sub-Saharan Africa or parts of South Asia. We want to minimise geopolitical risk and have renewable exposure in 30 to 40 countries around the world.
What are your energy commitment levels going forward?
It’s lumpy for us. We made a $20 million commitment in 2006 and followed that up with $15 million to $20 million each in 2014 and 2015. But we did nothing since because funds get drawn over time. We expect a further allocation of between $10 million and $20 million in late 2017 or early 2018, mostly because the fund managers we particularly like are raising capital again. But it’s been quiet for a couple years. We’re not actively seeking to increase the proportion of energy in our private equity portfolio.