New fundtiers: novel UK investment opportunities

The last few weeks has seen the launch of several new types of speciality infrastructure fund for alternative assets in the UK. Each specialises in a niche proposition though all look to support the energy transition.

Borne of changing global energy trends, these vehicles are seeking to define new sub-sectors of infrastructure, and advance them as complete investment opportunities in their own right.

The myriad sub-sector strategies appearing in the UK specifically are targeting investments in energy efficiency (retrofitting of LED lighting, installation of cogeneration and trigeneration plants, smart metering outlay), energy storage (batteries), electric vehicle charging infrastructure, and smart city infrastructure (city-wide wifi networks, for example).

The new funds are: 

The landscape

There is a growing global consensus that climate change is both happening and man-made thanks to ever increasing supporting evidence, both anecdotal and scientific. The intergovernmental World Meteorological Organization recently published data stating that 22 of the last 20 years have been the warmest on record, while parts of Lapland have had to cancel Christmas this year due to a lack of snow. 

Whilst climate change may still be sinking in for some, billions of dollars has already been invested in the so called energy transition. True, in some parts of the world this transition means a ramping up of fossil fuel production – the US is now the world’s largest oil and gas producer. In Europe, however, the transition has hinged on a prodigious appetite for renewables, an increasing role for electricity in transportation, and strong drives to improve energy efficiency.

The UK is law-bound to reduce CO2 levels as enshrined in its carbon budgets, and has committed to closing all coal power plants by 2025. Indeed, since 2008 coal as a percentage has fallen from over 30% to well below 10% according to the Department for Business, Energy, and Industrial Strategy (BEIS). 

The corresponding shortfall being made up by renewables heralds a variety of new challenges and opportunities. The trend towards greater electrification of mobility is fuelling the need to develop the underpinning infrastructure – indeed a greater uptake in electric vehicle numbers is predicated on there being such infrastructure. In addition, the need for balancing mechanisms to counteract the lack of reliability in renewable power – where wind speeds can fluctuate and winter, cloud, and night frustrate a PV panel – is creating opportunities to capitalise on unpredictability.

Pioneers

The new 'fundtiers' opening up in the UK, it must be said, are not all without precedent. Swiss fund managers SUSI, whose tagline is “we finance the energy transition”, has been especially active in developing speciality vehicles for at least five years. Sustainable Development Capital (SDCL) has had several unlisted energy efficiency investment vehicles for even longer, with UK, Ireland, Asia, and US-focused offerings.

Recognising the importance of diminishing energy demand through savings in efficiency, SUSI launched its first 10-year energy efficiency fund in 2013: the SUSI Energy Efficiency Fund (SEEF) obtained €250 million ($284 million), and its successor SUSI Energy Efficiency Fund II (SEEF II) began fundraising in October this year (2018) with a target of €300 million ($341 million).

These debt funds take on counterparty risk for energy efficiency projects for transactions involving energy service companies and their customers, and so fund projects without impacting customer balance sheets.

SUSI calls this tri-partite transaction structuring. “Investors participate in the energy cost savings created for several years and benefit from attractive and stable annual returns. Infrastructure owners realize energy, emissions and financial savings without the need to commit their own capital. Technology partners benefit from additional orders that would not have been possible otherwise.”

SUSI also pioneered by launching its SUSI Energy Storage Fund I in 2016, with a target of €250 million, and reached final close in June 2018. The platform seeks to invest in projects in OECD countries.

New fundtiers

Most of the new proposition infrastructure funds have a UK focus (with the exception of Whitehelm’s smart cities fund and SEEIT), and are launching within several months of each other, begging the question - why now? One fund manager cited a variety of factors including more robust pipelines, the right interest from counterparties, and the right risk profiles appearing for these asset classes. Europe being the forefront of sustainability, development, and management have also been advanced as reasons for the rise of these opportunities.

One fund manager admitted that the proposition to investors is complicated, owing to its inherent newness, but expected fundraising to continue growing as the story is communicated.

The first of the new funds, Gresham House’s Energy storage fund launched with an IPO at the beginning of October (2018) targeting £200 million ($256 million) with an expected 7% yield. It expects to capitalise on the increasing reliance on renewables, and the attendant insecurity in energy supply, by investing in energy storage projects.

These projects are able to address frequency variations in the grid by importing and exporting power through Firm Frequency Response (FFR), thereby generating revenue streams. Frequency variations are expected to increase with the greater uptake of renewable energy. In addition, it hopes to buy and sell electricity in order to capture a spread between the high and low electricity prices on any given day.

This fund has adopted a listed strategy; a source close to the fund explained the choice based on the evidence of success in the listed model, pointing to Greencoat Renewables, TRIG, and the Bluefield Solar Income Fund. The fund eventually raised just £100 million ($128 million). One of the main excuses given for the fundraising shortfall were the concurrent rival fundraises by INPP and JLEN. It is understood the fund will return to market in the new year (2019).

Whitehelm’s Smart Cities Fund (SCIF) followed in November, announcing it had raised €250 million from a single LP, APG. Whitehelm had been exploring the launch of a smart cities vehicle for some time and it claims to be the world’s first smart cities fund. In this time, Whitehelm forged links with US-based technology conglomerate Cisco to assist in sourcing deals. The vehicle’s strategy is to forge bilateral deals with municipalities. For the time being, Whitehelm will be targeting smaller cities with a more streamlined approval process. Three deals are currently anticipated.

A single LP model presents unique advantages such as flexibility of fund life, deployment, and return targets. This last item, returns, may be the crucial factor as the untrialled opportunity may have teething problems. A source close to fund suggested that funding such a new opportunity is a harder role for traditional LPs and public markets to play.

Whitehelm is convinced that the tech and benefits in smart cities are proven, and sees the scalability of projects in this space as an attractive feature. However, procurement regulations stipulating choosing the lowest upfront costs, and political and security issues may make this area challenging for some time to come.

SDCL’s Energy Efficiency Income Trust (SEEIT), another listed vehicle, launched its IPO in November (2018), with a target of £150 million ($192 million). Its results were released on 7 December 2018 revealing it had raised £100 million ($127 million), a third shy of its target.

As mentioned, SDCL has a long history of fundraising and investing in energy efficiency projects, having managed closed vehicles and platforms in the UK, the US, and Asia since 2012. SEEIT, however, is a listed strategy, and like Gresham House wants to establish energy efficiency projects within the listed asset class, and hopes to take advantage of its first mover advantage.

The fund has an attractive, cash-generative seed portfolio including:

  • combined cooling and heating power plant at a Citi data centre
  • combined cooling and heating power plant at St Bartholemew’s Hospital in London
  • LED lighting projects for hundreds of Santander properties
  • LED lighting projects for more than 100 NCP car parks

The two funds yet to launch both cover electric vehicle infrastructure. Quercus is to launch its EV infrastructure fund in Q1 2019 with a £500 million ($626 million) target. The equity fund will offer high single digit returns to its institutional investor and family office backers.

The UK government is also launching an EV infrastructure fund, having opened bidding for the vehicle in the summer, though rumours suggest two bidders will be selected. It will aim to accelerate the construction of EV charging points. After a projected close in 2019, and beginning to deploy capital soon thereafter.