With pensions in its sights
Mark Nicholls asesses the UK’s Green Investment Bank plans to target the institutional investment community, and pension funds in particular
The UK’s Green Investment Bank (GIB) has the pension fund industry squarely in its sights. Six months since its launch to help finance the country’s green economy, the bank is looking to leverage an initial £3bn (€3.5bn) of government money – and sees pension funds and other institutional investors as its natural partners.
“The scale of the opportunity in the UK is very large,” says Shaun Kingsbury, who moved from clean energy private equity to take the helm of the GIB last October. The government estimates that around £200bn needs to be invested in energy efficiency, power generation and the supporting infrastructure in the UK over the next decade to meet the country’s climate and clean energy targets – and to keep the lights on.
“We need about £20bn a year – and at the moment, we’re currently investing about 40-50% of that. We can’t close that gap on our own,” Kingsbury tells IPE from his office in London’s Millbank Tower, a block within sight of his political bosses in Westminster.
The GIB is owned by the UK government, although it is an independent organisation. It has two objectives: what Kingsbury describes as its “green bottom line” of delivering reductions in greenhouse gas emissions and waste to landfill, and increases in biodiversity and renewables capacity; as well as a requirement to be profitable.
Specifically, it is intended to help direct finance towards four priority sectors – offshore wind, waste recycling and energy from waste, industrial energy efficiency, and domestic energy efficiency.
In offshore wind and waste particularly, bank funding has been drying up as a result of the financial crisis and tightening capital adequacy rules that make it expensive for banks to offer long-dated finance.
Step forward institutional investors like pension funds and insurance companies. “We think that these assets are really interesting to them,” says Kingsbury. “They’re long-dated: 20-25 years for offshore wind, or waste plants for that matter; they’re cash generating, [with] revenue certainty for 15 or 20 years, and with indexation to inflation.”
Investors interested in taking equity positions in operating offshore wind farms can earn returns in the low teens, if they are geared, and in the high single-digits ungeared. “Finding a group of institutional investors with that appetite for operating, cash-yielding assets, to match with [the projects’] need for the capital seems to us the way forward,” says Kingsbury.
Most observers agree that the GIB has got off to a good start. In May, it announced its results for November to end-March – its first partial financial year. In that time, it committed £635m to 11 transactions, leveraging some £2.3bn of private sector co-investment.
These deals include a £100m loan to Drax, western Europe’s biggest coal-fired power plant, to help finance its transition to biomass – debt that helped close almost £1bn in financing. It has provided debt and equity to offshore wind farms, and has provided funding to the Green Deal Finance Company, which is charged with underwriting the UK’s domestic energy efficiency programme.
The bank has also seeded a number of funds designed to channel finance to smaller projects, in waste, biomass and industrial energy efficiency. Its most recent fund structure saw it provide £50m to a fund managed by the insurer Aviva, to invest in ‘energy centres’ at hospitals and similar organisations, reducing their energy costs and carbon emissions.
“We’ve got a nice opening spread across all our key sectors… we’ve done both equity and debt transactions. It’s a really good start,” says Kingsbury.
So far, the bank has done one deal involving a pension fund. In December 2012, it provided £46m of a £224m package of debt to PGGM and Ampere Equity Fund to allow them to refinance their 24.8% stake in the Walney offshore wind farm.
“Some of the big pension funds are very supportive of the GIB’s work,” says Ingrid Holmes, the low-carbon finance project leader at E3G, a London-based not-for-profit sustainable-development organisation. “They’re looking for someone to co-invest alongside in large-scale infrastructure projects, but it hasn’t really emerged to date.”
Many pension funds remain wary of infrastructure investment. “It’s a really nascent asset class,” Kingsbury acknowledges. “Knowledge is a barrier.” Potential investors “have questions about technology, how the market works, how you make investments – all of which we’ve got good answers to.”
He notes that the GIB now has a staff of 75 – expected to top 100 by the end of this year – which means “we’re one of the biggest teams in the UK focused on each of our sub-sectors.… and our job is to bring in private sector capital,” Kingsbury says.
“The issue for UK pension funds with infrastructure is that they are looking for capital protection, a rate of return on capital of at least 5-6% ‘real’, flexibility and low exit costs,” says Howard Pearce, until recently the head of environmental finance and pension fund management at the UK Environment Agency pension fund. “These deals are relatively rare in the UK.”
Those returns are certainly achievable, but capital protection might be asking too much of the GIB, says Kingsbury. “Providing guarantees is hard. We want to invest on the same terms as the market.” Indeed, the GIB’s mandate – its requirement to operate at a profit – makes offering such guarantees difficult.
Where Kingsbury is confident that the GIB can help is around regulatory risk, which particularly haunts investors in renewable energy infrastructure after reversals and retroactive changes to various European subsidy regimes.
Firstly, the GIB’s role as a “sector specialist” should reassure its co-investors, he says.
“The expertise and skill of the team should give them comfort that we know what’s going on.” But the bank also has “skin in the game”, Kingsbury adds. “We’re putting government money alongside theirs. There’s real alignment, with capital on the same terms, pari passu, with the same risks and liabilities. That goes a long way.”
However, continuing regulatory uncertainty around energy and climate policy means the GIB must get involved in lobbying, experts say. “The question is, how do you get green investment with a very low carbon price, and without a clear regulatory policy framework?” asks Rory Sullivan, a leading responsible investment consultant. “The GIB needs to be prepared to play in the public policy space, as well as in private finance.”
And that is a role that Kingsbury is prepared to fulfill: “We have a unique position,” he says.
“We’re a part of the industry, with one arm around its shoulder.… But, uniquely, we’re also owned by government. We’ve another arm around the shoulder of our shareholder. We’ve a unique role in bringing the two together in a way that delivers the government’s desired policy objectives and a profitable market where investors can make the appropriate risk-adjusted returns.”
Kingsbury is convinced that pension fund investors represent “the future of renewables”.
“They’ve got long-dated obligations, and we’ve got long-dated assets. They’re looking for cash-yielding securities they can lock down and bank, and we’re looking for long-term, consistent owners of equity and long-term debt.
“We’d love to talk to them as a group or individually as to how we can work together. What they’re looking for is what we’re trying to bring in.”