Where to look for value in real assets

Some of the best value opportunities are currently found in highly selective, diversified portfolios of wind and solar assets in core European countries.

Europe is a more stable region

The EU renewable energy market offers a compelling opportunity to gain exposure to infrastructure. In particular, it is attractive because it is a large, stable economic region, dominated by a single, relatively stable currency.

The high level of demand for operating assets gives the advantage to investors who can execute a 'buy, build and sell' capital gains-oriented strategy   

It has supportive regulation based on consistent climate change policies and the aim to shift the energy generation mix away from fossil fuels and nuclear. There is also a diverse combination of wind, solar and hydro resources – and it is a strong market because of a declining cost structure in wind and solar markets.

Europe is a more stable investment region than most other OECD and emerging markets. New-build and secondary asset markets are strong, with growing demand for core infra yield from quality EU operating projects.

By contrast, global investment vehicles can be exposed to emerging market volatility and currency issues. 

Commitment to new construction

Throughout Europe there is a strong commitment to new construction through to 2020 and beyond. The EU has imposed a binding target to produce 20 per cent of its electricity from renewable energy sources by 2020.  

This will require over 130GW of renewable electricity installations (of which 52GW is planned from onshore wind).

The National Energy Plans of nine key EU countries alone set a target that requires more than €200bn (£178bn) of investment in renewables by 2020. In just the wind sector, these countries plan to install 87GW of wind generation, representing an investment of €148bn (£132bn) by 2020.   

High demand for investment creates an opportunity for private capital. Most developers are undercapitalised, and many utility power generators suffer from capital constraints to fund the construction costs.

Advantage is for greenfield investors

Many institutional financial investors are neither able nor willing to take on the complex development and construction obligations of these investments.

By contrast, exit markets are marked by a growing crowd of institutional investors committing capital to the infrastructure sector, but mostly in the downstream or ‘destination buyer’ brownfield markets.

This high level of demand for operating assets gives the advantage to investors who can execute a ‘buy, build and sell’ capital gains-oriented strategy.   

A relatively fast rotation of three to five years of a well-diversified portfolio of assets by means of a ‘buy’ (pre-operational projects), ‘build’ (the wind farm or solar park) and ‘sell’ (to utilities or brownfield infrastructure buyers) model is currently a very attractive value proposition.

Strong execution management needed

This strategy benefits from the opportunity to buy assets at a discounted cash flow valuation that is 250-400 basis points higher than at exit. Strong risk and execution management is therefore critical for this model to be successful.  

The construction risks faced by renewable energy plants are similar to those of other construction projects, but are typically contracted out to established suppliers.

However, they need to be managed by a team with strong project management skills and a successful track record in constructing on time and within budget. With short six to nine-month construction periods and ‘turnkey’ construction contracts in place with credible corporate contractors, construction can be effectively derisked.

It is also key to avoid high spending when project risk is highest at the early pre-permitted stage, when obtaining a government permit can take time or fail entirely, but this can be avoided by conditional purchasing with local developers. 

Peter Rossbach is co-head of private equity at Impax Asset Management