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'Asset transfers give us a lot of headaches’

At our Renewables Forum, held today in Berlin, an LP shared concerns on potential conflicts of interests at fund managers and his reasons for going direct.

In what remains a fragmented and competitive market, setting up platforms to invest in renewable projects makes a lot of sense, delegates at our Renewable Energy Forum heard in Berlin today.
 
The issue, as both Oldrik Verloop of Aquila Capital and James Hall-Smith of InfraRed observed, is that “platforms mean different things to different people”.
 
“The first thing investors have to ask themselves is: 'What kind of platform are you looking for?'” Verloop said. For instance, the company his firm has set up to target the hydropower sector – designed to grow through the acquisition of bolt-on projects – aims to deliver “economies of scale, operational benchmarks, consolidation of IT systems, in effect all the benefits you can derive from growth”.
 
“Instead of setting up a structure for each asset, we're just deploying capital from this one company.”
 
The situation was slightly different for Jonty Graham, a director at Foresight Group. “Our listed vehicle is focused on more vanilla operational solar. It's very different from a value-add vehicle that takes on development and construction risk,” he said, adding that Foresight's solar fund charges a 1 percent flat management fee. “Essentially, it acts as a fixed-income substitute.”
 
Jonathan Ord, investment manager at the Local Pensions Partnership, expressed yet another view. “Platforms for us mean partnerships – with fund managers, management teams, or strategics.”
 
“We have a platform for UK bioenergy,” he cited as an example. “We didn't want to do that in-house so we partnered with a management team to roll out [projects] across the UK.”
 
Yet platforms are not without complexities, panellists recognised. In particular, difficulties can arise when an asset is sold by a manager's greenfield fund directly to a low-risk, yield-focused platform managed by the same firm.
 
“It's important to be absolutely transparent with the market,” said Hall-Smith. “Third-party, arm's-length valuation is paramount,” added Graham.
 
TRANSFER WINDOW
 
That did not appear to fully appease Ord's concerns. “We're always speaking to fund managers about assets coming to market,” he noted. “But transferring one asset from a fund to another pocket always makes us uneasy. We have to ask managers: how are you going to address that conflict point? It causes us a lot of headaches because we have to talk to managers in a lot more detail than we normally do.”
 
Thankfully, he observed, most managers are “very transparent”. But as a recommendation to GPs, he said “the more information managers can give to LPs the better”.
 
Ord said LPP would continue to invest through funds, possibly keeping a 20-30% exposure to them over the long run. But he explained why his institution had decided to start going direct as well: in the core space, assets LPP wanted to hold for the long term were being sold by managers. “There was a churn we didn't need to see.”
 
He also noted some instances of strategy drift. “The problem with private placement memorandums is that they are so widely drafted they do allow the firm [to keep some leeway].”
 
Yet Ord cautioned against the significant time and staff resources needed to build an in-house unit. “We've been on this journey for about three to four years,” he remarked. “Take whatever team you think you're going to need and double it.”?