Foresight Group launches first Australian infra debt fund

The UK-based fund manager will launch the Foresight Renewable Energy Income Fund this month, a debt fund targeting A$150m-A$200m that will invest in smaller-scale renewables projects.

Foresight Group is set to launch a renewable energy infrastructure debt fund in Australia this month, with more debt and equity funds to be launched in the coming years.

The move follows the appointment of the firm’s new head of Australia, Kim Nguyen, who previously held roles with Hastings Funds Management, Origin Energy and Macquarie Group.

Kim Nguyen, Foresight Group, Australia
Kim Nguyen

Nguyen will oversee the launch of the Foresight Renewable Energy Income Fund, which aims to raise between A$150 million ($101.7 million; €91.7 million) and A$200 million from wholesale investors and smaller institutional investors. The fund will invest in smaller renewable energy projects, typically with output sizes of 50MW or lower, and their associated infrastructure.

The fund will have a five-year term and will be raised in “two or three” tranches, Nguyen said. A first close is expected in November on around A$50 million-A$70 million. It is the first Foresight Group fund to be targeting Australian investors.

Speaking to Infrastructure Investor, Nguyen said the structure of the fund was very deliberate because of the nature of the investors Foresight is targeting.

“[Superfunds] are very fee-conscious and the large superfunds are moving away from fund managers. You see a very different relationship between LPs and GPs here, and in what LPs are looking for as they internalise more,” she said.

“Where the fund manager still plays a fairly important role is with the smaller institutions. They can’t afford to hire three people, say, to do infrastructure debt [in-house], but in theory they should still have an allocation to infrastructure debt. We’ve been able to create a product that gives access to the asset class for those smaller institutional players who don’t have their own internal teams.”

Nguyen said that all the loans made by the fund will be certified via the Climate Bonds Initiative or the International Capital Markets Association’s Green Bonds Principles, in what she said was a first for the sector in Australia.

The fund size of A$150 million-A$200 million is also the “perfect” ticket size to sell as a bundle to a larger institutional investor at the end of the fund’s life, she added. “We speak to those investors and we’re know they’re interested in it,” she said.

On returns for investors, Nguyen said: “During the fund term, the yield will be 400-450 basis points above the Reserve Bank of Australia cash rate – then at the end there’ll be an exit dividend that will occur because of yield compression when we sell the portfolio. There’s a nice little uplift piece there as well which you don’t tend to see in debt funds.”

Looking small

Nguyen explained that FREIF will target smaller projects because they are more resilient in the current energy policy environment in Australia.

“The two key risks we’ve been experiencing and will continue to experience for a little while longer while the regulatory framework sorts itself out are [changes to] Marginal Loss Factors and contractor failures. Our view is that these smaller projects have a competitive advantage on those technical elements: they can be located closer to where the load is in the grid which allows them to be more MLF-resilient, and then they also have a faster connection process and lower cost, bringing down construction time and increasing the certainty of the delivery of the project,” she said.

“[The fund] has very much been designed around where the renewables market is going in the short term and our understanding of the market. My team are all renewable energy experts, we’re not generalist fund managers, which allows us to understand the market and identify the risks in projects to make sure we mitigate them appropriately.”

On top of this, she added, the fund’s debt investing strategy means it is also inherently less risky than equity funds.

Nguyen was also bullish about the prospect for Australian renewables more generally, despite concerns expressed by some investors in recent months about the market.

“We have an ageing coal fleet in Australia that will come offline, as its operating and maintenance costs are going up. New-build coal is simply not competitive with renewables plus firming capacity. That’s a fundamental driver of the renewables market that will continue. Regardless of what government does, we will still require more renewables to come into the system and there’ll be increased penetration. We’re not reliant on external or third-party forces to have a growing market,” she said.

UK-headquartered Foresight Group intends to launch its first Australian equity fund in early 2020 and has a plan to launch more equity and debt funds in the years to come.

The firm entered the Australian market in February 2017 with the acquisition of the 25MW Barcaldine solar farm in Queensland, followed by the 110MW Bannerton solar farm in Victoria in September 2017. It then acquired three under-construction projects from Canadian Solar in October that year, taking the portfolio’s combined output to 252MW.