Fundraising is underway for NTR and Legal & General Investment Management‘s first joint clean energy vehicle, which is set to be markedly bigger than NTR’s previous undertakings, senior leaders from the two firms told Infrastructure Investor.
The new L&G NTR Clean Power (Europe) fund – LGIM’s first infrastructure equity vehicle – will invest in opportunities in wind and solar in the wider Eurozone, with up to 20 percent of the 10-year, closed-end vehicle allocated to non-eurozone assets (e.g. the UK).
The fund is coming up to first close, although the partners declined to disclose its size or the target size of the vehicle.
A good match
“We’ve been looking at the energy transition opportunity for some time, partly based on the growing and demonstrable investor demand that we see, and partly because there is a very exciting opportunity to fund into a space where private capital is going to become more important against the background of an indebted public sector.”
“LGIM has got a client base that absolutely sees the appeal, and NTR has a business with a proven track record and deployment,” Hughes adds.
NTR’s chief executive, Rosheen McGuckian, is equally keen on the partnership: “We’re a specialised team that is quite independent and quite nimble. We recognised that funds are getting bigger, and we wanted to accelerate our growth whilst keeping that independence and speciality. We felt that the best way to achieve that was to partner with someone who could bring additional institutional appetite and access to institutions, and take on the stewardship while leaving us to focus on what we like to do and do very well: accessing the transactions and then develop, construct and optimise the assets.”
The new fund will be significantly larger than previous NTR vehicles. Is 2018-vintage second fund – which was originally targeting €500 million and closed on €350 million – is now 95 percent committed.
Looking to profit
L&G NTR Clean Power (Europe) is targeting returns in the “high single digits”, McGuckian told us.
The target investment period is less than four years. “Investors are interested in confidence about deployment as they don’t want to be held in a queue for a very long time,” says Hughes, who’s seeing global interest in European renewables.
“There’s a lot of commitment in Asia to this particular energy transition story. We’re seeing a lot of capital and there are large pools of capital there that want to export into other markets,” Hughes explains.
The average ticket size will be between €30 million to €100 million, and the level of debt to equity will be lower than in previous NTR funds.
“Even before interest rates started to go up, we had assumed a lower debt-to-equity ratio than previously, given there are slightly more merchant revenues in the mix. Merchant revenues tend to correlate with inflation but you would want to take a more conservative approach to the amount of debt, to allow for any movement in power prices. Also, debt is more expensive than it has been in recent years and a lower debt structure is preferable to maintain net yields for investors in the earlier years,” says McGuckian.
Regionally, the fund will steer clear of Europe’s renewable champion:
“Germany is not a core market for us. While it is a very large market, it’s quite fragmented in terms of scale and size and, to be frank, we can get better returns in other European markets,” says McGuckian.
“We are already in Sweden, Finland, France, Italy, Ireland and the UK, and the intention would be to build on those markets,” she adds, though she’s keeping her options open for adding another country or two for the new fund.
The new fund will be Article 9 under the EU’s Sustainable Finance Disclosure Regulation framework. The strategy is to go for mainstream core and core-plus technologies. So while energy storage is included in the prospects, this will first and foremost mean battery storage.
“At this point in time, we would find it difficult to find a hydrogen project that we could say is proven and fully commercialised, but we are allowing ourselves to keep the optionality open for hydrogen and ammonia, etc, if it’s commercialised and proven within the investment period, says McGuckian.
There is likely to be more wind than solar developments in the portfolio, she adds. This is down to solar providing slightly lower returns than wind, and also because wind developments have more social impact given that they deliver more MWh.
The fund will predominantly focus on onshore wind, but there’s an allowance for some offshore, most likely at the operational stage, McGuckian adds. And all will be the deepest shade of green.
“Article 9 is a very important aspect of this fund for investors,” says McGuckian. “They will have different allocations, obviously in broader infrastructure and maybe energy generally, but so far as they’re looking for clear, dark green social impact, that’s where we fit firmly within their portfolio.”