Infracapital: Create and rennovate amid the energy transition

The energy transition lies at the heart of both greenfield and brownfield infrastructure investment strategies, says co-founder and head of Infracapital, Martin Lennon.

This article is sponsored by Infracapital

What are some of the interesting investment opportunities being driven by the energy transition, outside of renewable energy generation today?

We are seeing a wide breadth of opportunities in the market today that go far beyond mainstream renewable energy generation. We’re finding exciting opportunities in sectors which have traditionally been difficult to decarbonise and it’s here we feel we can add real value. A particularly interesting theme gaining momentum is energy storage, focused on capturing excess or waste energy and repurposing it efficiently.

Martin Lennon

We recently invested in a business called EnergyNest, which captures surplus heat generated by industrial customers and stores it for when it is needed, with the additional possibility to be converted into electricity. The thermal battery solution can also assist in storing renewable energy, when generation levels are high, helping to address the intermittency imbalance. EnergyNest is a very entrepreneurial low carbon, effective solution with many different applications and I suspect we are only just scratching the surface of it’s potential.

Another opportunity that we see is around the decarbonisation of transport. The shift towards electric vehicles is obviously integral to the energy transition, and there is a huge need for infrastructure to support that. As an example, one of our portfolio companies, Zenobe, is a market leading owner and operator of battery storage and electric vehicle (EV) services. Zenobe serves around 20 percent of the EV bus market in the UK and currently services nearly 300 electric buses. We see real potential for both domestic and international growth for the business which has already made its first foray outside of the UK.

Do you think about the energy transition primarily in terms of greenfield development, or in terms of transitioning existing infrastructure assets?

The answer is both. Our greenfield strategy is of course typically closer to the cutting edge of some of the most impressive modern-day solutions when it comes to the decarbonisation agenda. It is all about creating new solutions or applying modern technologies to old solutions. I would struggle to point to anything in our current greenfield pipeline that doesn’t seem to have a compelling sustainability impact.

But the same is true of the brownfield strategy; there is a critical role in transitioning and evolving established companies to adapt to changing times. Two interesting examples in our portfolio would be GB Railfreight, our UK railfrieght business, and BCTN, our inland shipping operator in the Benelux. One train takes approximately 70 trucks off the road, while for a single barge that figure increases to 100 trucks, representing a carbon emissions savings of around 75 percent when compared with traditional road haulage.

Unsurprisingly, responsible businesses that are thinking about their own emissions are looking at their logistics chain, which means we see significant growth in demand for these transport assets as a result. While this is clearly a step in the right direction, there is still more that we can do. We are actively working with both companies to look into electrification or hybrid engines to be used in their own activities, and if that isn’t possible, what alternative options are feasible.

A lot of institutional investor capital is being deployed into ESG themes. What impact is that having on competition and how can you continue to deliver the returns you have promised in that context?

It feels as though the market has been becoming more and more competitive every year, certainly since the financial crisis. We remain focused on buying well and one of the ways we seek to stay ahead of the market is by taking a proactive approach to deal origination, sometimes working to uncover opportunities over several years.

We see a good pipeline of dealflow stemming from leveraging relationships with entrepreneurs, corporations and developers, months or sometimes years before a situation comes to fruition. In some circumstances, initial conversations with a company may have proven, to be a little early for us – where, say, the technology was still too immature or the business case unestablished. In those situations, we are happy to give help and guidance, for example to suggest that if certain changes take place, we would be happy to engage fully and look to progress to a transaction. This has resulted in a successful deal occurring sometimes some years later.

We can add value for our investors by always being aware of where the bigger picture is heading. We have experienced a number of successes stemming from understanding where value may be under threat or falling out of the marketplace and where value may be represented in a new opportunity set. Over the years, we have been early investors in sectors like ports, smart metering, district heating and fibre broadband. Once those sectors become mainstream, that early-mover advantage fades away, but the recalibration on pricing is advantageous for us from a value or exit perspective. We are always looking out for new, interesting developments and attempting to avoid competition where we can.

Focus on ESG has increased dramatically. Do you think the emphasis still primarily falls on the E, or are social and governance factors playing a more important role?

All three aspects of ESG are equally important, for both ourselves and our portfolio companies. In 2020, we ensured all our portfolio companies had a standing board agenda item for ESG, which is used to review specific areas of focus. When you consider the diversity of industries and countries involved, it is an big achievement to have all businesses focused and caring about these matters in the same way that we seek to do. Since then, we have been organising workshops for our executive teams, enabling them to share best practice and experiences, and providing our management teams access to sustainability-related material and trainings.

It is critical that they understand how important this is for Infracapital and our investors, but also how they will benefit from better incorporating ESG practices into their companies. Governance is also a key, sometimes overlooked, limb to responsible investment. When implemented effectively across portfolio companies, it provides consistency, accountability and transparency in how business is conducted – and we see that translating to value and downside protection. We have come a long way, certainly, although there is always so much more that can be done.

What about diversity and inclusion? How big a concern is this today and how are you incorporating these factors into your investment and asset management process?

Both the infrastructure investment industry and the subsectors of infrastructure where we deploy capital are typically very white male-dominated and that is something we have to work hard to address. As a starting point, we think it is important to set the standard and start by putting our own house in order. We pride ourselves on being a diverse team of more than 60 investment professionals, comprising 23 nationalities and 26 different languages spoken. Yet, we recognise this is an evolving target and that the job isn’t done. We are striving for continued improvements, particularly when it comes to gender balance.

“We are seeing a wide breadth of opportunities in the market today that go far beyond mainstream renewable energy generation”

Part of the problem is a structural challenge around availability of quality candidates, particularly at a more senior level. The talent pool is simply smaller than it needs to be to rebalance and so you have to think laterally. One solution is we continue to explore hiring opportunities in adjacent industries where there may be a higher female or ethnically diverse representation and an overlap in transferable skills.

And when it comes to entry-level talent – putting the building blocks in place for the future so that these challenges abate over time – there is a really exciting opportunity to engage with students. Something we think about carefully is social mobility: how can we promote more diverse students into our industry? Currently, we are prioritising education about the infrastructure industry and promoting internships and apprenticeship programmes targeting social mobility candidates. We also continue to enhance our recruitment and retention policies to promote ethnic minority representation. In 2019, we established the Infrastructure Industry Foundation together with industry peers, which will be launching a social mobility initiative to encourage and assist a more diverse pool of talent into the infrastructure industry.

What do you see as the biggest challenges and opportunities facing this industry going forward?

We hope that restrictions on meeting in person and on travel will soon ease, because this is still a people business in many ways. Nonetheless, we will also continue to do more remotely in a bid to reduce our carbon footprint. Sustainability is something that we will need to continue to be mindful of in everything that we do.

“We continue to explore hiring opportunities in adjacent industries where there may be a higher female or ethnically diverse representation and an overlap in transferable skills”

Another key challenge in this fast-evolving sector is the risk of stranded assets. Assets can become obsolete for many reasons, including new technology that comes in and replaces what is already there, or if there is a change in economic or public policy direction. Additionally, the recent proliferation of sustainability regulation has the potential to intensify stranded asset risk. Going forward, it is possible that there will be very few infrastructure funds classifying as anything less than Article 8 under SFDR, if not already considering Article 9. If you are selling assets that don’t work for those classifications, the capital pool is likely going to become materially smaller.

What we try to do is match available opportunities with our clients’ needs, whilst always being aware that those needs are changing. As long as we can continue to create those happy marriages, with one eye looking forward and another over our shoulder, I think it will continue to be a very exciting time for the infrastructure world.