Making a clean break

Capital Dynamics has put itself in the vanguard of what it believes is a major new investment theme

All the talk is that heavyweight investment groups have green infrastructure on their radars and are preparing to back up their environmentally friendly talk with plenty of capital. For the first real sign of this you might want to consider the evidence emerging from the picturesque town of Zug in Switzerland.

This is the base from where alternative assets giant Capital Dynamics, with $21 billion under management in private equity and real estate funds, has announced that it will be moving into the clean energy infrastructure (CEI) space with an investment team headed by Novera Energy founder David Scaysbrook. Scaysbrook, a speaker at PEI’s recent Responsible Investment Forum in London, has plotted the investment thesis with his former Novera sidekick Rory Quinlan, who has also joined the new team at Capital Dynamics.

While acknowledging that regulatory unpredictability may trigger the occasional investor palpitation, it should be borne in mind that governments ultimately have to remain committed to clean energy

As yet details of how Capital Dynamics will launch into the space are scant, but the firm, which typically invests through funds of funds, says that it will be investing directly into CEI. The raising of a fund may presumably be expected in due course.    

In conversation with the firm, it is clear that it sees CEI as a huge opportunity. Indeed, one source described it as an emerging asset class in its own right – a big claim indeed. The same source expressed the view that three different types of investor would be interested in the proposition: managers of “classic” institutional portfolios would likely commit (perhaps equally) from their private equity and infrastructure allocations; so-called “thematic” investors would be attracted to the renewable energy theme; while other investors are expected to commit funds in order to comply with ESG (environmental, social, governance) principles.

So why does Capital Dynamics apparently have faith in CEI being the ‘next big thing’? It could be argued that, at the current time, such a view is counterintuitive. After all, faced by huge budgetary deficits, some countries seem to be taking the view that they can no longer afford to be quite so generous in their support for renewable energy. On page 9, for example, we report on investor concern that the Spanish government might withdraw its extremely attractive solar subsidies – not just going forward, but also retroactively.

To some, this only serves to underline the regulatory risk of this kind of investing. This, indeed, is part of the reason why Capital Dynamics says it currently prefers clean infrastructure to cleantech – it would not want to layer technology risk on top of regulatory risk.    

But while acknowledging that regulatory unpredictability may trigger the occasional investor palpitation, it should be borne in mind that governments ultimately have to remain committed to clean energy. In the European Union, this is partly do with meeting the target of producing 20 percent of electricity from renewable energy sources by 2020. But it also stems from the issue of energy security. Countries not wishing to be forced into reliance on other (perhaps politically unstable) regimes for their energy supplies may have no option other than to accelerate domestic renewable energy production.  
For this reason, Capital Dynamics believes CEI is a durable investment strategy. Crucially, it is also considered to be commercially compelling. Although cynics may recoil at the suggestion that CEI combines the steadiness of investing in infrastructure assets with private equity-like returns (doesn’t that sound just a little too good to be true?), there are decent arguments in favour of setting scepticism aside.

After all, it is possible to build clean energy infrastructure which is generating energy and channeling it into the grid – thereby yielding a return – within months. Plus, clean energy generates carbon credits –which you don’t have to work hard for and whose value will be expected to increase. Plus, there is every prospect that, when it comes to the exit, you will find willing buyers in the form of utilities forced by regulatory pressures to invest in renewables.

These compelling characteristics have not gone unnoticed by the savvy investors from Zug. Expect other investment groups to also discover the magic ingredients of the CEI space in the months and years to come.