Mirova’s ‘riskier’ strategy nets €1.6bn for fifth energy transition fund

The French GP adds ‘upstream’ PE stakes and developing markets to its fifth infra fund, to maintain performance as returns trend lower.

Impact firm Mirova is preparing to take on more risk to maintain returns for its latest infrastructure fund, affiliate title New Private Markets reported.

Mirova has closed Energy Transition 5, an Article 9 fund, at €1.6 billion – smashing its €1 billion target and its original €1.3 billion hard-cap. It is linking 15 percent of its carried interest to sustainability-related KPIs such as avoided emissions, biodiversity, health and safety and gender diversity. Five percent of its management fees will be committed to Mirova’s foundation for philanthropy and social investment.

Although this is the fifth vintage of its renewable energy infrastructure strategy, Mirova has allocated around 30 percent of the fund to “upstream” private equity stakes in renewable energy development firms – rather than the underlying generation assets, Raphaël Lance, the strategy’s director, told New Private Markets.

This is a growing trend among infrastructure funds seeking double-digit returns: KGAL and Asper have inked similar deals in recent years, Infrastructure Investor reported. Mirova has already completed three such private equity deals from ET5. “There is value to be captured further up the value chain. There is strong likelihood that these developers will turn into asset owners,” said Lance.

Why? Returns on renewable infrastructure strategies in developed markets have been trending lower as the market de-risks, said Lance. “In order to maintain the returns – or enhance it a bit – you have to take more risky positions.”

Mirova is also expanding into emerging European markets such as Poland in a bid to increase ET5’s risk exposure and returns, although the majority of the fund is likely to be invested in developed European markets, said Lance. Renewable energy assets in Poland, for example, can generate a premium because “some investors do not dare to invest in Poland” and the Polish government has committed to shifting more of its energy supply to renewables, “so it’s a bit more competitive.”

Moreover, Lance cites a “great need” for investment in renewable infrastructure in Eastern Europe to power the energy transition “because their energy mix is very carbon intensive at the moment”.

Most of the fund’s investors are pensions and insurance companies, and many are investing from dedicated sustainability or impact buckets, said Lance. Twenty-five percent of investors are based in France, most are European and a handful are from other geographies such as South Korea, Japan and North America. “We turned down investors by the end,” said Lance.