When an entrepreneur sells their business, what do they do next? Sit on a luxury boat somewhere with a stunning view, sipping cocktails perhaps? Well, maybe for a while – but, in many cases, only for as long as it takes to identify the next business opportunity.
Towards the end of 2009, David Scaysbrook oversaw the sale of the business he had founded – renewable energy developer Novera Energy – to private equity outfit Terra Firma in a deal reportedly worth £112 million (€132 million; $174 million).
A mere six months or so later, up popped Scaysbrook as managing director and head of Switzerland-based Capital Dynamics’ new clean energy and infrastructure (CEI) investment team. And – no surprise – here was a man with a plan.
On a broad view, Scaysbrook thought there would be growing demand for renewable energy in both the developed and developing world. And, with the decline of equities, investors now wanted yielding alternatives – therefore, Scaysbrook sensed that real asset allocations would increase.
The PE/infra gap
At more of a micro level, he saw a gap between the renewable energy approaches of (mostly US-based) energy-focused private equity funds, on the one hand, and infrastructure funds on the other. The private equity funds were “not specialised, they were energy investors doing a bit of renewable energy. And they were portfolio investors, with a view to exit”.
The infrastructure funds, meanwhile, “had not done much in renewable energy projects except buy existing assets”. Scaysbrook saw a neglected opportunity for investment in what he describes as the “asset creation cycle” and the moulding of tailored strategies on behalf of institutional investors. This was the sweet spot that Capital Dynamics would set its sights on.
The next decision was which sector to focus on first? The answer to this question became clear with the raising of a US solar fund, which closed on $282 million around the middle of 2012. Scaysbrook, seated in Capital Dynamics’ plush West End office in London, describes the rationale thus:
“There was an opportunity to move early and get above average rates of return for low risk. We thought the simplicity would be attractive to limited partners (LPs), but it was a nascent market so we needed to provide some education. The strategy was to get involved in late-stage development and construction. The market offered a very significant added return for those able to invest capital at the construction phase.”
Indeed, Scaysbrook relates that, of around 50 projects backed by the solar fund, “all but nine” have seen involvement by Capital Dynamics during the construction phase. He says roles performed by the firm have included procuring equipment, putting in place operational teams, and monitoring and overseeing solar assets.
Summing up the CEI team’s experience with the fund, which is now almost fully invested, Scaysbrook says: “We found good deals early, got involved in the construction and took advantage of investment incentives. And we did it without debt with a view to refinancing when we were done. We’re moving into that phase now.”
Front of mind for many an infrastructure fund manager is how to create a product attractive to pension funds. Boasting near-term cash yield, a period of only three to six months from draw down of capital to first revenues, low risk and diversified off-takers, Scaysbrook believes the firm’s US solar investments fit the bill nicely.
He believes that pensions “underestimate the extent to which they are competing with each other” when seeking to go direct. “They are concerned about deal flow but for all excluding the largest institutional investors with truly global reach, only a relationship with a GP will give them the access they want.”
He adds: “GP remuneration has to be reconciled with a 20-year asset with modest cash flows. Some firms have been paid carried interest out of asset re-valuations and that is potentially a conflict of interest. Moreover, performance fees that were paid pre-Crisis have not tended to be recouped by investors when assets have been re-valued down post-Crisis. There has been no claw-back.”
Scaysbrook says that the remuneration of his team is not linked to the value of the assets; hence, the valuations that are produced for investors are purely for information.
Even taking into account the difficulties of alignment that his own firm has sought to overcome, Scaysbrook holds far from a negative view when it comes to the future of infrastructure funds. He believes that pensions “underestimate the extent to which they are competing with each other” when seeking to go direct. “They complain about deal flow but only a relationship with a GP will give them the access they want.”
This is not to say that Capital Dynamics will not consider more tailored arrangements. Indeed, the firm runs a separate account for an unnamed UK local authority pension fund which has invested in landfill and coal assets. “The fund structure is to maturity,” he says. “There is not a view to disposal.” He adds that the account acquired “existing assets at an attractive valuation” and that “landfill was close to our heart through Novera, which had a lot of landfill gas assets”.
In the future, Scaysbrook says the CEI team is unlikely to do more separate accounts “that are not related to support of the fund programme” but does not rule out a co-investment element. “There may be a high quality asset that does not fit the fund but is still attractive.”
And when it comes to service offering, no longer is Capital Dynamics focused on the US solar strategy that acted as its springboard. “In US solar, an opportunity was available for a limited period for above average returns,” says Scaysbrook. “Now the return opportunity has contracted materially. It may still be viable but it’s a different product design; you would do it in a different way.”
Instead, the firm is shifting its focus to several markets (that will provide currency diversification) where there are similar thematic plays. “We have teams in Europe, North America and Australia where we can choose to deploy our capital according to where a window is opening or shutting,” says Scaysbrook. He adds that the firm sees opportunity in areas such as onshore wind, solar, biomass, small hydro, gas-fired generation and peaking.
According to market sources, Capital Dynamics is currently around halfway to a target of $750 million for a new fund, which is aiming for a final close around the second quarter of next year. If there were ever a time for Scaysbrook to put his feet up for a while, it’s unlikely to be now.