The power of diversification

Setting up a renewables business requires more than putting a finger to the wind. Much analysis goes into figuring out on which hills the wind blows strongest or in which field the sun really shines. Working out timings is just as crucial, so that your facilities are ready when the elements are most active and on standby when they’re not. In a nutshell, renewables-focused entrepreneurs need a very fine sense of time and place to succeed.

It may seem odd therefore that John Laing, the UK developer, chose March 2014 and London to launch its environmental fund. The IPO of John Laing Environmental Assets Group (JLEN) came in the wake of a flurry of renewables listings in the city last year: The Renewables Infrastructure Group, Bluefield Solar, Greencoat UK Wind and Foresight Solar Income Fund all raised hundreds of millions of pounds in 2013. And competition for green-focused capital doesn’t seem to abate, with Ingenious Clean Energy also floating in March and some of last year’s funds soon to return to the markets.

Yet David Hardy and Chris Tanner, co-head of JLEN, sound undeterred. The launch is not a response to the market, they say. “We’re at the stage now where we have a lower risk, operational portfolio that lends itself well to going into a listed vehicle,” Tanner explains. It also happens, Hardy follows, that it was a good time for John Laing to free up some cash for new investments. “The timing of the launch fits with John Laing’s overall business strategy and the development of its Environmental Infrastructure portfolio.”

But there’s another reason why John Laing feels confident it can stand out from the pack – and one that has likely been used as a motto during Tanner and Hardy’s roadshow. While vehicles generally viewed as their competitors are largely focused on wind and solar, JLEN has a broader mandate. “It’s an environmental infrastructure fund. That includes renewables but also waste processing and wastewater technologies,” Tanner says. “As a result we have a number of different technologies and revenue streams and that’s a real differentiator.”

Organic growth

John Laing, traditionally focused on social infrastructure, received a strong boost when the government launched its Private Finance Initiative (PFI) programme in the mid-1990s. The developer acquired solid experience in negotiating contracts and designing, building and operating public facilities such as schools, roads and fire stations. The company sold its construction business later on – but kept its investment capabilities, with a focus on public-procured assets.

Its involvement in environment-themed assets, Hardy explains, was a natural evolution of the business. In 2004, the UK government launched a series of waste PFIs, and John Laing saw great potential in applying its bidding expertise in a new area for public-private partnerships. This gradually led it to look at energy-from-waste and biomass assets, and entrepreneurs soon asked whether they’d consider investing in wind and solar. This was not a straightforward move – but the team forged on regardless, making its first investment in 2012.

“There are plenty of skills that are common to each of these sub-sectors of environmental infrastructure. Wind and solar projects require contract management, investment appraisal and financing skills in the same way that longer-established types of infrastructure project do. These are all skills that the JLEN team and John Laing have in abundance.” Perhaps more of a challenge was mapping out the projects’ revenue streams, Hardy notes. “We needed to spend some time understanding the power market and the incentives behind green energy.”

The decision to roll out these assets in a listed fund, announced in February, also owes a lot to John Laing’s history in social infrastructure. In October 2010 the firm raised £270 million for John Laing Infrastructure Fund (JLIF), a London-listed vehicle to which it sold a collection of mature social infrastructure assets. It is now aiming to replicate JLIF’s success – the fund raised another £242.3 million last September – with its portfolio of environmental assets.

A broader appeal

With a target of between £160 million and £174 million, the fund will most likely be smaller than JLIF (the results of the issue were due shortly before Infrastructure Investor went to press). But just like its elder cousin, JLEN has much of its prospective money already committed to a varied portfolio of seed assets.

These will include the Tay wastewater treatment plant; the D&G and ELWA waste processing projects; the Bilsthorpe, Castle Pill & Ferndale and Hall wind farms; and the Amber Solar project. Should the fund reach the upper end of its target bracket, it will also acquire the Branden solar farm. All these projects, based in the UK, are fully operational – with completion of their acquisitions expected shortly after conclusion of the fundraising.

The forthcoming pipeline looks equally appealing: JLEN will have ‘right of first offer’ on an estimated £185 million of John Laing assets. It will also be open to transactions with third-party vendors, a potential pipeline on which Hardy and Tanner find it hard to pin a figure. “We could do as much business as our board of directors and investors wants to. If we can grow with assets that meet our investment policy and help meet what we promised to investors then we will – but we haven’t set ourselves a target for growth.”

What is being explicitly targeted by the fund, however, is a 7.5 percent to 8.5 percent return (net of fees) and a stable dividend of 6p a year, indexed on inflation. While this is in line with the promises made by many of its renewable peers, investors may be surprised that the team responsible for delivering such results only comprises three full-time members – including Hardy and Tanner. But the fund intends to capitalise on the industry knowledge, analytical capabilities and back office resources of its parent group – something its co-heads think will provide another point of differentiation for the fund.

Green future

But Tanner has other ideas about what it can do to further stand apart from the competition. “On day one we’re fully invested in onshore wind, solar and certain waste and wastewater processing technologies. But we can see other technologies like energy from waste, biomass and possibly some hydro coming through to add further diversification to the portfolio.”

Will this mean bringing materially different assets under the same label, at the risk of diluting the fund’s original strategy? Hardy thinks not, because the team only intend to invest in clearly defined sub-sectors of the environmental space. “Assets in waste processing use tried and tested technologies. Perhaps things are done better and facilities are more integrated now but the technologies have good track records of performance.”

As a counter example, he notes that one entrepreneur is currently looking to raise £150,000 for a tidal power facility. “We’re not going into these projects until they have demonstrated that they can deliver stable operational performance. We don’t want to dramatically change the fund’s overall risk profile.”

Which doesn’t mean emerging technologies won’t become a bigger slice of the opportunity in years to come: Tanner thinks they could bring fresh business in the longer term, potentially within three to five years. And the growing diversity of environmental assets out there will surely entice JLEN back on the fundraising trail – although probably not before another 12 to 18 months have passed, he says.

“We don’t want to come back to the market too quickly, certainly not before we pay our first dividend. It’s important investors can see we do what we say.”