Gone with the wind

Weather patterns are eminently changeable. So much so that they form the core of most coffee break conversations in the UK – and perhaps more importantly, they can determine the fate of renewable energy ventures. This has not been lost to specialist insurers like GC Cube, which last month launched a Weather Risk Transfer mechanism for the wind and hydroelectric energy sectors as a means to mitigate “the financial impact of resource volatility”. The device aims to improve on the limited array of weather risk hedging tools currently available to renewable power generators.

That could have come in handy for some early movers in the field. Infrastructure Investor last month reported that Carlyle/Riverstone Renewable Energy Infrastructure I, a fund managed by US-based The Carlyle Group (Carlyle) and Riverstone Holdings (Riverstone), had seen its value nearly written off in full as at the end of last year. Performance tables produced by investors in the fund left little room for doubt: the California Public Employees’ Retirement System (CalPERS) says the vehicle’s return multiple stood at 0.1x as at the end of last year.

Focusing on net interim IRRs led to similar conclusions, with CalPERS placing the fund’s performance at -33.6 percent as at 31 December 2014 and the California State Teachers’ Retirement System (CalSTRS) estimating it at -32.88 percent as at end March this year. And it’s not like performance figures only applied to the vehicle’s first few deals, with much of the money still to be invested. Having reached its final close on $685 million nearly 10 years ago, the fund is now fully deployed.

The vehicle has a mandate to invest in the wind, solar, geothermal, biomass, and biofuel sectors in the US, with typical equity cheques ranging between $20 million and $60 million. The exact composition of its portfolio is not public, so it is not possible to assess each of its investments separately. Little more is known beyond its backing of ethanol plants and a geothermal power station, in 2006 and 2008 respectively. Carlyle and CalSTRS did not respond to a request for comment, while CalPERS declined to comment and Riverstone couldn’t be reached before press time.

This leaves us with few tangible facts to help us understand what went so badly wrong. But there are still a couple of credible hypotheses. One is that perhaps Carlyle and Riverstone got unlucky with timing. The fund was raised prior to the Global Financial Crisis (GFC), and started investing just before market panic really began. So perhaps the pre-GFC euphoric mood led it to overpay for assets, and maybe it took on too much leverage which it then found hard to pay down or refinance.

Both may be partly true. But it’s still hard to understand how an investment product that’s described as an infrastructure fund, which to most investors should aim towards lower risk and stable yield, could end up seeing so much of its value being marked down. That perhaps indicates that the vehicle’s strategy had less in common with infrastructure – or at least what is currently labelled as the “core” part of the asset class – than it did with classic private equity. Maybe the fund had ambitious return targets, which pushed it to make riskier bets.

One may have been biofuels. As a 2014 report by consultancy Bain & Company suggests, the sector is probably the one area among those targeted by the fund that has faced the strongest headwinds. A number of factors explain this: rising production costs, inadequate infrastructure for blending ethanol, wavering government support for subsidies and tax credits, waning consumer interest and concerns over impact on food prices. Unless they’ve been especially good at cherry-picking, it’s hard to see how investors would do well by plugging money into this.

We may not be able to push the guessing game much further. But limited partners in the vehicle are unlikely to be content without clearer answers. If they haven’t already, they must now be pushing the fund’s managers to explain why they threw caution to the wind.