Quenching Germany’s ABS thirst

What looks like a private equity investment but has returns like fixed income? European renewable energy infrastructure funds, at least from the perspective of German institutional investors. European fund managers have taken note.

SUSI Partners and Luxcara are, respectively, a Swiss and German fund manager raising their second and third renewable energy vehicles. The funds share many common traits: they are both targeting European wind and solar projects; they are both targeting German institutional investors, particularly insurers; and, crucially, they are both targeting the latter’s asset-backed securities (ABS) quota using a special securitisation option.

Speaking to sister publication Low Carbon Energy Investor, SUSI chief executive Tobias Reichmuth explained what first prompted the Swiss fund manager to offer the securitisation option for the SUSI Renewable Energy Fund II, which is targeting between €300 million and €500 million:

“This was asked for by German insurance companies. They were telling us that we have a vehicle which for them is like a private equity investment, but with a bond risk/return profile. So they asked us to help book it as a bond. We talked it through with our lawyers and concluded that the easiest way is to offer the fund as a securitised product. And that’s what we did.”

To make it work, SUSI set up a Luxembourg-based securitisation company that buys a stake in the SUSI Renewable Energy Fund II. The securitisation company then issues investment-grade bonds to interested investors, collateralised against the company’s assets. To hedge against the years where you have less wind or sun, the securitisation company offers a fixed annual return that is not guaranteed. That way, if the return isn’t met, the bonds don’t default.

“The great thing about the securitisation option is that it allows investors to book investments in the fund via their ABS quota. That is a largely untapped pool of capital among German investors, which are allowed to invest 7.5 percent of their portfolios in ABS. But at the moment they are not doing that because they don’t see any attractive ABS deals.”

Luxcara managing partner Kathrin Oechtering, which is raising a third €250 million renewable debt fund, is also making use of a similar structure:

“The fund offers institutional investors two alternative access options: a direct investment in the fund as a limited partner, or the option to indirectly obtain exposure to the fund through a registered bond with a fixed coupon and a variable component issued by a securitisation vehicle. The note shall have an investment grade rating and allow German insurance regulated investors a qualification of the investment as an asset backed security. The note is also an option for investors that cannot or do not want to invest in the fund directly, such as investors investing through German special funds.”

As one German lawyer explained, the “repackaging” of these two renewable funds as ABS investments seems largely a play to capitalise on the ABS quota defined by German investment regulation. Importantly, he also highlighted that this kind of securitisation option might have a somewhat limited shelf-life, considering that Solvency II is about to enter into force.

“Note that the German Investment Regulation will apply to most German insurers only through the end of 2015. As of January 1, 2016, most German insurers will become subject to the Solvency II rules instead. Only the smallest insurers, in particular those with a premium income of less than €5 million annually, will continue to be subject to the German Investment Regulation.”

The use of the structure comes at an interesting juncture for the European ABS market. According to the Association for Financial Markets in Europe, only €217 billion of asset-backed debt was issued in Europe in 2014, compared with $1 trillion in the US last year and a European high of €819 billion in 2008. But European policymakers are now seeking to revivify the ABS market, which may be good news for other fund managers wanting to replicate this structure.