Buy, build and sell

Buy, build and sell. Impax Asset Management’s capital gains strategy works at a quicker pace than that of long-term investors in Europe’s infrastructure industry. It’s about “feeding the growing demand” for renewable assets, according to Peter Rossbach, managing director for private equity and infrastructure. And there is growing demand for operating renewable assets, he says, thanks to infrastructure emerging as an asset class, anaemic bond returns and the growing demand for yield from core assets with long-run power sales agreements.
The UK-based asset manager has a long-standing focus on renewable assets, which make up about 75 percent of new build European power generating capacity over the last 10 years. Rossbach has played a pivotal role at Impax since 2003 developing its “buy, build and sell” strategy and navigating through Europe’s changing infrastructure markets and regulatory environments.
His career in energy finance began in 1983 and has included stops at the renewables division of the US Department of Energy, Standard & Poor’s, Catalyst Energy and the European Bank for Reconstruction and Development.

Q – How would you characterise Impax’s private equity strategy in infrastructure?
PR: We sell to a growing group of ‘destination investors’ – such as infrastructure fund investors, insurance companies, pension funds and yieldcos – on top of traditional utility buyers. This investor ‘crowd’ likes long-term operating wind and solar farm cashflows rather than complex biomass facilities. We therefore typically have 10-15 bids for each set of assets where we have signed sales. This demand also acts as a price hedge versus interest rate risk. As the exit market is key to the strategy, if we see deep institutional demand for wind or solar assets in a country, we focus there. We don’t build in Cyprus, Latvia or Croatia for instance.

Q – How is this different from other private equity strategies?
PR: To be clear, we don’t go for assets where returns depend largely on economic trends, high financial leverage or sales to other private equity firms in a ‘pass the parcel’ style. Those strategies entail going further out the risk curve both in execution risk and exit timing.

Q – What are the elements of your ‘buy, build and sell’ strategy?
PR: With growing demand for operating assets, we decided to build new assets or repair and repower existing ones to give a high-quality product to picky and risk-averse institutional demand. Our ‘buy, build and sell’ strategy entails building, adding international standard quality to and cutting risk from assets with long term offtake contracts. As for ‘international quality’, buyers of our assets tell us we get superior operating warranties from suppliers. We also don’t over-lever – our profit comes from quality creation not a leverage game.
Our model is fundamentally a capital gains model, rather than a yield model. The increasing demand for these assets is a validation of, and the source of profit from, our strategy.

Q – Why did you decide to focus on renewables?
PR: Renewables are the largest segment of the new build power sector, making up roughly 75 percent of the generating capacity built in Europe over the past 10 years. The International Energy Agency forecasts renewables will make up roughly 75 percent of power capacity built in Europe through 2020. As renewables are ‘high capex, low opex’ assets, this means they will make up closer to 85 percent of the total capital invested in new build private power assets.
A second point is a trend of technology change reducing costs. Wind and solar power are radically lower cost to build per installed unit of production than they were only 10 years ago. This helps with competitiveness and regulatory stability; it also makes it competitive to deploy in new regions in Europe and the Americas.
The third item is experience. Some of us have been in the sector since the 1980s, so we bring a lot of contacts and experience to bear. Also, our team is deeply experienced across the infrastructure sector and its core lessons, but we like renewables going forward. 

Q – How have your renewables funds been performing? And are you planning to raise a new one this year?
PR: Investors like performance. As we are now ‘dividending’ profits to investors, we are getting good feedback. Impax has managed two renewables funds to date – Fund I and Fund II. Fund I is largely exited but for one portfolio. Fund II has already returned 58 percent of drawn capital to investors1 and is on track to return over 115 percent of money invested by this summer from exits closed or signed2. We’re therefore targeting raising new money for this strategy in 2016.

Q – What kind of returns have your funds been generating?
PR: I can speak about the most recent situation. We’re targeting 12-15 percent net IRR3 for Fund II, which is unique in the infrastructure sector. We still have portfolios in five countries and assets in construction in three. With projects still in construction, we have a great deal of value to create beyond our exits closed or signed to date.

Q – What are the main challenges to your strategy?
PR: It’s all about execution. Fortunately we’re able to manage our risks in-house because we control 100 percent of shares and because we have deep engineering, technical and asset management expertise. Most of our challenges lie in the detail intensity of the business: wind assessment, grid access, turbine choice, and turbine supply and operating contract terms.

Q – So asset management plays a big part in your business model?
PR: Asset management is key because we are an execution-driven business. Execution of the ‘buy, build, sell business’ model involves upgrading permits on sites we buy, identifying a better turbine for a particular site, optimising operations agreements, improving financing from what might have been done by a developer and generally squeezing more value from a project.

Q – How do you manage risk at the larger portfolio level?
PR: The first thing is diversification – diversification by project site, by technology and by country. Typically, no project is more than 15 percent of the fund’s capital, and typically no country represents more than 20 percent. Next is execution management. We like and get 100 percent ownership or we control the board. Third, we avoid lots of binary permitting risk. Less than 4 percent of our investment spend exposure relates to greenfield permit risk.

Q – Utilities have purchased many of Impax’s assets. Do you think that’s because utilities were slow to build renewable capacity or because companies like Impax are better suited for asset creation?
PR: Utilities might be not entrepreneurial enough to develop multiple small-site projects; they’re used to building centralised projects. Utilities still seek projects from us, but importantly utilities are being challenged by the institutional market, as evidenced by our recent sales to Canadian and German financial investors after intense bidding competition.

Q – What would you say to an LP that is considering a generalist infrastructure fund versus a dedicated renewables fund?
PR: Two dynamics are now at work. First is the massive demand increase for long-term yielding assets and with it asset prices are going up and ‘buy-and-hold’ returns are going down. Impax is one of few investors creating new assets rather than just passing the parcel. Therefore, we’re structurally able to profit from rising demand for operating assets. Second, renewables are where asset growth is today and new build private transport has more complex risks to assess.

Q – Are more LPs considering renewables as a separate investment pocket instead of general infrastructure? And what role did COP21 play in this?
PR: COP21 will drive renewable ambitions at government level for the next five to 10 years. Investors are learning that what was once a niche sector is now the dominant sector within the electricity sector at 75 to 85 percent of investment. It’s no longer niche or ‘green’ only. Moreover, from a risk perspective, renewables have no fuel costs, so they avoid much of the commodity volatility that is plaguing infrastructure assets in the oil and gas sector.