SEP fund earns ‘significant’ return with UK gas sale to Arjun

The sale of Indigo Pipelines is the first exit from Scottish Equity Partners’ Environmental Capital Fund, which raised $176m in 2014, targeting a 14% IRR.

UK-based investment group Scottish Equity Partners has sold the first asset from its 2014-vintage Environmental Capital Fund, offloading gas transportation network Indigo Pipelines to Arjun Infrastructure Partners.

Indigo Pipelines became the ECF’s first investment in September 2014 when SEP bought the network then known as SSE Pipelines from the Scottish energy group for an estimated £52.7 million ($68.9 million; €60.4 million).

SEP and London-based fund manager Arjun declined to disclose the purchase price on the latest deal, although SEP told Infrastructure Investor “the return on investment is significant and ahead of the original plan”.

ECF raised a total £135 million from investors such as SSE Ventures, Lexington Partners and the Strathclyde Pension Fund. The vehicle targets a 14 percent IRR, according to documents from Strathclyde. The vehicle is structured through two investment strands – one being the acquisition of the Indigo utilities business and the other acquiring a series of smaller-scale renewable energy projects. It has completed seven investments.

Indigo Pipelines is regulated by Ofgem, which is in the process of introducing proposals to lower returns in the country’s electricity and gas transmission sector. The proposed new regulatory regime was criticised by National Grid earlier this year as too low-risk for transmission companies and “will not offer adequate return for investors”. Jonathan Brearley, executive director at electricity regulator Ofgem, recently said these changes would be adjusted if things were to “go out of kilter for shareholders or consumers”.

Indigo Pipelines is the UK’s third largest independent gas transportation network. It owns about 180,000 gas connections, some 50,000 more than it owned when bought by SEP.

The deal is Arjun’s second investment in regulated UK assets this year, following a 75 percent acquisition of water group South Staffordshire from KKR in April.