Silly season – WIR

Just as the skies were clearing, macroeconomic turmoil has thrown another chill over Southern Europe. Yet there are good reasons for investors not to abort their trip.

Southern Europe's sunny climes have long been a magnet for holiday-goers continent-wide. And with heat records topped in Spain, Italy and Portugal over the last two months, the trend doesn't seem ready to abate.
Yet after a few weeks when things have looked a bit too hot in Greece, investors are balking at joining in the latest fashion: Southern European solar energy. Or at least that's what recent developments in the sector seem to indicate.
In late July, UK fund manager NextEnergy said it would postpone the listing of its €500 million solar vehicle, which seeks to aggregate solar assets mainly in Spain and Italy. A week later, Bluefield Partners , a London-based rival, delayed the €400 million IPO of a similar vehicle. That left Luxembourg-registered Quercus Assets Selection as the only fund manager fundraising in Southern Europe, following the launch of an unlisted €150 million wind vehicle in June.
This came in contrast to the improving outlook enjoyed by the region, a reality investors have awakened to over the last 12 to 18 months. As governments boasted healthier finances and economic prospects, friendlier regulators and a pick-up in demand created the right environment for them to consider making the journey. Coming after the Financial Crisis and the regulatory mishaps that followed – with the renewable energy sector a prime victim – that was a relief.
Just looking at deals closed in recent months seemed to confirm this vision. In March, Madrid-based GED Capital agreed to buy the infrastructure fund management business of Ahorro Corporación, an investment company headquartered in Barcelona. “This new business area has a strong future ahead both at national and European levels,” commented Felix Guerrero, the firm's executive vice president, upon doubling GED's assets under management to more than €700 million.
International players followed suit in demonstrating their enthusiasm for the region, with Allianz Capital Partners teaming up with Canada's Bastion Infrastructure in May to buy three metro concessions in Spain. France's Ardian then signed an agreement with Portuguese developer Ascendi Group to own and operate five motorways in the Iberian country.
So what to make of the recent climb down by fund managers interested in the region? Not too much, suggests Michael Fronte-Friedheim, chief executive of NextEnergy.
Investors' concerns, he told us this week, seem to result from a unique combination of factors. Of course, there was the EU's brinksmanship over Greece. But there was also the uncertainty surrounding possible rises in US interest rates, compounded by the Fed's ambiguous language, and their likely impact on investment companies driven by yield.
Add to this the UK summer budget, which came with retroactive cuts to renewable subsidies, as well as difficulties within the US' yieldco sector and the crash of China's stock market, and you understand why in July IPOs were not flavour of the month.
How long such factors will hold is of course hard to know. But it's worth noting that the region retains a number of attractive characteristics for investors. For one, Southern European infrastructure markets at large, and the renewable sector in particular, are ripe for consolidation: insiders continue to describe them as fragmented and inefficiently structured. But while sellers of assets abound, keen as they are to refocus on their core business and raise cash, prospective buyers remain sparse.
This has not been lost to every fund manager: Morgan Stanley Infrastructure agreed to invest in Milan-based Ital Gas Storage in July, and Italy's F2i closed its second vehicle above its €1.2 billion target later the same month. Meanwhile a study by Linklaters singled out Spain for its steady progress in making electricity regulation more stable and fit for purpose.
Investor caution is warranted: arrangements drawn up in the aftermath of the Financial Crisis, some of which seemed overly generous, may not last forever. But with the heatwave now drifting away from European shores, investors should keep calm and carry on exploring the continent's Southern tip.