SUSI Partners, the Zug-based asset manager specialising in sustainable infrastructure investments, is hitting the fundraising trail as it seeks to raise €400 million for the SUSI Energy Efficiency and Transition Credit Fund.
Described as the “third vehicle of SUSI’s credit platform”, SEETCF differs from its two predecessors since it will also invest in assets such as self-consumption solar PV, heat pumps and smart metering, in addition to the traditional energy efficiency measures SUSI Energy Efficiency Funds I and II targeted.
“The first two funds were largely focused on energy efficiency measures,” co-chief executive and head of clients Marius Dorfmeister, said. “This third product is a natural evolution of the two [previous funds].”
“Given the rising inflation expectations, the need of institutional investors to invest in more ESG-labelled products and the geopolitical environment, I think it’s a perfect time to launch this product now”
Marius Dorfmeister
According to Dorfmeister, the decision to expand the third fund’s remit mirrors the strategy SUSI applied to its equity funds roughly three years ago.
“We decided not to have single pillars – energy production, storage, efficiency – but to combine them under the headline Energy Transition Fund,” Dorfmeister explained. “Now, we are going down the same path on the credit side.”
The launch of SEETCF comes as more than 80 percent of SEEF II, which closed on €289 million in May 2020, has been invested.
“The investment and deployment of the second fund has been really good and delivered in a shorter time than expected,” Dorfmeister commented. “Given the rising inflation expectations, the need of institutional investors to invest in more ESG-labelled products and the geopolitical environment, I think it’s a perfect time to launch this product now.”
Categorised as an Article 9 fund under the EU’s Sustainable Finance Disclosure Regulation, SEETCF, has a 15-year lifecycle and a 6.5 percent gross IRR target.
A financing solution
Alexander Hunzinger, head of SUSI’s credit platform, explained the rationale behind the creation of these credit funds and their structure.
“If energy efficiency is a key tool for reducing CO2 emissions, why is it not applied universally and around the world on a large scale? There are several reasons,” Hunzinger said, including a slow roll-out of energy efficiency measures, small project sizes, and a degree of complexity involved in implementing them.
“On top of that, it’s usually not high up on the priority list of neither corporates nor the public sector,” he explained. “Corporates for example, may have total energy costs on their P&L of maybe 2 to 3 percent. So, it will never be in the focus of the CEO or CFO. It will always be a kind of side story; a nice to have but not a must have.
“Putting all those things together, there isn’t one key reason why there is underinvestment in energy efficiency, but there are a lot of smaller barriers that make it cumbersome. And that’s exactly why we came up with this financing solution,” Hunzinger said.
SUSI teams up with energy service companies that provide technical solutions related to energy efficiency under long-term framework agreements. These agreements include certain underwriting criteria, which if met, SUSI will finance any type of energy efficiency measure as small as €500,000.
“So far, we’ve deployed €490 million across two funds, with the typical size of those projects ranging between €500,000 and €5 million,” Hunzinger said. But the energy service companies aggregate the projects, so while SUSI has deployed capital across 75 transactions, the underlying assets total nearly 3,000 single energy efficiency projects.
“We offer unitranche financing solutions covering 100 percent of the capex needed, basically enabling our partners to get all the financing they need for a project through a single partner – us,” he commented. “However, we do that only in exchange for getting a 100 percent technical performance guarantee over the full tenor of the project – ranging between 10-15 years – and in exchange we assume the credit default risk of the end customer,” referring to the private or public sector entity having the measures implemented. “That way, we have a risk allocation where each party assumes the risk they know best.”
SUSI also receives a significant premium from its ESCO partners for serving as a one-stop-shop for financing.
Hunzinger attributes those companies’ willingness to pay the premium to two factors: the first is that it allows the companies to keep assets off their own balance sheet; the second, is the significant reduction in transaction costs.
“For example, for one of our key clients – Signify [formerly Phillips Lighting] – we offer one single financing solution for 12 different countries. That’s pretty unique and certainly something a universal bank cannot offer them,” Hunzinger remarked.
A drastically changing landscape
While SUSI’s model has been unique until now, Dorfmeister expects “more models like ours” to emerge.
Energy efficiency measures have always been the most cost efficient, “but because of other constraints, such as budgeting and priority settings, they were never taken advantage of”, he said.
“If energy efficiency is a key tool for reducing CO2 emissions, why is it not applied universally and around the world on a large scale? There are several reasons”
Alexander Hunzinger
“Then there was this huge wave of ESG-focused investing, trying to incentivise institutional capital especially, to invest in doing good – that did the trick for a little while but not to the extent that regulators and governments were hoping for. But now, geopolitical turmoil adds another component that leads to a renewed emphasis on independence from problematic or unreliable energy suppliers and the high cost associated with that, which in combination with ESG considerations, creates a positive perfect storm for energy efficiency and other energy transition measures,” he said.
Hunzinger agreed that high energy prices are the strongest driver for investment in energy efficiency.
“We see that in Poland, one of our core markets. Since the carbon emission prices increased strongly over the last years, energy prices more than doubled and our investments in energy efficiency tripled,” Hunzinger said.
SEETCF will primarily invest in Europe “while opportunistically investing in other OECD markets”, according to the statement. Asked which markets SUSI is considering, Hunzinger said the US.
SUSI has already made some investments in the US, a market it sees as having “a lot of potential”, according to Hunzinger.
“Energy efficiency in the US was sort of dormant for a very long time but is now taking off rapidly. What’s interesting about the US is that when it comes to single investment sizes, it’s basically 10x bigger than in Europe. So, it’s super interesting. The long-term vision would be to raise a dedicated US fund at some point.”
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