In any given month, Wattle Partners meets with many different professionals offering a new investment product, idea or scheme. Most are a pass from us, but now and again some pique our interest.
This month, we met with Foresight, a UK-based renewable energy specialist investor focused on the providing debt to a diverse range of assets.
Foresight is one of the world’s leading renewable energy investors with 34 years of experience and $7.1bn in assets under management across Europe and Australia. They are owners, operators and financiers of key strategic energy projects.
Foresight offers a unique opportunity to gain an exposure to the renewable energy sector from the position as a debtholder, rather than an equity investor. The majority of renewable energy investments are focused on equity investment, meaning you are exposed to some operational, production and legislative risks. This Fund sits at the opposite end of the capital structure and offers investors a consistent income stream secured by both the operational businesses and physical assets. Importantly, management demand strong financial covenants and have the expertise to foreclose and operate any assets as required. Foresight has an extensive track record in Europe, where it is the second largest owner and manager of solar assets and the largest owner of grid connected batteries. Their experience including managing the construction, operation and exit phases of any asset sets the business apart from many domestic competitors.
Why Income Bucket?
The fund meets the requirements of the Income Bucket as it is targets an annual return of 4.0 to 4.5% over the RBA Cash Rate during the five year term of investment. As a debt holder, this income will be paid quarterly from establishment, representing the payment of interest and repayment of capital and has limited reliance on the success of the underlying assets into which it will invest. The fund will originate 10 to 20 senior secured loans each year to smaller scale renewable energy projects in Australia, all of which will be amortised over the life of the loan. The fund will benefit not only from loan repayments but also arrangement and commitment fees paid by the individual projects for the establishment of each loan.
Performance & Top Holdings: Foresight is the first of its kind in Australia and will be extending loans following its first close, hence performance and transparency into the underlying assets is limited. That being said, since 2009 Foresight has deployed $3bn of capital into 192 infrastructure assets, 32 construction and 160 operational, delivering an IRR of 10%. The fund already has several assets under management, including Oakey 1 (30MW) & 2 (70MW) in Queensland and Bannerton (110MW) in Adelaide. The fund will be diversified across various renewable energy sources including solar, wind, bio energy, energy efficiency and storage, and currently has a pipeline of over $450m in potential loans ready for deployment.
Reasoning: Private infrastructure debt investments are generally restricted to institutional and sovereign wealth investors but offer some of the most consistent, risk-adjusted returns in an increasingly volatile market. Whilst debt investing into renewable energy projects is common overseas, as with most similar strategies, it has yet to become established in Australia outside of the pension fund industry. The fund offers a unique opportunity to access this lower risk sector which Moody’s estimate exhibits substantially lower default rates than non-financial corporate issuers. An investment allows you to benefit from both the illiquidity premium of these smaller solar assets, in the form of higher yields, and the complexity premium associated with undertaking due diligence on said assets; which Foresight has a proven track record of delivering on. Importantly, the private debt sector has shown little correlation with equity markets (0.3), negative correlation with government bonds (-0.1) and no correlation with corporate bonds, meaning it offers excellent diversification opportunities. The fund will have a five year term, with the option for a further two years, and will consider opportunities to exit via the sale of the loan book to larger pension funds, a securitisation or IPO. The target size of the fund is $150m, with a management fee of 0.85% and a performance fee upon exit of 17.5% of outperformance over an IRR of 6%.