As more energy-infrastructure projects seek financing, institutional investors are playing an increasingly significant role not only as lenders, but as energy suppliers. Partnering with the right active manager – one who has expertise in managing infrastructure projects – is critical to pursuing attractive returns and managing risk.
New global political agreements mean more infrastructure projects are coming online, and institutional investors are increasingly supplying capital in place of governments and banks
In the energy infrastructure space, privately negotiated electricity consumption agreements are on the rise, forcing investors to learn how to act as energy suppliers
Partnering with the right active manager – one who has the infrastructure expertise to manage the project itself – is critical to pursuing attractive returns and managing risk
Infrastructure equity has become a major investment theme for the institutional investment community – particularly “green” infrastructure. In fact, according to Preqin, half of all institutional investors plan to increase their infrastructure allocations, preferably through energy infrastructure investments.
New global political agreements mean more infrastructure projects are coming online – including in the fields of renewable energy, water infrastructure for supply and sanitation, green buildings and sustainable transport. In Europe in particular, there is enormous demand:
The European Commission has been canvassing for a so-called Energy Union, which would be financed by EUR 315 billion in guarantees granted by the European Investment Bank and from capital released from the European Structural Funds.
In 2020 alone, roughly EUR 1.1 trillion will be needed within the European Union for investments in energy grids, generation and storage.
At the same time, these projects cannot be paid for out of government budgets alone. Moreover, faced with higher capital requirements, banks are exercising greater restraint when financing investments. This has encouraged institutional investors to play a significant role as lenders in an asset class that can feel unfamiliar.
Why use active management in infrastructure equity?
As more investors move into this multi-trillion-dollar space, the energy industry is changing dramatically. While energy infrastructure investments were once the preserve of large energy suppliers, new opportunities are being opened up by increased decentralization and disintermediation. One only needs to note the latest “buzz phrases” in today’s industry – the rise of storage facilities, direct marketing of electricity, the decentralisation of the electricity market, etc – to realize that many new changes are taking place.
As a result, privately negotiated electricity consumption agreements are on the rise, and financial investors must not only find ways to put their money to work, but also learn how to act as energy suppliers. It is here where partnering with the right active manager – one who has the expertise to manage the project itself – is critical to pursuing attractive returns and managing risk.
Two examples of the benefits of active management
First, in the past, infrastructure investors frequently acted within fixed feed-in tariffs structures to limit the return for electricity generated from renewable energy sources, both upward and downward. Today, however, prices can be optimised through individual, well-negotiated contracts between generators and large industrial consumers – which an active asset manager can help facilitate. Of course, if poorly negotiated, these contracts can be detrimental.
Second, due to the interrelation of different individual energy generation types – including renewable, fossil or nuclear resources and how they interfere in the electricity grid – the electricity market has become highly complex. Analysing the nature of the market and understanding where revenue flows come from is crucial for success. For specific markets, market electricity prices can be highly volatile, but exposure can be limited via individually negotiated power purchasing agreements that offer cash flow stability and visibility – and it is here where experienced active managers can again add value. “To invest and to forget” using a passive investment strategy can be a disadvantage in today’s complex energy infrastructure markets.
What to look for in an active infrastructure manager
To help add value in the energy infrastructure space, the right active asset manager can bring broad knowledge and extensive experience to the table, including:
The ability to understand the supply and demand patterns of energy markets, source the right assets, and extract commercial and technical efficiencies.
In-house technical and commercial expertise to help improve projects.
Deep knowledge in the commercial and technical aspects of energy-generation plants, storage technologies, energy grids and energy-efficient technologies.
A time-tested track record of establishing partnerships with energy companies and developers.
Extensive portfolio management and asset management capabilities to help create an attractive risk-return profile.
Experience in the structuring and regulation of alternative investment funds – and demonstrated insurance know-how to complete the picture.
In our view, these are essential capabilities for helping to execute both long-term buy-and-hold and mid-term buy-and-sell strategies in this space. If infrastructure-equity managers make the right investment decisions and actively manage their clients’ assets, they can hope to achieve an attractive risk-return profile, smooth out volatility and seek stable cash flows while retaining value over the lifetime of their clients’ portfolios.
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Armin Sandhoevel is Chief Investment Officer (CIO) Infrastructure Equity with Allianz Global Investors, which he joined in 2012. Under his lead, the first renewable energy fund of AllianzGI was successfully put in place during the summer of 2013. Armin has been focusing on energy themes since 1994. He was previously Head of Carbon Risk, and led the risk management of renewable energy, at Dresdner Bank AG. In 2001 Armin joined the Allianz Group. From 2007 until 2013, he was CEO of Allianz Climate Solutions GmbH, where he now serves as a member of the Board of Administration. He has accumulated more than 20 years of specific expertise in investment management, emissions trading and renewable energy financing. Moreover, he is a member of the board of directors of the German Energy Agency (dena), among others. Furthermore, he advises several carbon-related funds as well as national and international institutions.