Alternatives, Asset Allocation, Asset Managers, Defined Benefit, ESG/SRI, Institutional Investors, Insurance Companies, Pension Funds, Private Equity, Public Funds

Renewable Energy Investments Taking Hold in Institutional Portfolios

Institutional investors are looking for opportunities to invest in renewable energy, and the markets have taken note.  In fact, more than half (54%) of the number of infrastructure deals completed in Q2 2018 were for renewable energy assets, while energy assets and utilities assets each accounted for 11% of all infrastructure deals, according to a recent report by research provider Preqin.

The $10.5 billion Chicago Teachers’ Pension Fund does not currently have a dedicated allocation to clean technology or renewable energy, but it does gain meaningful exposure to the asset class through the existing global-diversified-infrastructure funds in its portfolio, said John F. Freihammer, real assets portfolio manager for the fund. “It’s a growing part of the market—wind farms, solar and some biomass landfill plays, as well,” Freihammer said. The Chicago fund has an 11% target allocation to real assets, and within that it currently has 25% of the portfolio, or about $225 million, invested in infrastructure and 75% allocated to real estate, representing approximately $760 million in real estate. The fund’s target investment in real estate is 9%. “Renewables are a growing part of the energy production market, so it’s definitely part of our portfolio,” he said.

Over the last several years, Freihammer has observed the steady development and growth of renewable energies, which he attributes to new adoption standards in Europe and the U.S. as well as the increasing cost competitiveness of renewables versus carbon-based solutions. “The rapid decline in the cost of producing and delivering renewable energy, over the past decade, in the U.S. and internationally has been dramatic. As the use of renewables continues to grow as a share of overall global energy consumption, assets that produce them will continue to ascend in number and value. This alone will organically lead them to become a bigger part of funds’ allocations, even if the strategies are not specifically focused on renewable investments,” he said.

The Toronto, Canada-based insurance company Manulife, with $850 billion in assets under management (AUM) is also a big investor in renewables. In early July, it announced the closing of approximately $2 billion in capital commitments to the John Hancock Infrastructure Fund. The Fund provides third-party investors the opportunity to invest alongside Manulife’s general account in direct, private equity investments and co-investments in the infrastructure sector in the U.S. (The company operates primarily as John Hancock in the U.S. and as Manulife elsewhere.)

As the use of renewables continues to grow as a share of overall global energy consumption, assets that produce them will continue to ascend in number and value.

Renewables currently account for a 29% weighting in the John Hancock infrastructure fund, which has a 30% aspirational allocation to the class. All of the projects in which the fund invests are U.S. based. “ManuLife has been involved in wind, solar, biomass, hydro, and energy efficiency for over the 17-year history of the program, according to John Anderson, Manulife’s head of corporate finance, who heads the fund. “We were early practitioners in the industry, and active in the Department of Energy, accelerating investment into wind and solar. It’s an important part of our portfolio now,” he said.

John Anderson, Head of Corporate Finance, ManuLife

ManuLife also financed the first solar farm in the U.S., at the Nellis Air Force Base outside Las Vegas, in 2007, and was a founding member and the first insurance company to join the American Council on Renewable Energy (ACORE)  in 2003,” Anderson noted.

Currently, the fund is about 60-65% percent committed. It has deployed $1.2 billion in capital and has $800 million left to go. Anderson declined to comment on expected returns for the fund.

“Renewables have been a long running theme for us, because we have seen retail electricity customers tell their governors and state assemblies that they want to see more renewable energy in their state’s energy supply, and in those states in the U.S. we see utility commissions and public electricity-system-planning authorities, asking ‘how do we get more wind and solar into the mix for the U.S, and how do we do it on the most affordable bases,” he said.

David Hunter, executive director, chief investment officer of the North Dakota Retirement & Investment Office, which has $13.8 billion in AUM, said that while the fund does not seek out renewable energy mandates, it is invested in the class through its externally-managed infrastructure funds. Its infrastructure managers are JP Morgan Asset Management, which manages $450 million in infrastructure assets, GCM Grosvenor, and its most recent managerial addition, for which it granted a mandate in the spring, I Squared Capital. The retirement system added the new manager to deliver better diversification for its $550 million infrastructure investment mandate.

David Hunter, Executive Director / Chief Investment Officer,
North Dakota Retirement & Investment Office

Going forward, rather than sharply paring back investment with JP Morgan, the fund will push more assets to the two other managers, Grosvenor and I Squared. “We prefer an equal three legged stool as opposed to a two-legged stool that is lopsided,” Hunter said.

The North Dakota retirement office currently has “strong capital inflows and manages money for the North Dakota Pension Trust, Insurance Trust and the Legacy Fund. The Legacy Fund was created in 2010, when the voters of North Dakota approved a constitutional amendment to mandate that 30% of oil and gas production and oil extraction taxes produced after June 30, 2011 be transferred to the Legacy Fund.  Since inception, the Legacy Fund has earned more than $1 billion of net investment income. Hunter noted that cumulative deposits into the Legacy Fund have exceeded $4.6 billion.

“Our managers do have renewables invested in their diversified portfolios, such as wind generation and solar. But we look at what is the best risk-adjusted return opportunity set, so we do not specifically say the next deal is renewables, but if it’s the best opportunity then perhaps they will be,” Hunter explained. “We hope that our managers would consider them as a viable opportunity.”

We saw a real surge in large wind farms and solar parks during the financial crisis and in the five-to-seven years after.

A class driven by climate-change policies

“Renewables have been a big part of the deal-making market for several years now, linked to broader climate-change policies in Europe and in Asia, said Patrick Adefuye, head of real assets products at Preqin. Asian deals are not as prevalent as deals in Europe, but they are growing all the time, he noted. Returns for infrastructure deals, overall, are about 10%, but there is concern going forward that those figures could decline, due to competitive pressures and more interest in the area, Adefuye said. That said, “based on our survey, investors are pretty satisfied with their returns or are surprised how good they are.” In fact, according to the Preqin report, 46% of investors feel renewable energy infrastructure represents an attractive investment opportunity. For the time being, “returns are in line with the rest of asset class,” Anderson added.

Europe ahead of the curve

Patrick Adefuye, Head of Real Assets Products, Preqin

The reason renewable energy deals are more prevalent in Europe is likely due to the targets that have been set in many European countries to reduce energy use–driving activity in the renewables asset class. European governments are evaluating how much production there is of renewable versus conventional energy in their countries and have been encouraging the creation of environmentally-sound energy sources, which have also become attractive to investors, Adefuye said. In Asia, the driver is population growth and a need to meet the energy demands  that creates, he added.  

Anderson has also seen evidence of European governments being more aggressive on moving to renewable energy than in the U.S. “One indicator is that the first solar park happened in southern Germany, before there were any in the U.S. And as it happens, Arizona and southern California are way better places to put a solar park than in Bavaria,” he observed.

Growing interest in the sector

Interest in renewables picked up after the financial crisis, and over the last few years has been driven by state governments and federal tax incentives, as well as state governments that are encouraging utilities to run auctions for solar parks and wind farms, Anderson relays. Recently, he has seen activity that has gone beyond the large utilities to smaller scale solar parks, including moves in New England toward the introduction of solar rooftop providers.

Anderson has also seen strong support for renewables in the Canadian markets. “Canada has really gone off of coal faster than the U.S, which has a bigger legacy of using coal,” he said. In fact, Canada has reduced use dramatically and has used more hydropower in terms of the electricity mix, he said.

Overall, Anderson is Pollyannaish about opportunities for renewables in the U.S. going forward. “We saw a real surge in large wind farms and solar parks during the financial crisis and in the five-to-seven years after. That has since slowed down a bit, in terms of large utility scale, but we are now seeing residential and municipal facilities picking up in recent years. It continues to be a topic investors want to see in the mix,” he said.

“The other trend will be Americans transitioning away from coal into natural gas, and we are definitely seeing that as well,” Anderson noted. “We have had a lot of cases of technology advances around directional drilling and recovery techniques that have half the carbon of coal and cleaner smoke stack emissions. As the transition off coal to natural gas happens it will be helpful for our carbon footprint, and that has been part of our opportunity set,” Anderson said.

Investors, overall, seem to be fans of renewable investments in their portfolios. “When we do renewable investment that is the one that we know will be on the slide show and the holiday party at the end of year; it goes up on the homepage, colleagues get excited about it, and employees give good feedback,” Anderson said. “Investors are pleased that there was a strong renewable energy content in the Hancock fund and want to share it with their board that they were participating in it,” he asserted.

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