Investing in renewables infrastructure

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1 Infrastructure Investing in renewables infrastructure Nearly half of all power is expected to be generated from renewables in ten years time. The German government is pursuing this goal very rigorously: by last year, wind and solar power were already accounting for just over one third of total consumption in Germany. 1 Since government funding and grants are nowhere near enough to cover the necessary investments, the involvement of private investors is especially crucial. AUTHORS: DR ARMIN SANDHOEVEL AND MARTIN EWALD 34

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3 01 NEWLY INSTALLED CAPACITIES OF RENEWABLE ENERGIES REMAIN HIGH IN EUROPE Newly installed capacities in the EU Explanations MW 25,000 20,000 15,000 10,000 Forecast Strong expansion and growth of the energy infrastructure over recent years; newly installed capacities will remain high in future The leading renewables are wind power and photovoltaics (PV) both technologies are firmly established in the market, and have proved their worth 5,000 0 Year In addition: the secondary market is becoming more liquid EUR 7.3 billion will be divested within the next four years as closed-end infrastructure funds reach the end of their terms Solar Onshore Wind Offshore Wind Source: BNEF 2016 Market for renewables continues to offer opportunities for institutional investors Investors looking for sustainable investment options offering above-average returns in an environment of low interest rates are therefore increasingly recognising the opportunities offered by this segment. According to Bloomberg, USD 314 billion were invested in renewables around the world in By last year, this figure had risen to USD 329 billion. Annual investments will average around USD 500 billion over the next 25 years. 2 The trend is sustainable, and the inflows show not just how attractive the sector is to investors, but also how important such investments are becoming for national economies. Potential for long-term returns in tune with idealistic conviction The idealistic conviction of investors is an argument that should not be underestimated when it comes to investing in renewables. Ultimately, however, what counts is the promise made to customers. Insurance companies or pension funds, for example, have long-term payment commitments that still apply even though the achievable yield on standard bonds is, at best, slim in real terms. Given that there are no signs of any changes in this respect, the need for conservative substitutes in a portfolio rises steadily as the pressure to generate returns increases. For three years, Allianz Global Investors and its Infrastructure Equity investment team have been offering institutional investors the opportunity to invest in real assets such as solar power plants or wind farms through closed-end vehicles. 1 Source: German Federal Ministry for Economic Affairs and Energy (BMWI) 2 Source: Bloomberg New Energy Finance 3 Ernst & Young April 2015 Investors with long-term payment profiles need security, and not just clearly defined conditions. Innovative investment solutions are needed to cover funding requirements over terms of at least 20 years. Periods as long as this tend to be the rule rather than the exception in the field of energy. High-quality projects can be expected not just to generate above-average returns, but also to earn predictable income from the sale of environmentally compatible energy. 36

4 UPDATE I/2016 INFRASTRUCTURE Diversification is a key element In a fund holding real assets, diversification relates primarily to geographical and technical aspects. The same applies as with other forms of investment: investors should always be sure to diversify risks, critically assess asset classes, regions and individual securities, and then balance them in a combined portfolio. meteorological and regulatory conditions. Although stateregulated feed-in tariffs for renewables are increasingly being replaced by revenue generated in a naturally competitive environment, they still play an important role in the assessment process. The currently low level of interest rates is favourable for refinancing new projects. Renewables investments have a stabilising effect in investors overall portfolios during phases of high market volatility, as their correlation with conventional asset classes is very low. That is to say: events on the markets do not influence whether the sun is shining, or a strong wind is blowing new energy into a portfolio. Investment decisions on the basis of technological maturity and regulatory requirements In recent years, the technology used in wind farms and solar power plants has matured enormously. Critical technical analysis is nevertheless crucial when calculating earnings. Further decisive factors governing economic forecasts include local At present, attractive projects that satisfy the strict criteria are mainly to be found in European countries such as Germany, as well as the UK and France, but also in Scandinavia, especially in Sweden. These fiercely competitive markets are particularly interesting for investors with a long-term horizon, as they offer the opportunity to earn attractive cash flows over the long term, quite apart from possible proceeds from the sale of plants. Sources of income such as these provide many investors with an important base from which to service their long-term payment commitments. This makes the ability of the investment manager to supervise and actively manage these investments over the entire term an important aspect for investors. ALLIANZGI INFRASTRUCTURE EQUITY: HONOURED TWICE FOR OUTSTANDING PERFORMANCE IN THE FIELD OF ALTERNATIVE INVESTMENTS Closed End Fund Renewable Energy 2015 Infrastructure Asset Management Newcomer of the Year 2015 As a subsidiary of a major insurance company, the manager also has access to an international network, which is an advantage when it comes to deal-sourcing and due diligence support, and constitutes a unique characteristic. [ ] the 2015 Fund Awards pay homage to these forwardthinking professionals across the globe who have orchestrated and implemented some truly exceptional strategies, and gained spectacular results for their clients [ ] Scope Ratings AG ( Wealth & Finance International ( 37

5 Nearly half of all power is expected to be generated from renewables in ten years time. Regulatory boost Moreover, target investments must comply with strict EU directives, and are subject to detailed reporting requirements. Solvency II, for example, specified new requirements in regard to the quality of infrastructure projects and their capital requirements at European level, and gave preferential status, in particular, to long-term projects with very predictable cash flow profiles. Although conclusive assessment of the exact application in practice is not yet possible, it is clear that the stability of conservatively planned infrastructure investments is considered to be very advantageous. Regulations such as EMIR and REMIT are definitely beneficial to this cause. EMIR regulates the treatment of derivatives used in the funding of target companies, while REMIT governs forward contracts relating to derivatives used in energy market contracts. As far as real assets held by institutional investors are concerned this is a welcome development, since stable framework conditions are essential for such long-term commitments. Investment managers, by contrast, now have to integrate aspects relating to their operational structure as well, and no longer just regulations such as the AIFMD, which specifically targets a company s organisational structure. Investors need to make sure they are working with partners and service providers who are capable of handling this enormous complexity at all levels of the investment. 38

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7 Within the space of two years, the fund assets of EUR 150 million were invested in a total of ten wind and solar power plants in four European countries. 40

8 UPDATE I/2016 INFRASTRUCTURE Solutions offered by Allianz Global Investors Three years ago, Allianz Global Investors launched its Allianz Renewable Energy Fund I (AREF). Within the space of two years, the fund assets of EUR 150 million were invested in a total of ten wind and solar power plants in four European countries. These plants generate enough energy to supply a year s worth of power to a city the size of Stuttgart. Allianz Global Investors invests, above all, on behalf of investors with a long-term horizon, for whom a conservative approach and in-depth technical understanding of this special investment segment are important. The close collaboration between the investment team and the experts at Allianz Climate Solutions a centre of competence within Allianz that focuses on renewables therefore constitutes a further strategic advantage for clients that will also be indispensable when designing and managing future funds. Dr Armin Sandhoevel has been engaged in energy topics since He was previously Head of Carbon Risk, and led the risk management of renewable energy, at Dresdner Bank AG. In 2001 Dr. Sandhoevel 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. Since September 2012 he has held the position of CIO Infrastructure Equity at Allianz Global Investors GmbH. Under his lead, the first renewable energy fund of AllianzGI the Allianz Renewable Energy Fund S.A. SICAV-SIF (AREF) was successfully put in place during the summer of Together with his dedicated team he set up AREF 2, for which the fundraising process has already started. 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, Armin advises several carbon-related funds as well as national and international institutions and is, last but not least, Counsellor of the German Chapter of the Prince Albert II of Monaco Foundation. Following the launch of AREF, further vehicles based on a similar recipe for success are already on the starting blocks. AREF II has already been established in Luxembourg, and is currently raising capital with the aim of making its first investments during the third quarter of Just like its predecessor, this fund is reaping the benefits of a strong parent, particularly good access to projects, and the calm approach an investment manager needs in this segment to match the calming effect that such an investment can bring to an investor s portfolio. Martin Ewald has more than eight years of experience in Renewable Energy, investment management, project finance and consulting. Martin joined Allianz SE/Allianz Climate Solutions in 2007 as co-head of the investment team, and investment manager. He led investments in real assets like Renewable Energy Projects and Forestry Based Carbon Projects in developing and growing economies. In 2012, Martin joined the Infrastructure Equity team at AllianzGI GmbH as co-head of portfolio management. Since 2013 he has been head of strategy, and supports the CIO in all strategic operations, and in the development of new investment vehicles. In the past, Martin worked at financial institutions including Dresdner Bank, Merrill Lynch and Deutsche Bank in the investment management sector, as well as at IBM as a business consultant. Since 2010 he has been a PhD candidate at the Technical University of Dresden. Martin holds a Master s degree in Science from the University of Exeter, and a Master s degree in Business Administration (Diplom-Kaufmann) from the University of Mannheim. 41