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Finding value in EMEA

When it comes to finding value in Europe, private fund funds have a large mosaic of investment opportunities to consider, given the jurisdictional, regulatory and market differences across the 27 EU member states (which now does not include the UK).

When it comes to finding value in Europe, private fund funds have a large mosaic of investment opportunities to consider, given the jurisdictional, regulatory and market differences across the 27 EU member states (which now does not include the UK).

For private market investors, one of the ways to consider unlocking value is to see what is happening in Europe’s renewable energy sector, which ties in closely to the European Green Deal; an ambitious initiative that aims to transition the EU to a low-carbon economy. One of the central goals of the Green Deal is to achieve bloc-wide zero carbon emissions by 2050 and a 50 to 55 per cent reduction in emissions by 2030.

Such is the scale of ambition that European commission president Ursula von der Leyen referred to as “Europe’s man on the moon moment”.

Part of the plan to help the EU meet these carbon emission reduction targets, as laid out more broadly under the Paris Agreement within the United Nations Framework Convention on Climate Change, was the introduction of the Renewable Energy Directive. Briefly, this sets a new binding target for the EU to achieve at least 32 per cent of its energy needs from renewable energy by 2030.

The upshot to this is that Europe will require significant infrastructure investment over the next decade, and could present a slew of investment opportunities for PE funds to finance green energy companies.

“We need more investment into the green energy sector to meet the Paris Accord that European member states have committed to,” says Timo Hirte (pictured), Commercial Director Fund Services at TMF Group (Germany).

Global investments in the renewable energy sector are expected to rise to USD3.4 trillion by 2030, including an estimated investment of USD2.72 trillion in solar and wind energy sectors, according to Frost & Sullivan‘s latest research analysis.

These numbers are substantial but where might the investment opportunities be for investors?

According to a report by the International Renewable Energy Agency (IRENA), heating and cooling solutions account for more than one third of the EU’s untapped renewable energy potential. They suggest that biomass will remain a key renewable energy source beyond 2030, and in respect to transportation, electric vehicles (including the construction of electric highways) will be need to realise the EU’s long-term decarbonisation objectives.

In Germany, investment into green energy has slowed down due to the regulatory environment and difficulties with infrastructure approval.

“For example, the German courts are preventing infrastructure building to support the movement of energy from offshore wind farms into the southern part of the country,” says Hirte. “People want to see the increased use of green energy and recognise the need for getting energy lines in place, but the attitude seems to be ‘Not in my back yard, please do it elsewhere’.

“There needs to be more interaction between EU member states to bring green energy to the areas where it is most needed. There is still a lot of room for investment, and need for investment, and I would expect that EU member states will incentivise private market investors. Otherwise, Europe will not reach its Green Deal goals.”

Hirte confirms that some of TMF’s clients are now preparing to launch new fund vehicles, primarily out of Luxembourg, to capitalise on the green energy revolution.

“One of my clients is preparing to launch the next vintage of their energy fund, which was delayed at the start of the year due to Covid-19. We are also busy onboarding a number of infrastructure debt funds,” he says.

By way of a country-specific example, one of the largest wind farms in Austria is being built in Burgenland, which is expected to be completed by the end of 2021. The entire wind farm will have capacity of 143 MW and provide around 90,000 households with electricity. The facility will be run by PÜSPÖK Group, a family-run business based in Burgenland.

To highlight the current investor demand for renewable assets, Foresight Group, an independent infrastructure and private equity investment manager, recently made the second investment by Foresight Energy Infrastructure Partners (FEIP), into two operational wind farms located in the Castile and León region of Spain.

This represents Foresight’s second acquisition from subsidiaries of wpd AG (“wpd”), one of Europe’s leading wind energy developers and operators, following the acquisition of a 50MW German wind portfolio in December 2018.

Richard Thompson, Partner at Foresight and Co-manager of FEIP, said: “We plan to secure independent EU Taxonomy verification for this portfolio which will make a visible contribution to the EU’s goal of Net Zero by 2050.”

Hirte believes that private debt structures will continue to be a key investment trend in Europe over the coming years.

“There are more and more debt structures being established. It’s a trend we’ve been seeing in Europe for a number of years as banks scale back their lending. Asset managers have sought to close that funding gap since the ’08 financial crash.

“I would assume we will keep on seeing these private debt vehicles come to market,” suggests Hirte.

Schroders has just raised EUR312 million for an initial close of its second pan-European infrastructure debt fund. It is aiming to raise EUR750 million in total.

The Schroder Euro Enhanced Infrastructure Debt Fund II  (Julie II) is managed by Schroder Aida, the specialist infrastructure finance subsidiary launched by Schroders in 2015.  “We continue to see exciting investment opportunities in the sub-investment grade infrastructure debt space and we expect to deploy this second vintage as efficiently as the first fund,” commented Augustin Segard, Head of Enhanced Infrastructure Debt and Fund Manager.

For those who are looking to invest in Europe’s green energy transition, Luxembourg remains the preferred jurisdictional option. A large number of global asset managers view the Grand Duchy as their European hub for international fund distribution.

“We do see a lot of US private equity houses using the Special Limited Partnership (‘SCSp),” states Hirte. “The way the SCSp has been designed is very similar to what US managers are used to with a Cayman/Delaware structure; it is based on the Anglo-Saxon LP structure. A manager can combine the advantages of both the SCSp, from a legal structuring perspective, with the Reserved AIF, from a fund structuring perspective.”

Luxembourg’s fund universe is well represented, offering managers a range of regulated and unregulated options.

The Specialised Investment Fund (SIF) is a fully regulated AIFMD-compliant fund, requiring an independent depositary and license approval from the CSSF, Luxembourg’s financial regulator. As such, this introduces a double layer of regulation, impacting managers at both the AIFM level and the Fund level.

“However, with respect to the RAIF, Luxembourg does exactly what the AIFMD wants, which is purely to supervise the activities of the manager. The RAIF itself is not regulated. As long as you have an approved AIFM managing the fund, you save the fund regulation part, which allows for a speedier time to market. You don’t need to wait for CSSF approval before marketing the fund,” adds Hirte.

In his view, Luxembourg has done a good job creating a flexible funds environment for international fund managers.

“It started with the UCITS fund but the SIF is now also widely recognised across the globe. The legislator has also demonstrated that it is very flexible. When AIFMD was first introduced, the Luxembourgish legislator created the RAIF, the SCSp. It has always been able to adapt to new regulations very quickly.

“The jurisdiction has been able to attract a lot of expertise. There is a deep pool of qualified, international talent working in Luxembourg.

“There is also a well-established service provider infrastructure in place, which has been built over the last three decades to support managers’ fund activities,” explains Hirte.

With all of the key fund, legal and service provider blocks in place, Luxembourg is well-poised to support private fund groups as they seek out value in Europe over the next decade.

Attracting private market participants will be key to Europe achieving its Apollo 11 mission, and realising its man on the moon ambitions.

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