Capital connection: Asper platform Vasa Värme is building a new heat network in the Ekerö municipality in Stockholm’s commuter belt

This story is sponsored by Asper Investment Management

The first weeks of 2018 were an exciting and busy time at Asper. We had just completed the spinout from our mothership private equity firm Hg, transitioning from a specialist team within a large organisation to an independent manager with over €1 billion AUM through two sustainable energy funds and additional vehicles. One of the key questions we faced was how to define our investment outlook.

Asper is an infrastructure manager focused on value-add strategies, so the sustainable energy market in Western Europe presents obvious challenges. Prices for many assets are above their historical norms and the IRR premiums that investors could achieve from taking construction or early operations risk – typically 200-300 basis points four to five years ago – have shrunk to challenging levels.

We think some of this decrease is ‘healthy’ de-risking, with recognition of the strong track record of delivering construction projects on time and on budget and more accurate forecasting of energy production. However, we also think that a significant portion of this re-pricing is cyclical rather than a reflection of the asset class’s intrinsic risk-return profile. With the conviction that it is not our job to call the peak of the market, our team decided to remain away from the ‘WACC shootout’ and stick to our value-add investment DNA.

This means, firstly, that we will continue to be highly selective and only pursue opportunities where we have a clear path within our control to deliver above-market returns. We believe that the way we can do this is through investment in greenfield opportunities. For Asper, this means backing developers from an early stage when projects are not yet ready for construction, sharing the development risk and gains with these developers, and building asset-based companies in partnership with them.

Many infrastructure investors have shied away from development stage opportunities. These investors have recognised the challenges in assessing the chances of securing positive planning permission or managing capital at risk in a project before it becomes ‘bankable’. We believe that to succeed with such development projects, cash must be drip-fed in to mitigate the risk of capital loss; exposure must be ruthlessly staged through development milestones; and, most importantly, a complementary relationship with the developer (which tends to be ‘glass-half-full’ and see opportunities everywhere) must be preserved.

This approach is only possible when team members have a specialised investment skillset allowing them to design tailored incentive systems, coach management teams through growth and realisations or set up control and ESG functions without disrupting the core development business. We believe these skillsets are closer to the ‘private-equity toolkit’ than those employed by core-focused infrastructure investors.

The advantages of this approach can be substantial. By funding development-stage projects, investors can capture the value uplift from bringing projects to being construction ready, with all contracts lined up and capital ready to be committed. This can naturally translate into important capital gains for the investor, or the opportunity to be part of the construction process with potential returns that are 300-500 basis points higher than those typically seen across the market. It also means avoiding the temptation of using aggressive assumptions to win assets in auctions, something we are seeing more and more of these days.

Focusing on projects at an early stage allows us to be more selective, to work only on the best sites and to design and optimise projects to higher levels of cost efficiency. This can be achieved, for example, by working alongside equipment suppliers to optimise layouts and planning envelopes. In today’s competitive market, the ability to provide a better solution is key to securing any form of contracted offtake (whether regulated auctions or private tenders) or to winning over customers (for heat networks).

BUILDING PLATFORMS
We have an established approach to launching greenfield investments: once we have comprehensively reviewed and selected a market, we aim to identify and back one of the premier (top two or three) developer teams and support them to build out not just a portfolio of assets, but also an industrial-scale company around that portfolio.

“An IPP with a well established footprint will be well positioned to source and optimise its offtake contracts, whereas a ‘naked’ asset is likely to become a pricetaker in auctions and commodity markets”

We call these ‘platforms’ and the concept is central to our investment approach. Platforms enable a combination of the consistent cashflow returns from real assets, with the upside from greenfield development, operational improvements and scale premiums at exit. It is a model we have worked with successfully across several Western European countries and sectors and through which we have delivered buy-and-hold IRRs in the 13-14 percent range and buy-and-sell IRRs of above 20 percent.

When shaping an investment thesis, we aim to build what we call ‘positive asymmetry’: a one-sided risk profile skewed to the upside. To do so requires a very disciplined approach on the infrastructure side of the equation. This might mean mitigating commodity-price risk with stringent requirements on contracted revenues (de-risking the return of capital plus a return) and using more conservative assumptions than the market would do for post-offtake prices. It also means limiting the use of debt to allow for de-risking through yield, and a comprehensive and detailed approach to budgeting for opex and contingencies.

At Asper, we see asset cashflows as a starting point rather than the endgame. The energy industry is going through a deep transition driven not just by the need to decarbonise our generation base, but also by fast-paced technological progress across both equipment and software. Incumbent business models are being challenged and new models are emerging. Our firm view is that focusing only on assets for their cashflows means missing out on exciting opportunities, and can potentially expose investors to unforeseen risks when the cycle turns.

As an example of this approach, we have experience in reducing the balancing costs risk (and capturing extra revenues) by expanding beyond wholesale power generation into trading and supply, thus building a layer of value on top of the asset returns. Another example is our experience with increasing revenue certainty. An IPP with a well-established footprint and an experienced management team will be well positioned to source and optimise its offtake contracts, whereas a ‘naked’ asset is likely to become a price-taker in auctions and commodity markets.

To achieve this upside, scale is key: platforms that reach critical mass in their respective market unlock operational efficiencies, better financing, access to bolt-on opportunities and scarcity premiums at exit.

Wind and snow: Munkflohögen wind farm was developed by Asper’s Swedish platform, Vasa Vind

As the second strand to our strategy, we structure bespoke investment vehicles for these platforms. This allows us to bring together highly sophisticated, like-minded institutional investors with an appetite for value-add greenfield strategies who want more control over their investments than they would typically get in a classic blind-pool fund structure. For lack of an established terminology, we call these structures ‘managed co-investment partnerships’.

Raising capital for specific platforms through these bespoke structures has several advantages both for the institutional investors and for us as a manager. An obvious one is that investors have much more control over their portfolio allocation: they can assess the specific opportunity upfront in the same way they would assess a direct investment – but with the advantage of doing so alongside an experienced manager with whom they are strongly aligned. Secondly, it provides the basis for a lasting relationship.

With Asper seeking to deliver a new platform every 12-18 months, investors working with us will see a regular flow of highly selected opportunities, and will be able to calibrate their exposure to each of them depending on their specific portfolio objectives.

A further feature which is highly attractive to investors is a tighter J-curve. This occurs, firstly, because the origination lag is avoided, and secondly because there is high visibility on commitments. At Asper, we originate and qualify the platform one to two years before raising capital for investment, allowing us to lock-in a proprietary pipeline of 70-80 percent of the total investment volume with an upfront commitment of at least 30-50 percent of the total capital.

SOURCING CO-INVESTORS
We have found that institutional investors prefer this to the profile offered by typical blind-pool funds, making it a structure well-suited for highly specialised investment strategies focused on greenfield development. We believe that tighter J-curves are a true win-win, meaning not only lower gross-net spreads for investors, but also a potentially better outcome for the manager from performance incentives.

These models have taken some time to develop but have progressed as institutional investors have become more interested in expanding their programmes beyond conventional funds. Recently, we have seen how a number of investors are seeking to capture the large opportunity from increased direct allocations by taking a more flexible approach to co-investments, leveraging the capabilities of a sophisticated manager while preserving an element of discretion. This hybrid formula is capable of delivering many advantages. However, it requires engaged investors with the resources and knowledge to execute the opportunities, and a ‘high-touch’ approach in their engagement with managers, providing scale, flexibility and commercial agility.

Single-platform strategies are by definition more concentrated than a traditional blind-pool fund, but we think that seeing this as a limitation is misplaced. After all, whether investing directly or through co-investments, institutions have the opportunity to think about diversification within their broader portfolio.

For that reason, we think co-investment partnerships enhance the diversification opportunities for institutions as they offer access to pre-defined strategies through stakes that can be spread across several platforms, with a level of control that is not possible in blind-pool funds. We are currently working with investors on these types of partnerships across the renewable power and sustainable heat network industries, enabling growth of existing portfolios and fostering the build-up of new ones.

It has only been a year since our transition to an independent manager and we remain clear in our conviction of how best to deliver on our core mission: to build new, sustainable infrastructure from the early stages, thereby helping management teams to grow industry-leading companies around A-grade assets and thus deliver consistently superior results for our partner investors.

For enquiries, please contact Luis Quiroga, head of investor relations, at luis.quiroga@asper-im.com