Cleantech from the top down

HgCapital, the €2 billion London-based private equity house is one of the biggest mid-market players in Europe. And it also runs the largest fund dedicated to renewable power. HgCapital’s interest in clean technology and power isn’t some aside business to its regular buyouts activity but a core interest. In fact this interest runs right to the CEO of the business Ian Armitage who tries to be green in his personal life by composting in the garden of his West London home and recycling. But he admits that he is a bit of a petrol head when it comes to driving his SL55 Merc.

AWP: HgCapital has the largest fund for European renewable power projects – Hg Renewable Power Partners. What is the size of the fund now? And why have you committed so heavily to the sector?

IA: Our fund is €300m. Some of our investors were attracted by lower risk, yield driven, infrastructure-style returns. A minority also wanted investments that give them exposure to a low carbon economy.

AWP: What is your personal view on the much hyped sector of renewable energy?

IA: I am absolutely dedicated to renewable energy as an industry. The true cost of energy derived from hydro carbons is now becoming apparent via the impact of CO2 emissions on climate change. For example think about the price of foodstuffs, driven in part by years of poor harvests and climate related disasters – these events impact our economies in real ways. I think if there is a solution to CO2 induced climate change it lies in an energy mix of conventional, renewables and nuclear. Renewables will be an important part of the energy mix of the future.

AWP: Do you think the feel good factor asociated with green investing can inflence decisions for the worst?

IA: Investing with a feel good factor can be bad for investment decision making producing ub optimal outcomes. No matter how good an investment feels – it is always important to balance risks against target returns and invest with discipline.

AWP: Many of the cleantech investments in your portfolio are infrastructure investments specifically wind farms. Why is this sector attractive to your cleantech team and the business as a whole?

IA: Wind is an attractive sector for investment because of the certainties it affords. For example, you can estimate the power output you can expect from a wind farm, you can be certain about the building costs and the operating costs too. Also you can be certain about the amount of debt you’ll need to take and the best ways to arrange it. What is less certain at the moment is the regulatory environment. Happily it varies from country to country and on balance the probability of serious adverse change for projects that are consented is limited. That said, never underestimate the ability of governments to change and never fool yourself that there are sectors free of government interference.

AWP: Last year, HgCapital made its first renewable investment outside wind in Aufwind Schmack a German biogas company. And HgCapital expects to build the world’s largest biogas portfolio. What does your team find so special about this sector?

IA: Biogas, like wind, is a proven technology in renewable power. And, like wind, you can predict the cost and availability of feedstock within bands with a reasonable degree of certainty. Risks are higher than wind but so are potential returns so for a large portfolio like ours it is a good form of diversification.

AWP: From a top down view how do Cleantech’s, infrastructure-style investments compliment the rest of the HgCapital buyouts portfolio?

IA: Our Cleantech investments are in a separate fund with separate return objectives. The rest of our business aims for north of 25% returns. But in this case, this is a long term yield driven with returns similar to infrastructure and mezzanine in the low teens.

AWP: What proportions of the group’s assets are focused on this sector at the moment? Do expect to see that proportion grow significantly?

IA: We currently have about 10% of our assets focused on Cleantech and we do expect to see that grow. We would like our next fund to be three times the size of the current fund. But as a proportion of the business I am not sure because the size of the rest of the funds will grow too.

AWP: Have you had any exits yet in the Cleantech space? If not, when do you expect to see these? If so, what types of multiples have you achieved?

IA: We have not had any exits yet. We could sell some of the business in our portfolio now but we are focused on long term returns and not driven by short term gains at the moment.

AWP: As the credit crunch looms over many buyout houses project finance seems to still be available. It must be helpful that you can diversify the types of investments that you make in the cleantech sector between new build and project finance etc?

IA: Project finance is not immune to the credit crunch but it has not been affected as much as buyouts yet. There is no special treatment for project finance with banks but it is lower risk than many buyout investments. For financing at the moment the £-market is tight, the €-market is better but in Scandinavia it is easier.

AWP: Why is that?

IA: Their banking systems do not appear to have the same exposure to poor sub prime assets as some. In addition they have a deep commitment to the green agenda and have in place an interesting market driven pricing scheme. Also there are many good sites available to build given the low density of population and associated scarcity of nimbies.

AWP: HgCapital is well known for its work in turn-around and change management. Infrastructure investors often complain about the slow processes and red tape that has to be dealt with for these types of investments. For a buyout house that is used to being nimble and making big changes early on is this sector challenging?

IA: This market is about 1/3 financing, 1/3 engineering and 1/3 legal. This industry has a very low tolerance to mistakes – the investments are geared pretty highly and attention to detail has to be first rate. In terms of the red tape, I am sure every investor in infrastructure wished that planning officers handled applications more efficiently and affectively.

AWP: Are you seeing much competition from other private equity investors in Cleantech at the moment?

IA: For private equity to be successful it must secure good deal flow. We are seeing competition mostly from utilities, who at present believe they have a lower cost of capital. Happily they are not always to the best developers’ liking and our flexibility and creativity gives us an edge.

AWP: HgCapital prides itself on being sector specialists. Late last year you added two new hires to the Cleantech team in Jean Perarnaud and Jens Thomassen and made several promotions within the team. You are obviously taking this sector seriously. What is HgCapital’s house outlook on Cleantech over the next decade?

IA: We think the sector has a long way to go and we want to be a major player in it. HgCapital is a research driven business and we continue our homework so we may identify where best to apply our efforts over the next three years. Almost certainly we will flex and do some things slightly differently in the next fund.