Special A PEI supplement

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1 July/August 2013 privateequityinternational.com The Investing in Energy Special 2013 A PEI supplement Why LPs love energy US firms look overseas Cleaning up in Asia North Sea outbound An audience with T. Boone How to hire an industry specialist...and more Sponsors: Actis Capital Dynamics Starwood Energy Group Global

2 KEYNOTE INTERVIEW: capital dynamics RENEWABLES Anatomy of returns If you get your strategy right, investing in renewable energy provides the sort of transparency, stable income and lack of leverage risk institutional investors are searching for, says Capital Dynamics David Scaysbrook Barely a day goes by without an energy story making the front pages of the newspapers. If it s not the latest fracking development, it s gas shortages, renewables quotas, controversies over nuclear, decommissioning legacy coal-fired power stations or energy security. Finding new ways to keep the lights on is big news and it s also big business. Institutional investors have long been interested in energy, of course, but forward-thinking ones are quickly coming round to the idea of renewables. At the forefront of this area is Capital Dynamics, a Swiss-headquartered global asset manager. David Scaysbrook, a managing director at Capital Dynamics who heads up the firm s clean energy and infrastructure investment management division, started his first company in the sector in the late 1990s in Australia, before moving to the UK and founding Novera Energy in He later bought TXU Europe s UK renewables business for a pound in 2001 which kick started what became, after 8 years and a London Stock Exchange listing, one of the largest non-utility renewables businesses in the UK. Novera Energy was voted UK Renewables Company of the Year by Rosenblatt in 2009 and was subsequently sold that same year to Terra Firma. We have been investing private capital in both conventional and clean power assets for more than 20 years as corporate investors, developers and independent power producers, he says of his team. Having developed successful projects and businesses and seen them perform and generate cash over a long period, and having lived on the dividends of that for over a decade, we are convinced that well structured clean energy assets are a perfect match for pension funds, he explains. We believe that what a pension fund really needs is unadulterated, transparent, high quality cash-flow over the long term. The lack of leverage also appeals to pensions, particularly after the debt induced failures of the financial crisis destroyed value even with supposedly safer or defensive infrastructure assets he says. In our programme so far, we haven t used a cent of debt. It s 100 percent cash investing. This is likely to change as more money comes into the sector, he adds, but for us, levered IRR can be an illusory metric of true equity returns and isn t necessarily what a pension fund wants if the equity cashflow is backended and there is real risk they could go into a cash lock-up. This is a potential risk if the revenue softens and the fund does not get any cash distributions for a few years whilst the banks assess the situation. Instead, they are looking at a day-in-day-out return to match their payout liabilities with their beneficiaries. BUYING REAL ASSETS What Capital Dynamics specialises in are proven clean energy assets with contracted cash-flows, which, unlike private equity deals, don t depend on making a successful exit to generate the expected returns. If you are looking for an annuity-style revenue-stream, many clean energy investments are ideal. The fundamentals of the business are strong, Scaysbrook says. We sell power Scaysbrook: world is short on clean energy first and foremost, and you usually always have customers for the power. One thing we like about this sector is that in almost every case the customer is a credit worthy utility; they are buying from us to on-sell to their consumers. The utility customers often sign long-term purchase deals, up to 30 years, which guarantee a stable income for the asset s owner. Scaysbrook also stresses that they are interested in real assets, not financial transactions. There has been an increased interest in this area recently, with core infrastructure assets attracting hard fought bidding wars, but Capital Dynamics is not interested in buying trophy projects at inflated prices. One of its strategies is to buy distressed renewable energy assets. We have acquired broken, bruised or slightly tarnished clean energy assets that have been mismanaged, overleveraged or haven t had operational best-practice, says Scaysbrook. We buy them at an undervalued price and we fix them, sharing the value created with our investors along the way. So far the firm has done two such deals in the UK, in landfill gas and coal mine gas and now manages over 40 sites across the UK. 16 private equity international july/august 2013

3 KEYNOTE INTERVIEW: capital dynamics We don t buy these particular assets with the intention of flipping them on, Scaysbrook adds. We ve bought them at an attractive valuation, [then we re] fixing them and sitting on the yield for our investors long term. The team also specialises in construction stage projects and recently acquired 100 percent of the rights to a 21-megawatt onshore Dunmore wind farm in Northern Ireland. The team negotiated the construction contracts and a 15-year deal to supply energy to the single market that covers both Northern Ireland and the Republic of Ireland, which is committed to getting 40 percent of its energy from renewables by 2020*. We are not taking development risk; we are coming in when it s shovel-ready, and we are overseeing the construction because we know how to build things, Scaysbrook says. For that we get a higher risk-adjusted return. We believe that the clean energy market is fundamentally about asset creation, about building new assets. There are not many managers out there who will take construction risk and successfully manage it for a higher overall return. ALL OF THE ABOVE Clean energy is appealing for a number of reasons, he suggests. The world is short on clean energy. You don t have to believe in climate change, the fundamental demand is there. Demand for renewables is not driven by a zero-carbon emissions pipe-dream; that is too strident, he argues. But these days, a political consensus is building around an all-of-the-above approach to energy policy: coal, oil, gas, nuclear and renewables all have a role to play, as well as emerging sources of energy like shale gas. One reason that renewables and shale gas in particular are a growth area for investment is that policymakers are developing a strong preference, out of necessity in many cases, for new indigenous energy sources. It s less risky than being on the end of an offshore gas pipeline if you are an energy dependent island like the UK, Scaysbrook says. But there is also the issue of restoring manufacturing competitiveness. In the US, shale gas advocates say it promises a cheap source of energy that could kick-start a US manufacturing renaissance, so countries with an abundance of solar and wind capacity for example, can harness their natural resources to the same end, especially when these technologies are approaching cost parity with conventional fuels. It goes from being a defensive imperative to an offensive one; that is compelling for all sides of government, says Scaysbrook. However, there is now an even stronger argument for renewables. Much of the new capacity needing to be built will replace old facilities that are nearing the end of their lives: in the UK, for instance, 20 percent of existing power station capacity will be decommissioned in the next five years. The figures are similar in several other developed countries including the US. As such, demand for new energy assets is no longer correlated with increasing GDP. This is not about consumption growth any more, it s about keeping the lights on when old plants are being shut down, says Scaysbrook. There are also mandated targets for new renewables: in the UK, it s 20 percent by And the returns look attractive and stable. Power prices in the past have often been correlated with inflation, but Scaysbrook points out that in the past ten years they have tended to increase faster than inflation on a compounding basis, something that looks set to continue; that s not a hard-and-fast rule, but the trend is friendly, as he puts it. After all, not many july/august 2013 the investing in energy special 2013 people are predicting energy prices to fall quickly any time soon. One key for successful renewables investing is choosing the right technology. Capital Dynamics doesn t invest in funky but as yet unproven technologies, and leaves cleantech to the VCs. We re about gas turbines, diesel engines and wind turbines; it s industrial, says Scaysbrook. These are proven technologies. This also allows for a greater degree of predictability: an American solar power portfolio that the firm owns is producing within 0.1 percent of its target production. And this sort of data matters. When it comes to wind, says Scaysbrook, there is some chequered history, especially in Europe. Some of the low-performing farms used too little wind data, leading to too much optimism around wind risk and new ones put in the wrong places. Understanding the technology, though, is only one part of securing good returns. Controlling for exchange-rate volatility and the finer points of regulation are at least as important as picking the right kit. The latter point, for instance, explains why Capital Dynamics focuses solely on developed economies the US, UK, Canada, Australia and Western Europe where there is little chance of governments retroactively changing the rules. And according to Scaysbrook, the returns they can secure in these markets mean that there is no need for us to make an emerging markets play, at least not at the moment. As with any sector, there are good and bad strategies for investing in renewables. But as Scaysbrook says: If you make good choices, and you know what you are doing, investors can do very well. n * Based on the All Island single electricity market between Northern Ireland and the Republic of Ireland 17

4 company profile: capital dynamics Capital Dynamics is an independent, global asset manager, investing in private equity and clean energy infrastructure. We are client-focused, tailoring solutions to meet investor requirements. We manage investments through a broad range of products and opportunities including separate account solutions, investment funds and structured private equity products. Capital Dynamics currently has USD 17 billion in assets under management. 1 Our investment history dates back to Our senior investment professionals average over 20 years of investing experience across the private equity spectrum. We believe our experience and culture of innovation give us superior insight and help us deliver returns for our clients. We invest locally while operating globally from our London, New York, Zug, Beijing*, Tokyo, Hong Kong, Silicon Valley, Sao Paulo, Munich, Birmingham, Seoul, Brisbane, Shanghai* and Scottsdale offices. CAPITAL DYNAMICS CLEAN ENERGY AND INFRASTRUCTURE TEAM Capital Dynamics Clean Energy and Infrastructure team comprises senior clean energy industry professionals who have decades of project development, acquisition, financing and operations experience covering a diverse range of proven clean energy technologies from methane recovery, solar and wind energy through to biomass and gas-fired power generation. The team of twenty dedicated professionals have committed investments in over 190 MW across 80 projects in North America and the United Kingdom whilst at Capital Dynamics, providing attractive risk adjusted returns from innovative direct investment strategies in clean energy. SUPERIOR INSIGHT LEADS TO RESULTS We believe informed decisions lead to enhanced performance. We gain insight through rigorous due diligence, ongoing market monitoring and industry-leading portfolio and risk management. Then, we select what we believe are the best investments. Our extensive experience, long-standing relationships and targeted research give us the additional insight required to generate attractive, riskadjusted, long-term returns for clients. FOCUS ON INNOVATION AND QUALITY We gain a clear understanding of our clients needs and based on our culture of innovation and our longstanding experience, we develop products and services that meet these specific requirements. We are an industry leader in an essential component of successful investing, quantitative risk management. Our methodology has been adopted by both Moody s and Standard and Poor s. Our expertise in this field enables us to help strengthen portfolios by reducing risk and volatility. BROAD RANGE OF INVESTMENT PRODUCTS Direct investments Our long-standing relationships with the globe s top-tier fund managers provide immediate access to powerful direct dealflow and high-quality investment opportunities. Our co-investment strategy is focused on mid-market buyouts, but also includes select development capital and special situations. Primary fund investments We have invested in private equity funds since the late 1980 s, across various cycles, diverse geographies and multiple strategies. Our investment experience includes many of the industry s pre-eminent managers from the launch of their first funds. We currently monitor more than 800 active funds, managed by over 400 General Partners in which either we or our clients are invested. Secondary fund investments Active in the secondary market since the early 1990s, we raised one of the first dedicated secondary funds. Today, we have consistent access to secondary deal flow through our global network of over 1,500 managers. Our extensive, active fund investments and deep pool of performance and fund data give us a unique advantage when evaluating secondary transactions. Clean Energy and Infrastructure Our specialised team of senior industry investors employs a direct investment strategy focused on proven clean energy technologies that can offer attractive riskadjusted returns and compelling diversification benefits from this new class of real assets. Structures Funds of funds We invest in private equity primary and secondary funds of funds, allowing investors to implement a global allocation and portfolio diversification strategy through access to premier private equity managers. Separate accounts We tailor individual investment programs to meet clients unique risk profiles and liquidity parameters. We offer legal structuring services to meet the regulatory, tax and compliance obligations for each separate account client. Structured products We customise solutions one client at a time. Every structured solution is designed to deliver compelling benefits such as early liquidity, enhanced return on investment, reduced risk, lower open commitments and/or decreased riskweighted capital reserves. Please contact us at clientrelations@capdyn.com, or visit our website for further information. 1 Capital Dynamics comprises Capital Dynamics Holding AG and its affiliates; assets under management, as of December 31, 2012, include assets under discretionary management, advisement (non-discretionary), and administration across all Capital Dynamics affiliates. Investments are primarily on behalf of funds managed by Capital Dynamics. * Capital Dynamics China is a legally separate company operating under a strategic cooperation with Capital Dynamics. 18 private equity international july/august 2013

5 Performance: the result of long-term dedication We understand the dynamics of performance and know that long-term dedication to uncompromising quality is the best route to success. Capital Dynamics is an award-winning private asset manager with extensive experience in direct clean energy and infrastructure (CEI), private equity, co-investing and secondaries. Our CEI team holds over 100 years of experience in investing, financing, owning and operating conventional and clean energy businesses globally. Capital Dynamics CEI business was established to address the attractive investment opportunities in this new class of real assets. Please contact us at London New York Zug Beijing* Tokyo Hong Kong Silicon Valley Sao Paulo Munich Birmingham Seoul Brisbane Shanghai* Scottsdale Capital Dynamics comprises Capital Dynamics Holding AG and its affiliates. *Capital Dynamics China is a legally separate company operating under a strategic cooperation with Capital Dynamics.