WEBVTT 1 00:00:08.240 --> 00:00:15.000 You're listening to Redefining Energy. Your co hosts from Berlin Gerard Read and from 2 00:00:15.080 --> 00:00:22.039 London Laurent Segalam. Today on Realefending LG Job, we're going to talk about 3 00:00:22.160 --> 00:00:27.000 Yill goes and a little bit about what's called MLPs. Yeah, He'll go 4 00:00:27.640 --> 00:00:35.119 is a generic term for listed infrastructure funds and those funds are owners of vulnerable 5 00:00:35.240 --> 00:00:39.880 energy as sets, wind farms, solar box Yeah, and an MLP is 6 00:00:40.000 --> 00:00:44.320 a US creation. It's called a master limited partnership and it's a company who 7 00:00:44.439 --> 00:00:48.920 organizes a public traded partnership. The reason they do this is because you combine 8 00:00:49.119 --> 00:00:53.240 the private partnerships tax advantages with the stocks liquidity, which you get to a 9 00:00:53.240 --> 00:00:57.479 public market. And it's used in the US for really a little bit real 10 00:00:57.600 --> 00:01:02.479 estate, but also for things like owning grids, cask grids and stuff like 11 00:01:02.520 --> 00:01:06.959 that. But first of all, from a partner, this podcast is powered 12 00:01:06.959 --> 00:01:11.719 by Expo, an international leader in providing sustainable energy solutions for the future. 13 00:01:11.400 --> 00:01:21.120 So they're about thirty listed infrastructure funds on the London stockick Change and it's something 14 00:01:21.239 --> 00:01:26.120 very particular. That's why we wanted to dive a bit into the operational and 15 00:01:26.200 --> 00:01:32.159 financial performance of those funds because they've been biggest set owners. They are biggest 16 00:01:32.159 --> 00:01:36.879 set owners. Their size is generally a bit less than a billion, but 17 00:01:37.000 --> 00:01:40.560 generally more than five hundred, so you know, it's a bit of a 18 00:01:40.599 --> 00:01:47.959 MidCap and they are managed by quite interesting teams're absolutely and they're they have been 19 00:01:48.079 --> 00:01:53.359 very important for the renewable rollout, particularly the UK because they have been really 20 00:01:53.719 --> 00:02:00.040 active buyers of everything from offshore into batteries. So we have decided to bring 21 00:02:00.719 --> 00:02:09.639 a veteran of the industry because collect Odd with a director at dB Numis has 22 00:02:09.719 --> 00:02:15.039 been tracking those vehicles for more than twenty years. She knows what she's talking 23 00:02:15.080 --> 00:02:17.879 about, she sure does. It was great to have her on the show. 24 00:02:19.919 --> 00:02:23.039 DBI Numiss, I mean, everybody knows Numis. It's a leading UK 25 00:02:23.199 --> 00:02:29.319 focused investment bank in the mid market and now it's part of Toutcha Bank, 26 00:02:29.400 --> 00:02:35.680 so it's called Deutscha Numiss and nobody knows Doutchia Bank. No Doutcha Bank are 27 00:02:35.759 --> 00:02:39.000 really a bad decade, but it seems that they're doing much better now. 28 00:02:39.039 --> 00:02:44.439 On the way back. On the way back, and you know gave me 29 00:02:44.599 --> 00:02:50.400 the idea to do this episode. It's your partner mister Bruce Buber. Oh 30 00:02:50.479 --> 00:02:53.639 Bruce, did I tell you? Okay? And because he wrote a very 31 00:02:53.680 --> 00:03:01.280 interesting piece in December last year, yield coo, bargain or zombie? Yeah, 32 00:03:01.400 --> 00:03:04.560 very good, very good, very good. Yeah. I think we'll 33 00:03:04.599 --> 00:03:08.919 put the link and finally, finally, job, we're going to talk fixed 34 00:03:09.000 --> 00:03:15.759 income and equity. Finally, Well, let's bring it on. I'm looking 35 00:03:15.759 --> 00:03:20.960 forward to this, colect welcome to the show. Thanks for having me. 36 00:03:21.439 --> 00:03:23.039 Let's just jump straight into this. I mean, we're going to talk about 37 00:03:23.400 --> 00:03:27.560 what we in the finance will know as yield CAUs. But I think a 38 00:03:27.560 --> 00:03:30.639 lot of people probably don't know what they are, so maybe you could talk 39 00:03:30.680 --> 00:03:35.479 about what they are and then where they're actually important for this whole renewables area. 40 00:03:35.680 --> 00:03:38.080 Firstly, in terms of the parlance, yield cosee is a guesser term 41 00:03:38.120 --> 00:03:44.400 which has greater use in the States coming out of things like the MLP structures. 42 00:03:44.719 --> 00:03:49.879 I don't specifically refer to the London listed infrastructure companies as yield cos per 43 00:03:49.919 --> 00:03:53.280 sale, though of course they do have income as a major component of their 44 00:03:53.280 --> 00:03:59.319 total returns. Depending on the infrastructure strategy, it's between fifty and eighty percent 45 00:03:59.520 --> 00:04:03.080 of the return targets come from income, and in the context of renewable energy 46 00:04:03.080 --> 00:04:09.439 specifically generators, they're sort of roughly around seventy percent income, so have some 47 00:04:09.520 --> 00:04:13.639 sympathy with the parlance. But I think what a lot of investors also hope 48 00:04:13.680 --> 00:04:18.279 to achieve in owning these kind of listed products is access to some capital growth 49 00:04:18.279 --> 00:04:24.360 as well through active management of portfolios, which includes bringing through new assets. 50 00:04:24.399 --> 00:04:30.439 And so from a transition perspective, they've been very important for delivering growth and 51 00:04:30.480 --> 00:04:34.240 delivering the assets that we need to meet the transition targets. And in the 52 00:04:34.319 --> 00:04:40.199 UK specifically, there have been a large number of funds. There are twelve 53 00:04:40.240 --> 00:04:45.480 renewable generators. There's seventeen that focus on the energy transition more generally, but 54 00:04:45.600 --> 00:04:48.839 of those twelve, renewable generators have been around since twenty thirteen. That was 55 00:04:48.879 --> 00:04:56.439 the first listed renewable generator company and that was Greencoat UK Wind, followed shortly 56 00:04:56.480 --> 00:04:59.639 by a number of others that year, including blue Field Solar. The first 57 00:04:59.800 --> 00:05:03.319 so a focus business and they've been around really to facilitate the transition. So 58 00:05:03.439 --> 00:05:08.000 when the UK was a primary market, when new projects needed to be funded, 59 00:05:08.519 --> 00:05:12.360 this was a route for investors to participate in that journey, and so 60 00:05:12.399 --> 00:05:16.199 it's been quite a key part of allowing the UK in particular initially to build 61 00:05:16.240 --> 00:05:21.480 out its renewable energy asset base, and the listed companies that we follow they 62 00:05:21.519 --> 00:05:28.879 own and operate a meaningful portion of the UK's renewable energy capacity. It started 63 00:05:28.879 --> 00:05:32.079 off with the UK focus, but as investors became more familiar with the nature 64 00:05:32.079 --> 00:05:35.360 of returns, as we said, income being a key component of that, 65 00:05:36.240 --> 00:05:43.240 then we've seen other investment companies listed which are investing in other jurisdictions, again 66 00:05:43.720 --> 00:05:47.160 with a view to giving investors access to the energy transition and the income and 67 00:05:47.240 --> 00:05:51.360 capital growth that can come from that. So we've got European focused portfolios, 68 00:05:51.800 --> 00:05:57.959 some US focused portfolios which perhaps haven't offerred as well in growth terms. So 69 00:05:58.000 --> 00:06:00.639 we've got a broad mix of it, international ass sets, different technologies, 70 00:06:00.920 --> 00:06:04.720 all part of the energy transition. Can I ask you a little bit about 71 00:06:04.759 --> 00:06:09.000 the background of how they came into being, because if you look at these, 72 00:06:09.680 --> 00:06:12.279 you can call them investment companies or whatever you want, but for me, 73 00:06:12.319 --> 00:06:15.600 they're funds, right, They're not like an independent power producer that we 74 00:06:15.639 --> 00:06:20.000 see sort of across the rest of the world. It's a very specialized vehicle, 75 00:06:20.040 --> 00:06:24.240 if you'd like to say, for investing. The structure of the investment 76 00:06:24.279 --> 00:06:29.639 companies is there's an independent board who's there to really look at ensuring that the 77 00:06:29.680 --> 00:06:36.560 target returns and the risks and diversification requirements of a listed company are being delivered, 78 00:06:36.800 --> 00:06:43.600 and they are managing. External managers are in charge of sourcing the assets 79 00:06:43.800 --> 00:06:46.279 and operating the assets, and they are the sort of the entrepreneurs and the 80 00:06:46.720 --> 00:06:51.639 experts in the asset class. It's a number of engineers and financial and technical 81 00:06:51.720 --> 00:06:59.199 experts who have put together portfolios which can deliver dynamics or investment characteristics which are 82 00:06:59.480 --> 00:07:01.839 attractive to a broad range of buyers. But these are investment companies. These 83 00:07:01.879 --> 00:07:06.160 are listed companies, so a bit different to MLPs in their structure slightly. 84 00:07:06.360 --> 00:07:12.519 They are owned by a wide range of investors from pension funds, institutional investors, 85 00:07:12.560 --> 00:07:16.360 retail investors, wealth investors. So the benefit of the structure is that 86 00:07:16.399 --> 00:07:20.480 it gives access to a broad range of investor types to the asset class, 87 00:07:20.759 --> 00:07:27.040 particularly where they're interested in participating in the energy transition and growth. But again 88 00:07:27.199 --> 00:07:30.879 it's not unique to renewable energy, unlike MLPs, which are specific to certain 89 00:07:30.920 --> 00:07:35.839 asset types. Investment companies actually invest in a broad range of asset classes, 90 00:07:36.000 --> 00:07:40.399 and the renewable energy peer group that we look at, so whether it's the 91 00:07:40.439 --> 00:07:46.079 twelve generators or the broader energy transition peers are part of actually a much bigger 92 00:07:46.120 --> 00:07:50.199 infrastructure peer group of thirty with a thirty billion aggregate market cap. Slightly different 93 00:07:50.199 --> 00:07:55.920 strategies, but designed to give a broad range of investors exposure to some large 94 00:07:55.959 --> 00:08:03.040 ticket assets delivering some economic and social environmental good I guess, Please correct me 95 00:08:03.079 --> 00:08:07.519 if I'm wrong. The general thesis was those yield companies will deliver or yield 96 00:08:09.240 --> 00:08:16.439 which is almost government back through existing support scheme, and the yield would be 97 00:08:16.839 --> 00:08:22.040 much higher than government bonds. So have those companies delivered the yield they were 98 00:08:22.279 --> 00:08:28.360 supposed to? And as that this is evolved over time, they all have 99 00:08:28.480 --> 00:08:33.240 stated total return targets and they give quite clear guidance on the level of dividends 100 00:08:33.279 --> 00:08:37.879 that they seek to pay to shareholders over certain periods of time, and that 101 00:08:37.919 --> 00:08:39.159 will be based, of course, as you say, on the level of 102 00:08:39.320 --> 00:08:43.720 earnings visibility that the companies have. Now if some of them have a high 103 00:08:43.759 --> 00:08:50.679 proportion of subsidies or regulated income clearly the visibility around those income levels is greater 104 00:08:50.799 --> 00:08:54.360 than if it was all merchant power price exposure, where obviously variability of power 105 00:08:54.440 --> 00:09:00.200 price will be a feature. They've all delivered their target dividends in each every 106 00:09:00.279 --> 00:09:05.799 year to investors. They have typically grown their dividends in most years. There 107 00:09:05.799 --> 00:09:09.200 are one or two examples where that's not been the case, but most funds 108 00:09:09.240 --> 00:09:13.279 have grown their dividends. There are some companies that have a stated policy to 109 00:09:13.440 --> 00:09:20.559 grow dividends in line with inflation, and so again investors, they've certainly looked 110 00:09:20.600 --> 00:09:24.639 at the sector because of the level of earnings and dividend visibility that they can 111 00:09:24.000 --> 00:09:28.440 achieve. Importantly, with the exception of the very weak power price backdrop that 112 00:09:28.480 --> 00:09:35.200 we saw going into the pandemic, most companies have consistently covered their dividends from 113 00:09:35.279 --> 00:09:41.279 cash flow generated from the portfolio net of paying back debt, although management costs 114 00:09:41.320 --> 00:09:46.159 and roughly speaking, there's been as a bias in the UK portfolios towards subsidy 115 00:09:46.159 --> 00:09:50.360 based cash flows. It's between fifty and sixty percent of revenues come from subsidies, 116 00:09:50.399 --> 00:09:54.159 so that gives you the visibility. The remainder comes from merchant power pricing. 117 00:09:54.799 --> 00:09:58.279 And what the managers are there to do is, of course, manage 118 00:09:58.320 --> 00:10:03.759 that volatility through time. And what we've seen is some pretty good successes, 119 00:10:03.480 --> 00:10:09.759 some standout companies who've been able to hedge sufficiently well to mitigate the lows as 120 00:10:09.759 --> 00:10:13.519 well as maximize the highs. And that has given a healthy level of earnings 121 00:10:13.679 --> 00:10:20.080 growth and dividend growth, and that has supported total returns over time and by 122 00:10:20.120 --> 00:10:22.799 and large the target returns that were set at IPO. If we look back 123 00:10:22.840 --> 00:10:28.759 to the IPO targets, the majority of the companies that are fully invested have 124 00:10:28.919 --> 00:10:33.799 met or exceeded their target returns. So that we would say is a validation 125 00:10:33.919 --> 00:10:37.240 of the strategy and the thesis. How the market views that at any point 126 00:10:37.240 --> 00:10:41.000 in time, of course as a function of when everything else is doing in 127 00:10:41.080 --> 00:10:45.519 the market, but the sector has delivered on its thesis to date. I 128 00:10:45.559 --> 00:10:48.960 can hear that in theory, But when I look at the share prices, 129 00:10:50.200 --> 00:10:54.000 I think all of them are trading with as in value. And maybe you 130 00:10:54.000 --> 00:10:56.039 could talk a little bit about that, because again most of us are realized 131 00:10:56.039 --> 00:11:00.360 that when we put money in a business, you look at earnings. But 132 00:11:00.480 --> 00:11:03.159 actually in this case I talked about NOV so maybe talk about that and why 133 00:11:03.240 --> 00:11:09.600 you think these companies are training when all love And also i'd ask just in 134 00:11:09.639 --> 00:11:13.840 relation to that, well, you know, we've seen last year, we've 135 00:11:13.879 --> 00:11:18.559 seen takeovers of one of the listed businesses, and there's obviously been a huge 136 00:11:18.559 --> 00:11:20.879 amount of rumors in the market about other takeovers. And this says, I'm 137 00:11:20.879 --> 00:11:24.600 sure we're going to see more mergers in that, but that only happens when 138 00:11:24.600 --> 00:11:26.639 there's undervalued. So then I would argue, well, well, why are 139 00:11:26.679 --> 00:11:31.679 they undervalued? It's a good question. Net asset values are the key metrics 140 00:11:31.679 --> 00:11:37.639 that investors use in this segment of the market to price the shares, and 141 00:11:37.679 --> 00:11:41.039 you're correct, the last eighteen months or so I've been a difficult period for 142 00:11:41.159 --> 00:11:46.399 share prices for renewable energy companies, but I would say that that is the 143 00:11:46.440 --> 00:11:50.759 case for all infrastructure businesses, and indeed that extends beyond the infrastructure segment. 144 00:11:52.000 --> 00:11:54.600 And part of that, as you'll be familiar with, is is of course 145 00:11:54.600 --> 00:11:58.679 the volatile macro backdrop that we've seen and the rapid rise in rates that we've 146 00:11:58.679 --> 00:12:03.440 seen interest rates across the different geographies. And how the net asset values work 147 00:12:03.799 --> 00:12:09.080 is they're based on DCF discounter cash flow valuations provided by the directors of the 148 00:12:09.120 --> 00:12:13.039 business and they look at the cash flows that they expect to receive based on 149 00:12:13.440 --> 00:12:20.360 the subsidies and the inflation escalations and their view of merchant pricing or more specifically 150 00:12:20.399 --> 00:12:26.679 a third party independent view on power pricing, and those individual assets are aggregated, 151 00:12:26.879 --> 00:12:30.279 and so the NEST asset value is a function of a DCF based on 152 00:12:30.320 --> 00:12:33.080 the cash flows they expect to receive over the life of the projects, and 153 00:12:33.159 --> 00:12:37.360 of course the asset life and how long you expect to receive those cash flows 154 00:12:37.480 --> 00:12:43.519 is also a feature of the net asset value. Discounts appear usually in the 155 00:12:43.559 --> 00:12:48.600 listed markets when the market is uncertain around the valuation of the assets the NESTS 156 00:12:48.639 --> 00:12:52.120 asset value. Generally, discounts exist because either they think the valuation or the 157 00:12:52.120 --> 00:12:56.759 assets are wrong. The balance sheets are higher risk, i e. There 158 00:12:56.840 --> 00:13:01.320 might be some refinancing exposure, and of course we've been through this higher rate 159 00:13:01.440 --> 00:13:07.120 environment, or whether cash flows aren't deliverable or dividends can't be supported. And 160 00:13:07.159 --> 00:13:11.000 what I would say generally about the companies that we follow in the context of 161 00:13:11.120 --> 00:13:16.879 infrastructure more generally and the renewables, is that asset values have been relatively robust, 162 00:13:18.000 --> 00:13:22.559 so notwithstanding lower power price forecasts compared to peak levels that we've seen, 163 00:13:22.279 --> 00:13:28.720 Notwithstanding obviously inflation and rising rates, inflation has been a general positive tailwind for 164 00:13:28.759 --> 00:13:33.519 net asset values of these companies because of the subsidies tending to have the annual 165 00:13:33.639 --> 00:13:39.720 escalation with inflation we've seen. Generally, the majority of companies have long term 166 00:13:39.960 --> 00:13:46.320 fixed cost debt, so there aren't any refinancing cliffs, as it were. 167 00:13:46.120 --> 00:13:50.000 There is in the capital structure a slight nuance. There is a mixture of 168 00:13:50.080 --> 00:13:54.879 long term strategic debt at the portfolio of company level, and there's also an 169 00:13:54.919 --> 00:13:58.679 element of shorter term bridge financing which is bearing higher interest rates, but that 170 00:14:00.240 --> 00:14:03.279 to be a relatively small portion of the capital structure. So generally, the 171 00:14:03.360 --> 00:14:09.919 reasons why discounts exist to asset values are because valuations aren't stable or are expected 172 00:14:09.960 --> 00:14:15.279 to come down. They have been generally stable modest declines between minus one and 173 00:14:15.279 --> 00:14:18.919 a half to plus one and a half percent each quarter. They are quarterly 174 00:14:20.039 --> 00:14:24.639 valuations, so we get a good level of visibility and at semi annual points. 175 00:14:24.639 --> 00:14:28.559 Sore annual results and the interim results management teams provide a lot of granularity 176 00:14:28.600 --> 00:14:33.639 around the sensitivities to valuation. They tell us the position that they have over 177 00:14:33.679 --> 00:14:37.159 their hedging, so we can see earnings visibility. So again, notwithstanding the 178 00:14:37.200 --> 00:14:41.919 power prices coming down from the lows, the net usset values haven't seen a 179 00:14:43.120 --> 00:14:46.200 major fall as a result of that phenomenon alone because of the high level of 180 00:14:46.240 --> 00:14:52.159 short term hedging positions that have been employed. Actually, the longer term outlook 181 00:14:52.200 --> 00:14:58.600 for power prices as published by the Independent Power Price Forecasters, has been generally 182 00:14:58.639 --> 00:15:01.759 stable, but speaking, the balance sheets have been stable. Fixed costs so 183 00:15:01.879 --> 00:15:07.799 limitedary financing. Asset values have benefited from a positive tailwind from inflation, which 184 00:15:07.840 --> 00:15:13.799 is offset higher discount rates discount rate being the key metric in discount cash flow 185 00:15:13.639 --> 00:15:18.720 and to reflect the rising rate back draw where often investors look at achieving a 186 00:15:18.840 --> 00:15:24.440 premium over risk free rates so relevant bond yields in relevant markets. What we've 187 00:15:24.440 --> 00:15:28.240 seen is that managements, when they're valuing the future cash flows, they have 188 00:15:28.320 --> 00:15:33.919 started to reflect that higher rate environment into their DCF so increase their discount rates, 189 00:15:35.200 --> 00:15:39.080 which we think is giving currently at the moment over a four hundred plus 190 00:15:39.240 --> 00:15:43.960 basis point premium over risk free rates. So we think that's a reasonable risk 191 00:15:43.039 --> 00:15:46.799 premium for the kind of cash flows that you get in these specific companies, 192 00:15:46.799 --> 00:15:52.679 whereas I say there is a reasonable element of earning visibility. Wow, that 193 00:15:52.919 --> 00:15:58.000 was a long explanation. I'm trying to make it a bit shorter for the 194 00:15:58.519 --> 00:16:03.639 non specialists. Can I summarize by saying, Look, government bonds used to 195 00:16:03.639 --> 00:16:07.919 be at one percent or two percent, so everybody was happy with a six 196 00:16:08.080 --> 00:16:12.759 or seven percent return, and now government's bonds are five or six so we 197 00:16:12.879 --> 00:16:18.080 expect almost double digit from those guys. So the validation has to readjust to 198 00:16:18.480 --> 00:16:23.000 meet those new expectations or is it probably more complex than that. It is 199 00:16:23.000 --> 00:16:26.960 slightly more complex than that. I mean, there isn't a one for one 200 00:16:26.039 --> 00:16:30.360 move. If on deeals rise by three hundred basis points, that does not 201 00:16:30.519 --> 00:16:36.039 normally equate to a discount rate increase of three hundred basis point because, as 202 00:16:36.039 --> 00:16:41.120 a reminder, the valuation of the listed companies that we look at didn't track 203 00:16:41.320 --> 00:16:45.159 the bon yealds going to record lows in the valuation, so they didn't move 204 00:16:45.200 --> 00:16:49.360 discourates down to the same degree, so they won't move up to match one 205 00:16:49.399 --> 00:16:55.279 for one the same degree. So it's definitely an input into the discount rate 206 00:16:55.320 --> 00:16:59.320 assumption. But what you also have, of course is third party transaction evidence, 207 00:16:59.679 --> 00:17:03.400 which gives investors again another sense for what other parties are willing to pay 208 00:17:03.400 --> 00:17:07.000 for these assets. And in terms of the listed companies, what we've seen 209 00:17:07.039 --> 00:17:11.680 to date is examples of them selling assets, a range of assets in a 210 00:17:11.839 --> 00:17:18.480 range of geographies with different characteristics, selling them above where the net asset value 211 00:17:18.759 --> 00:17:22.160 has valued them at the last reported date. So we're seeing a combination of 212 00:17:22.400 --> 00:17:27.039 managers have increased discount rates to reflect a rise and bond yields, and we're 213 00:17:27.039 --> 00:17:33.200 also seeing third party transaction evidence showing us that valuations in the listed funds are 214 00:17:33.319 --> 00:17:37.599 robust because people are buying at levels that are higher than the valuation. Applies 215 00:17:38.680 --> 00:17:42.960 back to the question about discounts and why the discounts are there, whether net 216 00:17:44.000 --> 00:17:47.680 asset values can be trusted or relied upon. I think we have to look 217 00:17:47.720 --> 00:17:52.640 at those two things as a starting point before overlaying individual company specifics, which 218 00:17:52.680 --> 00:17:56.440 is where does the discount rate value the cash flows relative to respected bonds. 219 00:17:56.480 --> 00:18:00.000 And we think, as I say, there's a comfortable buffer and all their 220 00:18:00.039 --> 00:18:04.759 buyers out there for these assets at prices which the listed companies are applying in 221 00:18:04.799 --> 00:18:10.200 the netosset values. Those two points have been proven in recent times in recent 222 00:18:10.240 --> 00:18:14.720 months in the sector. Can I also ask you a little bit about how 223 00:18:14.720 --> 00:18:17.720 you see the future. And I just want to make a point that, 224 00:18:18.000 --> 00:18:22.079 certainly from the renewables point of view, these zeal coals are incredibly important, 225 00:18:22.200 --> 00:18:26.200 especially in the UK, and the reason why because they were the best buyers 226 00:18:26.200 --> 00:18:30.559 in the market. They were the lowest cost of capital for owning renewables. 227 00:18:30.039 --> 00:18:33.319 But if I look going forward, it's going to be very difficult for these 228 00:18:33.359 --> 00:18:37.200 companies to raise money. So correct me if I'm wrong, and it's to 229 00:18:37.279 --> 00:18:41.880 just talk about how you see that. Then another important piece of the puzzle 230 00:18:41.920 --> 00:18:48.279 when we're looking at companies as well as current valuation statistics is how sustainable are 231 00:18:48.319 --> 00:18:52.519 these returns over the long term. Can companies continue to grow and enhance returns 232 00:18:52.519 --> 00:18:55.759 over time? What are the sources of the capital to allow them to do 233 00:18:55.839 --> 00:18:59.680 that? And of course raising equity in the listed markets, as you say, 234 00:18:59.759 --> 00:19:03.640 is incredibly important in that growth story. But you know, even if 235 00:19:03.680 --> 00:19:07.720 if we look at some recent newsflow across the sector, we can see that 236 00:19:07.079 --> 00:19:12.079 companies and boards and again the independent boards are important here, but managers and 237 00:19:12.119 --> 00:19:18.000 boards have been looking across the portfolios and businesses to see what they can do 238 00:19:18.079 --> 00:19:22.640 to continue to work their existing asset base to raise capital from other forms. 239 00:19:22.839 --> 00:19:27.960 And we've seen the introduction of strategic partnerships a recent one with some local pension 240 00:19:27.960 --> 00:19:33.279 funds and a very large, well known solar business which provides a number of 241 00:19:33.359 --> 00:19:37.640 options for the business to continue to generate returns over time. So we've just 242 00:19:37.680 --> 00:19:41.440 seen what the listed format on the board structure of the companies allows them to 243 00:19:41.480 --> 00:19:45.640 do is explore all options. Selling assets has been a way to raise capital 244 00:19:45.680 --> 00:19:49.519 to reinvest into new developments. So selling on assets that have been held for 245 00:19:49.599 --> 00:19:55.759 period of time, operational assets generating good levels of earnings. You selling on 246 00:19:55.799 --> 00:20:00.519 to additional holders using that cash to pay down debt facilities, which which allows 247 00:20:00.519 --> 00:20:04.519 the funds to free up capital options to fund their pipeline. And it's about 248 00:20:04.559 --> 00:20:10.000 looking at who's got access to proprietary pipeline as well as sources and uses of 249 00:20:10.000 --> 00:20:12.920 funding it. At the moment, strategic options have been undertaken, so selling 250 00:20:12.920 --> 00:20:18.480 assets, recycling capital, using excess cash to fund the pipeline. You know, 251 00:20:18.519 --> 00:20:21.400 a lot of these companies, as I've already said, have not just 252 00:20:21.480 --> 00:20:25.279 met their dividend targets, that they exceed their dividend targets and they've got excess 253 00:20:25.279 --> 00:20:27.759 capital beyond that, and so they are able to use that access capital to 254 00:20:27.799 --> 00:20:33.039 fund growth. So it might be sources of capital coming from a broader space. 255 00:20:33.559 --> 00:20:37.279 And when the market that sentiment returns to the sector, as we believe 256 00:20:37.319 --> 00:20:41.960 it will, then that will be another opportunity to fund growth. But not 257 00:20:41.000 --> 00:20:45.440 all businesses will have access to proprietary pipelines. And then is those businesses that 258 00:20:45.480 --> 00:20:52.279 we think will have more options around finding additional sources. It's time to be 259 00:20:52.359 --> 00:20:56.960 a bit provocative. Was it just a moment? And I don't want to 260 00:20:56.960 --> 00:21:02.160 make the ballel with SPACs in the US because SPACs that's upon this scheme mostly. 261 00:21:03.039 --> 00:21:07.200 Now, if you look at the sophistication of the big fund managers, 262 00:21:07.519 --> 00:21:12.160 the KKR, the black Rock, the Macquarie of this world, who somehow 263 00:21:12.480 --> 00:21:18.720 creates similar vehicirls. Maybe if you're a big pension fund, you're going to 264 00:21:18.759 --> 00:21:22.839 ask yourself or should I put my money in a yield core or with those 265 00:21:22.160 --> 00:21:26.759 very larger non listed supermarket of finance. If I may say, so, 266 00:21:27.160 --> 00:21:32.079 do you have an opinion on this? I do so. Look it's a 267 00:21:32.119 --> 00:21:36.519 valid point, and we'll remind ourselves that some of the recent news flows is 268 00:21:36.559 --> 00:21:41.599 showing you that some of those pension fund investors who might also choose to invest 269 00:21:41.640 --> 00:21:47.000 their money with the larger asset managers in private funds, which different fees for 270 00:21:47.039 --> 00:21:51.640 different investors. I think the benefit of an investment company structure is that the 271 00:21:51.680 --> 00:21:56.079 fees are quite clear the return targets that you're looking to achieve a net of 272 00:21:56.119 --> 00:22:00.279 those fees. So you've got liquidity in listed funds which perhaps you don't have 273 00:22:00.400 --> 00:22:03.920 the same access to in other structures. You know, different structures will work 274 00:22:03.960 --> 00:22:07.480 for different kinds of investors, of course, but again we would say that 275 00:22:07.519 --> 00:22:12.440 there are examples and recent examples if we look at the announcements say from blue 276 00:22:12.480 --> 00:22:19.200 Field Solar Income and the strategic partnership announced with Glen Infrastructure, whereby you've got 277 00:22:19.400 --> 00:22:25.400 groups of pension funds so long term investors in the energy transition partnering up with 278 00:22:25.480 --> 00:22:30.839 a well established listed company operator that has a track record of developing assets at 279 00:22:30.839 --> 00:22:34.960 an opportune point in time in the market and has built a proprietary pipeline. 280 00:22:36.119 --> 00:22:38.599 So I would say different things work for different investors. But a key benefit 281 00:22:38.680 --> 00:22:45.160 of the investment companies is that the liquidity and the visibility over fees. And 282 00:22:45.200 --> 00:22:51.759 as I say, they are companies with active managers who have been busy building 283 00:22:51.799 --> 00:22:56.359 portfolios of opportunities which the shareholders can benefit from. How they fund them is 284 00:22:56.400 --> 00:23:03.480 becoming more innovative through strategic partnerships or selling older assets to recycle. But that's 285 00:23:03.480 --> 00:23:07.039 the benefit of the sector is it gives the investors the choice to invest when 286 00:23:07.079 --> 00:23:10.960 it works for them and to exit when it works for them. And that 287 00:23:11.039 --> 00:23:15.359 is a big difference between the listed investment company structure and other forms of investment. 288 00:23:15.400 --> 00:23:21.599 You're reliant on drawdown and access to deals with which are perhaps slightly less 289 00:23:21.599 --> 00:23:25.640 out of your control, versus a listed company that will typically look to be 290 00:23:25.680 --> 00:23:29.599 fully invested at all times. So draw down is a big positive factor for 291 00:23:29.640 --> 00:23:32.960 listed funds. Collect Now, first of all, thank you very much for 292 00:23:33.000 --> 00:23:36.079 this. As I'm listening to you, I'm just reflecting, and I suppose 293 00:23:36.559 --> 00:23:40.519 if you look at an alternative for these businesses. Alternative for these businesses that 294 00:23:40.519 --> 00:23:45.119 they become independent power producers and then move in that direction and The reason I 295 00:23:45.160 --> 00:23:48.240 say that is because if you look at the future. You said earlier on 296 00:23:48.319 --> 00:23:52.680 that a lot of these vehicles what they had was they had government back revenues. 297 00:23:52.799 --> 00:23:56.480 I if I look in the future, it's not government back revenues, 298 00:23:56.519 --> 00:23:59.759 it's our purchase agreement. You might have a CFD that gives you some form 299 00:23:59.799 --> 00:24:04.680 of risk reduction, which you know, monetization of your portfolio through trading and 300 00:24:04.720 --> 00:24:10.240 all this typics becomes much more important. And that sort of sounds to me 301 00:24:10.319 --> 00:24:12.440 like an independent power producer. And also, then as you just said, 302 00:24:12.559 --> 00:24:18.640 I think the pipeline is really really really important. Rather than just being a 303 00:24:18.960 --> 00:24:22.559 I say, a dumb buyer of assets, what you need to be is 304 00:24:22.559 --> 00:24:26.960 the intelligent manager of assets and whatever. And that's going to be more complicated. 305 00:24:26.960 --> 00:24:29.519 So is that not the direction we go? That's what I'm asking, 306 00:24:30.440 --> 00:24:33.839 whether you call it an independent power producer or a renewable generator fund. I 307 00:24:33.839 --> 00:24:37.240 mean, we think that you've got some of the same characteristics that you would 308 00:24:37.279 --> 00:24:41.559 perhaps be more familiar with in an operating company business. You have got management 309 00:24:41.559 --> 00:24:45.400 teams that build pipelines, are not sort of just financial owners of the assets. 310 00:24:45.440 --> 00:24:51.680 These are very well ingrained experts in their respective fields and things like GPAs 311 00:24:51.799 --> 00:24:56.079 and accessing having internal resources. You know, listed companies very much through the 312 00:24:56.119 --> 00:25:00.359 management of these vehicles. You know, if we look at some of the 313 00:25:00.400 --> 00:25:03.599 European names, particularly where PPAs are certainly a bigger part of the market, 314 00:25:04.079 --> 00:25:08.640 managers are adapting to that. They are very much growing their internal merchant markets 315 00:25:08.680 --> 00:25:12.160 teams. Some already have some of the biggest merchant market teams out there. 316 00:25:12.400 --> 00:25:17.680 So we definitely when we're assessing the peer group, look to the manager's expertise 317 00:25:17.759 --> 00:25:22.920 and skill set to ensure that they have exactly what you would expect a toolkit 318 00:25:22.039 --> 00:25:26.960 if you like, across the value chain to run these businesses over time, 319 00:25:27.000 --> 00:25:32.319 and we look at sourcing origination, we look at how they manage power, 320 00:25:32.359 --> 00:25:36.440 price exposure, and risk capital structure. So we look to those managers that 321 00:25:36.519 --> 00:25:41.039 have that broad suite of expertise already in house to take a view on whether 322 00:25:41.039 --> 00:25:45.920 the list of companies can continue to deliver value for shareholders. So the name 323 00:25:45.000 --> 00:25:48.480 that's on the tein asn't wear is less important to me. The analysis is 324 00:25:48.519 --> 00:25:53.480 still the same companies and managers and boards got the added benefit of the boards 325 00:25:53.480 --> 00:25:59.000 in the sector which are independent and therefore there to protect all shareholders' interests. 326 00:25:59.480 --> 00:26:02.680 We do that analysis, So whatever you call them, it's okay for me. 327 00:26:03.160 --> 00:26:06.200 I just want to know that you've got as a manager that skill set 328 00:26:06.279 --> 00:26:11.359 in house which is going to help me take confidence or not on whether you 329 00:26:11.400 --> 00:26:15.680 can deliver the returns you've said you can for investors. Well, thank you 330 00:26:15.839 --> 00:26:18.880 very very much for coming on the podcast. Greatly interesting. Thank you, 331 00:26:18.079 --> 00:26:23.039 yeah, super interesting. Thank you call it sol What did you think of 332 00:26:23.039 --> 00:26:27.880 that? Number? One? It works? Does infrastructure funds delivery yield? 333 00:26:29.640 --> 00:26:33.319 Which was what they were supposed to do? And of course there's a lot 334 00:26:33.319 --> 00:26:38.400 of question around the future because the performance into twenty three was not very good. 335 00:26:38.960 --> 00:26:45.960 But I like the vehicle provides liquidity. It requires much more discipline than 336 00:26:47.000 --> 00:26:52.279 the funds you will have under those big asset manager where they're not as liquid 337 00:26:52.319 --> 00:26:57.400 and I don't know how granular the calculation of nav is and here the fact 338 00:26:57.440 --> 00:27:03.519 that it's industry kickshite provides really the very good understanding of what's going on in 339 00:27:03.559 --> 00:27:08.160 the portfolio. So yeah, I like those vehicles. What I really like 340 00:27:08.240 --> 00:27:14.759 about them is the fact that they give the retail investor and the small institutional 341 00:27:14.839 --> 00:27:19.720 investor, the opportunity to invest directly into renewable assets, because to be clear, 342 00:27:21.000 --> 00:27:22.799 if I try to do this, say where I'm living in Germany, 343 00:27:23.000 --> 00:27:26.799 it's very difficult. I have to go to a private fund and the other 344 00:27:26.839 --> 00:27:32.359 thing and whatever. So I think that's number one. And number two is, 345 00:27:33.200 --> 00:27:37.680 especially in the UK market, they have been the best buyers for renewable 346 00:27:37.680 --> 00:27:41.640 assets for the last seven eight years, and that's really important because what I 347 00:27:41.680 --> 00:27:45.839 mean by the best buyer, what I mean is they are the people who 348 00:27:45.920 --> 00:27:51.680 pay the highest prices. That's a very good thing because what that is actually 349 00:27:51.720 --> 00:27:56.720 doing is it is just increasing the efficiencies in and around the role that are 350 00:27:56.720 --> 00:28:00.599 renewables. We need guys like this that have low costs of capital behind them, 351 00:28:00.000 --> 00:28:03.599 So I think they're very important. I'd love to see changes in tax 352 00:28:03.680 --> 00:28:08.440 legislation and other countries to allow more of these vehicles to go onto the list 353 00:28:08.440 --> 00:28:15.279 of markets. I also really like your comments at the end where you said 354 00:28:15.319 --> 00:28:22.599 that they would progressively morph into ipp independent power producers, because let's be clear, 355 00:28:22.799 --> 00:28:27.480 the thesis when they were created ten years ago was you're going to get 356 00:28:27.519 --> 00:28:34.160 some flat government back revenues, so which really positioned themselves very well into the 357 00:28:34.200 --> 00:28:40.720 core infrastructure, and now their revenues are going to be much more merchant which 358 00:28:40.759 --> 00:28:45.720 means that those you'll go will need to bring in house the expertise of trading, 359 00:28:45.839 --> 00:28:49.839 aging and so on. The way. They're already doing this. Guys 360 00:28:49.880 --> 00:28:55.119 like the Green Coasts are doing this already and it's great because they're adapting to 361 00:28:55.200 --> 00:29:02.240 the changing world renewables. Renewables is not about subsidies anymore. It's about commercializing 362 00:29:02.279 --> 00:29:07.359 renewables and that's two PPAs and that's also true an element of power trading and 363 00:29:07.440 --> 00:29:11.319 risk management and all that type of stuff. So yeah, it's good to 364 00:29:11.359 --> 00:29:15.720 see the leading gel cos becoming an investment companies. That's really what they're becoming, 365 00:29:15.720 --> 00:29:18.880 renewable investment companies. As I said, I'd love to see more of 366 00:29:18.880 --> 00:29:22.880 these coming to being. One of the thought I have is it's going to 367 00:29:22.920 --> 00:29:30.079 be difficult to replicate that model for let's say, pure place storage, because 368 00:29:30.240 --> 00:29:34.240 the results of the storage business is so all over the place. You know, 369 00:29:34.279 --> 00:29:40.000 they might deliver twenty percent one year and they might deliver five percent the 370 00:29:40.039 --> 00:29:42.799 other year. There's too much better. The alpha is great, but there's 371 00:29:42.799 --> 00:29:48.880 too much better. And I think that investors who go into yield cos they 372 00:29:49.079 --> 00:29:55.279 like the low better better means the volatility of the result, the alpha being 373 00:29:55.319 --> 00:29:59.960 the absolute result. I go along with you and we just add that store. 374 00:30:00.039 --> 00:30:03.480 It is going to be a critical part of any of these renewable asset 375 00:30:03.519 --> 00:30:08.880 owners going forward because it enables them to manage the risks in and around negative 376 00:30:08.920 --> 00:30:12.720 pricing, zero pricing, low pricing, et cetera, et cetera. But 377 00:30:12.880 --> 00:30:18.640 just standalone storage, I hear you on that. It's it's just too volatile 378 00:30:18.759 --> 00:30:21.039 for the average customer. Or you don't do it as a yel code. 379 00:30:21.039 --> 00:30:25.079 Maybe you do it as something else. It's a it's a storage fund, 380 00:30:25.440 --> 00:30:26.799 but it's not a yield. You're not there to do yield, right, 381 00:30:27.079 --> 00:30:30.480 yeah, yeah, yeah, yeah yeah. You're a trader, that's what 382 00:30:30.559 --> 00:30:32.480 you are, Isn't it really right? You're going and saying, listen, 383 00:30:32.480 --> 00:30:33.240 we're gon, we're gonna have a great year. We're going to go to 384 00:30:33.279 --> 00:30:37.680 the UK market, then we're going to go to the Textan market. You're 385 00:30:37.759 --> 00:30:40.559 up and down, up and down, and you're managing this portfolio of assets. 386 00:30:40.960 --> 00:30:45.160 But ultimately what you're doing is trading and optimizing. Okay, So it 387 00:30:45.400 --> 00:30:52.160 was a technical, but nevertheless very pleasant conversation. We like it very financial, 388 00:30:52.240 --> 00:30:55.480 so we kind of understand what's going on. Sometimes we get engineers on 389 00:30:55.519 --> 00:31:00.039 the shore and we have no clue what they're talking about. Well, you 390 00:31:00.119 --> 00:31:07.000 understood collect we spoke our language. Yeah exactly. We thank AXPU for the 391 00:31:07.119 --> 00:31:11.000 support, and two weeks time we'll have Aquilla coming back. So I'll talk 392 00:31:11.000 --> 00:31:15.680 to you next week for our minutes and in two weeks time another big interview 393 00:31:15.279 --> 00:31:29.119 look forward to. Thank you for listening to Redefining Energy. Don't forget to 394 00:31:29.200 --> 00:31:33.759 read the show and subscribe on Apple Podcast, Spotify, or the platform of 395 00:31:33.799 --> 00:31:36.599 your choice.