Pension funds in the UK are set to increase their investments in renewable energy as the sector draws investors with attractive returns, says a survey of 50 pension fund investors by Pureprofile and real estate investment firm Alpha Real Capital.

The survey found that nearly 70% of pension funds plan to increase their allocations to renewables over the next five years, while 10% expect to cut their positions. Some 74% of pension funds surveyed already invest in the sector, with 30% describing it as “mature”, 52% classifying it as “developing” and 18% as “early stage”.

“Renewable energy infrastructure is an attractive secure income asset with predictable cash flows, significant inflation linkage and good duration,” said Phillip Rose, chief executive of Alpha Real Capital.

The pandemic has been an accelerator for the trend towards renewables that was already in place, experts, fund administrators and placement agents told Private Equity News.

“There is no turning back from this,” said Chris Hulatt, co-founder of Octopus Group, an institutional-scale investor in real assets, private credit and high-growth businesses with £2.4bn under management.

Louise Dalton, a partner in the Power team at global law firm CMS, also noted the enhanced appetite from pension funds for the clean energy space during the pandemic. “Although returns are not as attractive as they have been in the past due to the current economic climate, with gilt yields and interest rates so low, current IRRs of 7-8% are very attractive to pension funds as part of a mixed portfolio of investments,” she said.

Dalton said that while short-term power prices are lower as a result of Covid, the longer-term perspective for the sector has not been materially hurt. “Pension funds are looking at 20-year investment horizons, so short-term reductions don’t have a material impact on valuations,” she added.

Despite the growing interest in renewables, Alexandra Daly, chief executive and founder at placement agency AA Advisors, is more sceptical about Covid-19 having created a momentum for renewables.

While there is more consideration around “building back better” post-Covid and what the recovery should look like, whether this materialises into an increase in allocations to renewable energy remains to be seen, Daly said.

“Typically UK pension funds are quite slow moving, but we are seeing the private sector pension funds moving more quickly on this front with a number of high-profile private sector funds now in the process of reviewing the impact investment landscape and looking to allocate to funds in this space in the near-term,” she said.

Another aspect to keep in mind is the level of subsidies the sector relies on, which is expected to progressively fade away in the next years.

The Alpha Real Capital survey covered UK pension funds, but experts are confident this is a widespread trend in Europe, with some countries more developed than others.

German and Nordic investors are very active in this space, according to Anish Butani, senior director of private markets at Bfinance, a financial advisory firm. Butani said Bfinance is aware of around 40 renewable energy strategies raising capital from investors at the moment, with the substantial majority of these Europe-denominated and targeting assets on the continent.

The top two investment areas for the next five years are expected to remain solar and onshore wind, according to the Alpha Real Capital study.

Apart from infrastructure assets, Andy Pitts-Tucker, managing director of ESG ratings & advisory at global financial services provider, Apex Group, has also seen clients interested in “clean technology”, as “there is a heightened awareness around both environmental and social investment opportunities,” he said.

Investors are also looking further afield because there has been a compression on returns observed in many onshore wind, offshore wind and solar assets in developed economies with mature regulatory environments, Butani said.

“A growing number of investors are looking further afield: into new technologies that support energy efficiency or grid stability; taking more construction and development risk to generate higher returns,” she said. 

In the post-Covid era, renewables and all its satellite segments will have more space to shine, market insiders anticipate. 

“As impact investing continues to grow, I expect real assets like renewable energy – that combine high yields with a clear social benefit – to be a haven for schemes to satisfy both demands at once,” Octopus’ founder Hulatt said. “There is no hiding place anymore for companies who behave badly – or the pension funds who back them”.

Source: Private Equity News

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