How is sustainability and green thinking affecting a leading infrastructure investor’s appetite and view on the Finnish and Nordic markets?

We Asked

D&I Quarterly Q3/2016

Posted on

21 Jun


Dittmar & Indrenius > Insight > How is sustainability and green thinking affecting a leading infrastructure investor’s appetite and view on the Finnish and Nordic markets?

Today, sustainability and green thinking permeates much of the infrastructure space globally and this trend has been very visible in Finland and elsewhere in the Nordic countries. Finland continues to be one of the hotspots for foreign infrastructure investors, in particular in the energy space, thanks to these global trends.

D&I’s Mikko Eerola asked Managing Director, Infrastructure Dominic Helmsley and Investment Director Jason Cogley of SL Capital Partners, a leading European infrastructure investor, their views on the key drivers for this development and the rationale behind their current portfolio assets in the Nordics.

D&I: Could You Explain the Key Drivers for the Global Investor Community, Including You, in This Asset Class?

Originally sustainability and green thinking took the form of EU regulations and national action plans supporting the deployment of renewable energy generation but also now includes reinforcement of electric grid infrastructure, reserve power, storage and new combined cycle gas turbine plants to manage renewable generation intermittency. Green thinking now also extends to the transportation sector in the form of decarbonisation of rail networks in the UK for example. In short sustainability and green thinking is touching much of the infrastructure world, requiring new capital to implement in turn creating opportunities for investors.

From our perspective, sustainability and green thinking touches each of our three core sectors of transportation, regulated utilities and energy infrastructure.

D&I: What Makes an Interesting Investment Opportunity in This Asset Class for You?

Energy infrastructure is a core part of our investment remit and there’s an abundance of opportunities in the Nordics. A lot of time is spent identifying opportunities that display the right infrastructure characteristics for our fund: high barriers to entry, provision of a public service, good downside resilience and monopolistic tendencies. We’re looking at predominantly brownfield assets and low technology and operational risk. We’re looking for a mix of revenues frameworks from regulated to contracted and some limited merchant exposure. On investment size, we’re targeting the mid to lower mid-market and have taken controlling stakes in smaller investments but have looked to partner with others for larger targets and look at minority stakes where they have the sufficient minority protections. Finally, we are looking at returns of 9-12 %. There’s an abundance of opportunities in the Nordics that fit our remit and so we’re quite picky about what we go after.

D&I: Tell Us About Your Investments in the Nordic Countries and Rationale Behind Them

In terms of sectors, we’re currently invested in the Nordics in a Finnish gas distribution business and a platform of Norwegian operating small hydro. We’ll also look at electricity grids, onshore wind, solar, some CHP, district heating, pipelines and mid-stream storage.

D&I: Your First Finnish Investment, Gas Distribution Service Operator Auris Kaasunjakelu, Is an Interesting Conviction Play?

Absolutely, and contributing to a more sustainable energy market. We’re a believer in the importance of natural gas as a bridging and balancing fuel as Europe continues to decarbonize and so we’re on balance positive about the gas economy in Europe. We’re also encouraged by positive developments in European natural gas supply and pricing with supply side pressure decreasing prices and evidence of increasing dislocation of the cost of gas from cost of oil. In Finland in particular we’re encouraged by the introduction of biogas as a domestic and renewable source of gas which is available to our customers with favourable tax treatment. In addition, we think there is capacity to increase market penetration in Finland especially when compared to other European neighbours which could accelerate if there is a liberalisation of supply in Finland.

D&I: Your Other Nordic Investment Is Small Hydro – Are There Any Safe Harbours in Electricity Generation, Given the Development on Electricity Prices?

Our Norwegian platform of operating small hydro is a good fit because hydro is a technology that has existed as an electricity generation source for more than 130 years and so very low technology and operational risk, very long lasting and we can sell whatever we produce. There is market risk both on power and elcerts but there is a relatively deep market for hedges and so we’re able to hedge away a majority of our price risk for a 5-10 year period at sensible prices. As a June 2015 entrant to the market we’ve not suffered from the electricity price falls in Nordpool that others have been exposed to and are quite bullish about where electricity prices will go over the long run. Hydro as a very long term asset is well placed to benefit from long term price movements and a good proxy for GDP exposure.

D&I: So We Can Expect Further Activity On the Back of These Megatrends on Your Part in the Nordics?

For SL Capital Partners sustainability and green thinking transcends the energy market and we see a healthy pipeline of good quality opportunities. The Nordics remain for us an important part of the expansion of our investment platform outside the UK.

Photo: Julius Konttinen

D&I advised SL Capital Partners in its first investment in Finland, the acquisition of the largest Finnish gas distribution system operator, currently Auris Kaasunjakelu Oy from state-owned gas wholesaler and transmission system operator Gasum Oy. The D&I team brought together specialist knowledge from a number of fields in order to address all relevant aspects of the deal and achieve a smooth execution of the transaction.

In addition, D&I has been involved in various roles in all recent major acquisitions of regulated network businesses in Finland.


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