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Attracting and Maintaining Institutional Investment in Renewable Energy

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Slides from the second afternoon panel session at the Eversheds event: Attracting and Maintaining Institutional Investment in Renewable Energy - 2nd July 2012

Slides from the second afternoon panel session at the Eversheds event: Attracting and Maintaining Institutional Investment in Renewable Energy - 2nd July 2012

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  • 1. Market of opportunityA workshop on attracting and maintaininginstitutional investment in renewable EnergyLondon2 July 2012
  • 2. Welcome and introductionChair:Michelle T DaviesHead of Clean Energy and SustainabilityEversheds
  • 3. Resource Revolution:Meeting the world’s energy,materials, land and water needsMcKinsey Global InstituteSustainability and Resource Productivity PracticeEversheds presentationJuly 2, 2011CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited
  • 4. Main messages ▪ The resource challenge of the next 20 years will be quite different from any we have seen in the past in five main ways 1. 3 billion new middle class consumers 2. Increasingly challenging and expensive sources of new supply 3. Increasing linkages between resources 4. Environmental factors creating negative feedback loops 5. Growing concern about resource access of the poorest households ▪ This new resource era creates large upside and downside risks for renewables – Large emerging market demand – New technological innovations such as shale gas could reduce penetration of renewables – Uncertain learning curves for renewables, highly dependent on manufacturing and supply chain efficiencies – Policy framework which is uncertain and shifting from climate concerns, to other issues such as energy cost, access and jobs McKinsey & Company | 1
  • 5. ContentsWhat are the emerging resourcetrends?What are the implications for theenergy sector? McKinsey & Company | 2
  • 6. Resource markets are changing fundamentally Commodity prices have increased sharply since 2000 McKinsey Commodity Price Index 260 World War I 240 1970s 220 oil shock ▪ Prices are 200 increasing World 180 War II ▪ Resource prices are 160 becoming more volatile 140 ▪ Resources are 120 increasingly inter-linked 100 80 Post-war Great depression depression 60 40 1900 10 20 30 40 50 60 70 80 90 2000 2011SOURCE: Resource Revolution McKinsey & Company | 3
  • 7. The emergence of 3 billion middle-class consumers will fuel futureGlobal middle class1, Billions of peopledemand 4.88 0.11 0.23 0.31 0.32 3.25 0.68 0.06 3 billion 0.17 0.25 0.33 Sub-Saharan Africa 1.85 0.70 Middle East and North Africa 0.11 0.03 0.18 3.23 Central and South America 0.34 North America Europe 0.66 1.74 Asia-Pacific 0.53 2009 2020 20301 Based on daily consumption per capita ranging from $10 to $100 (in purchasing power parity terms)SOURCE: OECD McKinsey & Company | 4
  • 8. Many countries have shown that as incomes rise, ENERGY EXAMPLEdemand for resource increases—and a similar curveis likely in China and India Historic (1970-2008)Per capita energy consumption, 1970–2008, projected to 2030 for India and China ProjectedMillion British thermal units per person250 United States200150 Australia Historical range Germany for energy consumption France100 evolution South Korea Japan United Kingdom 2030 projected 50 China 2030 projected India 0 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 Per capita GDP Real 2005 $PPP per personSOURCE: IEA; Global Insight; McKinsey analysis McKinsey & Company | 5
  • 9. Major new driversThere is a significant risk of real price increases of productionand greater volatility as we approach short-term supply limits to 20202020 cost curve – maximum production potential 2030 demand: Breakeven price1 104 Mbpd $/bbl (real 2008$), WTI 120 110 2020 demand: 100 96 Mbpd 90 80 2010 demand: 87 Mbpd 70 60 50 40 existing oil sands Coal to liquids 30 Next phase of Gas to liquids New offshore Oil shale New Iraq 20 10 Capacity Mbpd -2 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 105 110 115 1201 Assumes an IRR of 10% for new capacity additions and cash break-even for existing production capacity2 Includes 3 mbpd and 3 mbd incremental capacity from Iraq and deepwater, respectivelySOURCE: Wood Mackenzie; BP Stat; IOGCC; McKinsey Oil Supply Model team analysis McKinsey & Company | 6
  • 10. Commodity price movements have become more closely linkedCorrelation with oil prices 1980–1999 2000–04 2005–11Maize -0.01 0.74 0.96Wheat -0.07 0.59 0.94Rice 0.32 0.96 0.61Beef -0.11 0.75 0.74Steel -0.01 0.99 0.99Timber -0.52 0.67 0.91SOURCE: McKinsey analysis McKinsey & Company | 7
  • 11. Governments care about these resource issues for different reasons Description Examples ▪ Threats to access to critical inputs (e.g.,Resource water, rare earth metals, etc)security ▪ Risks to competitiveness of local firms inFirm face of rising input costs and constraintscompetitiveness on resource access ▪ Resource prices raising the cost of livingInflation for households and putting pressure on inflation and growth ▪ Potential for local firms to capture globalNew growth resource productivity growthopportunities opportunities ▪ Rising cost of government subsidies inPublic finances the face of higher resource prices ▪ Concerns with resource trends onEnvironmental environmental factorsresilience McKinsey & Company | 8
  • 12. ContentsWhat are the emerging resourcetrends?What are the implications for theenergy sector? McKinsey & Company | 9
  • 13. Four major uncertainties1 Emerging market energy demand2 The shale gas revolution2 Learning curves of renewable technologies3 Regulatory frameworks McKinsey & Company | 10
  • 14. EMERGING MARKET DEMAND GROWTH In energy, the developing world will account for over 90% of the Developing1 growth in energy demand by 2030 with 60% coming from China Developed and India Primary energy demand; QBTU CAGR, Share of 2010-30 growth 664 % % 587 173 China 2.8 43 494 148 57 India 4.3 19 100 39 25 Rest of 1.3 31 222 195 Non-OECD 170 81 81 81 USA >0.1 >1 0.3 4 94 98 101 Rest of OECD 27 29 Global 1.0 3 24 2010 2020 2030 * Includes cross-border energy use, e.g., sea, air travelSOURCE: McKinsey analysis (Cost Curve v3.0); McKinsey Global Energy Perspective (GEP) McKinsey & Company | 11
  • 15. SHALE GAS Renewables1 In the US, cheap gas displaces coal, becoming the2 majority fuel at a price of between $3/MMBTU and $4/MMBTU Petroleum Nuclear Power sector generation by fuel; Henry Hub price, TWh; $/MMBTU Gas Coal 2012 2020 2030 4,421 4,476 4,243 4,336 3,947 4,011 4,061 3,823 727 727 3,765 793 555 555 888 0 558 0 444 567 14 0 28 26 27 29 27 872 872 848 848 872 799 848 872 848 746 975 823 1,207 843 615 657 1,423 1,715 1,653 1,766 1,768 1,619 1,797 1,820 1,615 1,235 1,162 3.5 10 6 4 3 10 6 4 31 Including hydroSOURCE: EIA, US Low Carbon Economics Tool McKinsey & Company | 12
  • 16. LEARNING CURVES Depending on the learning curve improvements of different renewable3 technologies, they could become cost competitive in next 5-10 yearsLCOE at 7% WACC Annual average x cost reduction LCOE 2011-2025 EUR/MWh 200 190 Solar PV 9 180 170 160 150 140 Wind offshore 5 130 120 110 100 Biomass 3Coal/gas today 90 80Coal Europe 70CCGT Europe1 60Coal US 50CCGT US 1 40 30 Wind onshore 1 20 10 0 2011 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Year1 CO2 price in Europe today at 10 EUR/ton McKinsey & Company | 13SOURCE: IEA; Eurostat; Platt’s; EIA; Team analysis
  • 17. LEARNING CURVES Across several technologies, performance improvement levers result3 primarily from manufacturing & SC maturing and technology gainsRelative improvement of LCOE PRELIMINARY ESTIMATES Lever with highest impact Cost reduction potential until 2025 PV Wind Wind Biomass Batteries for (until 2020) onshore offshore greenfield vehiclesTotal 66% 18% 50% 38% 71%improvementManufacturing& Supply 31% 12% 30% 13% 23%ChainMaterials 11% 0% 0% 0% 18%O&M 0% 5% 10% ~0% 0%Technology 24% 2% 10% 25% 30%improvementSOURCE: Solar KIP, Battery KIP, Wind onshore & offshore model; Biomass model; Team analysis McKinsey & Company | 14
  • 18. POLICY UNCERTAINTY Climate and energy policies are seen to be largely driven by energy4 costs, energy security and local jobs, rather than GHG mitigationWhich of the following policy priorities are the most important in determining your countrysfuture climate and energy policies over the next ten years? North Policy makers World Europe America China world total Lowering energy costs 31% 31% 33% 24% 38% Increasing energy security 21% 21% 27% 16% 16% Promoting local jobs and investments 21% 17% 27% 16% 30% Reducing GHG emissions & global warming 11% 14% 6% 16% 12% Reducing local air pollution 9% 8% 3% 25% 4% Increasing physical security 5% 9% 1% 2% 0% (e.g., avoiding nuclear power) N= 3.954 1.409 1.082 148 80SOURCE: Global McKinsey Quarterly survey, November 2011 McKinsey & Company | 15
  • 19. POLICY UNCERTAINTY For those companies that use a CO2 price, the average assumption is 31-4 36 USD/tCO2 by 2020, and 37-42 USD/tCO2e by 2030 across regions Avg. price USD / tCO2e by 2020If you use a CO2 price what level of CO2 price do you use when planningfor future investment decisions, in each economy by 2020? Between 2020-2030? Avg. price USD / tCO2e 2020-2030 Average CO2 price for the Average CO2 price for the Average CO2 price for the EU market US market Chinese market Ø 36 Ø 41 Ø 36 Ø 42 Ø 31 Ø 37 N= N= N= Energy sector 31 20 7 Europe 36 43 34 41 30 38 30 13 7 Energy sector 13 10 11 dev. markets incl. 34 42 36 41 25 29 China and India 13 8 11 Energy sector 11 32 4 32 38 32 41 34 41 North America 11 20 5 Energy sector 4 7 3 Asia Pacific 43 41 41 46 37 40 OECD countries 4 4 3SOURCE: Global McKinsey Quarterly survey, November 2011 McKinsey & Company | 16
  • 20. Institutional Investment Trends in EU RenewablesandA Pension Fund PrimerEVERSHEDS WORKSHOP:Attracting and Maintaining InstitutionalInvestment in Renewable EnergyLondon, 2 July 2012Tom Murley, Director & Head of Renewable Energy, HgCapitalJens Thomassen
  • 21. HgCapital Introduction to HgCapital RPP and HgCapitalFIRM SNAPSHOT INVESTMENT STRATEGY:ϒ Europe’s largest pure-play renewable energy infrastructure investor “Sector expert investors building strategicϒ Over €900 million of dedicated renewable institutional equity renewable energy platforms.” capital raised since 2006ϒ Backed by over 30 leading global institutional investorsϒ Invested in over 70 European renewable projects valued >€1.7 THE EU ENERGY FINANCE GAP (the billion numbers)ϒ Largest financial investor in Nordic onshore wind €1 Trillion: The required investment in European power infrastructure to 2020ϒ Dedicated team with over 75 years power sector experience €600 billion: The finance gap, that utilities and Governments are seeking to bridge with private institutional capital €400 billion: The estimated finance capacity of the EU electric utilities to 2020,ϒ Part of HgCapital, a leading European Private Equity Firmwϒ Founded in 1989champions HGCAPITAL RENEWABLE POWER PARTNERS – BRIDGING THE GAPϒ Over €5 billion of capital committed across nine funds HgCapital supplying equity to over €1.5 billion in EU renewableϒ Equity for growth buyouts and renewable energy infrastructure projects. Not only are we a proven partner for developers, but our experience, track record, exclusive focus EU renewable energy andϒ Large team: more than 90 people in two offices (London and access investment opportunities makes HgCapital the leading Munich) bridge to the institutional investor market.ϒ Independent: owned by its Partners Our goal is to be the investor of choice for EU renewable energy projects Sector expert investors building strategic renewable energy platforms © Copyright 2011 HgCapital 2
  • 22. HgCapital >€900 AUM, largest dedicated EU renewable energy investor Supporting over 1200MW of EU renewable energy projectsRPP Investments as of 10 January 2012 ϒ 3 operating / construction wind farms – 120MW ϒ 10+ development wind farms - >250MW ϒ 6 operating wind farms -113MW ϒ 2 wind farms in construction - 44MW ϒ 3 Permitted wind farms - 48MW ϒ 5+ wind farms in development - >250MW ϒ 34 operating hydro electric projects - 130MW ϒ 2 hydro projects in construction - 10MW ϒ 7 operating solar PV plants - 61MW ϒ 2 operating wind farms -140MW ϒ 1 wind farms in construction - 50MW ϒ 2 operating wind farms - 24MW ϒ 4 wind farms in planning - 120MW Sector expert investors building strategic renewable energy platforms © Copyright 2011 HgCapital 3
  • 23. HgCapital Who are our investors?ϒ Jean Frazierϒ Indiana University Teaching Degree, 1946 (Delayed due to working a drill press in an aircraft factory 1942-1945)ϒ 35 Years 6th grade schoolteacher in Los Angelesϒ Recognized as a California “Master Teacher” from 1965 until retirement in 1981ϒ 91 years old, lives in Laguna Woods Californiaϒ Pension paid by California State Teachers Retirement System, an investor in RPP Fund 1 and RPP Fund 2ϒ One of 856,000 members and beneficiaries of a pension fund with $150 billion in investments - the second largest pension fund in the United States Sector expert investors building strategic renewable energy platforms © Copyright 2011 HgCapital 4
  • 24. EU RE EU Renewable Project InvestmentMarket Resilience being tested; infrastructure investment falling EU RENEWABLE PROJECT INVESTMENT – NEW BUILD AND EXISTING ASSETS, DEBT, EQUITY, M&A, REFINANCING 2007-2012 25,000 22,378 21,946 20,000 19,483 18,486 16,995 17,362 16,432€ Millions 15,647 15,000 12,941 12,301 12,469 11,793 11,975 10,737 10,910 Refinancing 10,000 8,956 7,368 8,071 7,949 M&A 6,862 New Build 5,000 2,942 0 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Source: Bloomberg / New Energy Finance Sector expert investors building strategic renewable energy platforms © Copyright 2011 HgCapital 5
  • 25. Investment Institutional Equity Investment in EU Renewables 2004-2011Survey Dataset and methodologyOBJECTIVE ϒ Map institutional / financial investor equity investment activity in EU renewable energy projects and companies from 1 Since 2004DATA COLLECTED ϒ 263 investments, €9.1 billion equity investments by 38 active investors, includingAND ANALZED ϒ Dedicated renewable infrastructure funds ϒ Dedicated renewable private equity funds ϒ General infrastructure funds ϒ Hedge funds ϒ General private equity funds ϒ Direct investors – pension funds, family offices and insurance companies ϒ Excluded ϒ German and Danish retail investor funds ϒ Regional and small sector funds with <€75m or less in capital (e.g. small solar funds)SOURCES AND ϒ Sources: Prequin, Bloomberg New Energy Finance, New World Energy Network, Sparkspread, InfrastructureMETHOLOGIES Journal, Fund Manager Websites, HgCapital discussions, Fund manager conference presentations ϒ Equity invested based on reported data sources, or if not reported using standard industry comparable (e.g. average selling price of German wind farms circa€1.6m/MW and 75% average gearing, average Italian solar pv deal equity circa €600k per MW). +/- 10% error on deployment. ϒ Certain ungeared investors to geared basis assuming 25% equity Sector expert investors building strategic renewable energy platforms © Copyright 2011 HgCapital 6
  • 26. Investment EU Renewable Project Equity From Financial Investors 2004-2012Survey Financial Investor Equity Investment in EU RE Projects 2004-2012STEADY GROWTH IN Equity Invested (€Millions) €5,000INSTITUTIONAL INVESTMENT €3,963 €4,000ϒ 37% CAGR since 2004 €3,000 €2,000ϒ From 2% to 8-11% of total EU asset €1,179 €692 €806 €867 investment since 2009 €1,000 €348 €451 €550 €263ϒ 2010-2011 growth driven by investments €0 2004 2005 2006 2007 2008 2009 2010 2011 2012 by general infrastructure funds and pensions and insurance companies in: – Single large operating assets (solar thermal and offshore wind); and Financial Investor Equity Investment in EU RE Projects % of Total Debt and Equity Investment – Large operating portfolios (onshore 12% 2004-2012 11% wind and solar PV) 10% 8%ϒ Coincides with reduced utility activity due 8% to balance sheet constraints and an 6% increase in ungeared investment as 4% lending falls 4% 2% 2% 2% 2% 1% 1% 2% 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: HgCapital Research Sector expert investors building strategic renewable energy platforms © Copyright 2011 HgCapital 7
  • 27. Investment EU renewable project equity from financial investors 2004-2011Survey INVESTMENT BY COUNTRY Financial Investor Investment in EU Renewable Energy Projects €4,500 2004-2012 by Country 3,963 ϒ Leading destinations €4,000 Other − Germany Equity Invested (€ Millions) €3,500 S weden − Spain Italy €3,000 France − France UK €2,500 − UK S pain Germany − Italy €2,000 ϒ Destination conclusions €1,500 1,179 − Preference for feed in tariffs €1,000 806 867 692 − Higher returns outweigh PIGS and 550 451 regulatory risks €500 263 348 − Nordics emerging but limited €0 market to date 2004 2005 2006 2007 2008 2009 2010 2011 2012Source: HgCapital Research Sector expert investors building strategic renewable energy platforms © Copyright 2011 HgCapital 8
  • 28. Investment EU Renewable Project Equity From Financial Investors 2004-2012SurveyRENEWABLE INFRASTRUCTURE, Financial Investor Investment in EU Renewable Energy ProjectsDIRECT INVESTORS AND GENERAL €4,500 2004-2012 by Investor TypeINFRASTRUCTURE LEAD 3,963 €4,000ϒ Investment entry points Equity Invested (€ Millions) – Renewable Infra – development > operation €3,500 Renewable Infra Fund – Direct investors – operation Direct Investor €3,000 – General infra – construction – operation General Infra Fund €2,500 General PE Fund – General and Renewable PE – development Energy Infra Fund – Energy Infra – construction> operation €2,000 Renewable PE Fund – Hedge Fund – development>construction €1,500 Hedge Fundϒ What it means? 1,179 €1,000 867 – Directs and general infrastructure emerging 692 806 as buyers of mature assets 451 550 €500 263 348 – Large infrastructure likely to be exiting investments in 2015-17 €0 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: HgCapital Research Sector expert investors building strategic renewable energy platforms © Copyright 2011 HgCapital 9
  • 29. Investment EU renewable project equity from financial investors 2004-2011Survey . . . BUT NEGATIVE RECENT QUARTERLY TREND €1,800 Institutional Equity in EU Renewable Projects 2008-2012 € Millions ϒ Q3 2011 driven by large Spanish €1,600 transactions and not likely to be €1,400 repeated €1,200 ϒ Removing Offshore wind investments € Millions shows real underlying trend €1,000 €800 €600 €400 €200 €0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2008 2008 2008 2008 2009 2009 2009 2009 2010 2010 2010 2010 2011 2011 2011 2011 2012 Offshore Wind €0 €0 €0 €0 €0 €0 €0 €0 €0 € 53 € 52 € 26 €0 € 800 € 378 €0 € 630 Other Technologies €134 €308 €76 €168 €76 €336 €54 €340 €72 €381 €65 €515 €308 €766 €1,071 €626 €173Source: HgCapital Research Sector expert investors building strategic renewable energy platforms © Copyright 2011 HgCapital 10
  • 30. Investment Not all investors are looking for the same thing SurveySource: HgCapital Research Sector expert investors building strategic renewable energy platforms © Copyright 2011 HgCapital 11
  • 31. EU RE Institutional investor appetite for EU renewable marketsMarket PIGS out, CEE a question, UK and Nordics in flux ϒ Fully open to institutional investment ϒ Open to institutional investment but changes could make less attractive ϒ Limited attractiveness to institutional investment, high returns expected ϒ Potentially closing to institutional investment ϒ Closed to institutional investment Sector expert investors building strategic renewable energy platforms © Copyright 2011 HgCapital 12
  • 32. Fundraising Global infrastructure and private equity fund fundraising Environment Hard hit by financial crisis, history suggests slow recovery Global PE and Infrastructure Fundraising 2003-2011 $645 $627 $700 $535 Final Cliosings $ Billions $600 PE Funds $500 Infrastructure Funds $345 $400 $263 $246 $225 $206 $300 $200 $97 $41 $35 $28 $25 $16 $10 $100 $8 $4 $1 $- 2003 2004 2005 2006 2007 2008 2009 2010 2011 Private Equity / Alternative Funds Global Funds Raised 1995-20010 $645 $627 $700 $535 $600 Final Clisings $ Billions $500 $345 $400 $273 $263 $246 $225 $206 $300 $166 $164 $141 $200 $99 $97 $84 $60 $50 $100 $0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Source: Prequin, Venture Economics, Thomson Reuters Sector expert investors building strategic renewable energy platforms © Copyright 2011 HgCapital 13
  • 33. Investment Challenging fundraising environmentSurvey EU RENEWABLE ENERGY PROJECT FUNDS FUNDRAISING RECORD EU REN EW ABLE EN ERGY PROJECT FUN DS FUN DRAISIN G RECORDFUNDRAISING: CAPITAL % OF TARGET MON THS INLONGER; LESS FUN D FUN D TYPE TARGET RAISED RAISED FUN D RAISING STATUSFUNDS HgCapital RPP Private € 500 € 545 109% 22 Final Closeϒ Fundraising since 2008 Fund 1 Private € 200 € 230 115% 12 Final Closeϒ Average time to first Fund 2 Private € 500 € 571 114% 30 Final Close close 12 months Fund 3 Private € 450 € 437 97% 27 Final Close Fund 4 Private € 250 € 209 84% 30 Final Closeϒ Average time to final close 24 months Fund 5 Private € 400 € 330 83% 27 Final Close Fund 6 Private € 500 € 320 64% 18 First Closeϒ Average fund 61% of Fund 7 Private € 600 € 320 53% 6 First Close target Fund 8 Private € 500 € 213 43% 26 Final Closeϒ Several funds Fund 9 Private € 300 € 69 23% 29 Second Close abandoned Fund 13 Private € 1,100 € 200 18% 14 First Close Fund 10 Private € 300 € 50 17% 48 First Closeϒ New funds face general Fund 11 Private € 500 € 15 3% 24 Launched fundraising environment Fund 14 Private € 400 €0 0% 13 Launched and first time fund Fund 12 Private € 200 €0 0% 12 First Close hurdles Fund 16 Public € 230 €0 0% 4 Abandoned Fund 17 Public € 700 €0 0% 9 Abandoned Fund 15 Private € 200 €0 0% 24 Abandoned Fund 18 Private € 250 €0 0% 24 Abandoned Fund 19 Private € 750 €0 0% 33 Abandoned Source: Prequin, HgCapital Research Sector expert investors building strategic renewable energy platforms © Copyright 2011 HgCapital 14
  • 34. Pensions & Where is the real money?Allocations Defined benefit plans and the USUS, EU & JAPAN DEFINED BENEFIT PLANS - $18.9 TRILLION US, EU & JAPAN DEFINED CONTRIBUTION PLANS - $9.0 TRILLIONϒ Longer investment horizon ϒ Shorter investment horizonϒ Trustee directed ϒ Beneficiary directedϒ Declining market share ϒ Increasing market shareϒ Structurally more likely to invest in illiquid assets ϒ Structurally less likely to invest in illiquid assets J apan $3,266 UK UK US $933 $1,460 $6,914 US Switzerland $9,166 $416 Canada $1,251 Australia $247 Germany Australia $94 $1,054 Netherlands Netherlands $73 DE, CH, FR, IE $973 J CN, FR, IE PN, $868 $172 Source:: Towers Watson Sector expert investors building strategic renewable energy platforms © Copyright 2011 HgCapital 15
  • 35. Pensions & How pensions allocate capitalAllocationsϒ FIRST, DETERMINE THE REQUIRED RATE OF RETURN − Determine inflows (contributions) and outflows (benefits) over life of fund (40-100 years) − Value current assets − Arithmetic will tell you how much return you need – typically 7-9% on all investmentsϒ SECOND, MAKE CAPITAL ALLOCATIONS BASED ON RETURN REQUIREMENTS AND LIQUIDITY NEEDS − Liquidity − 70-80% of investment will always be in tradeable/listed bonds and equities. − The more mature the plan, the greater the listed allocation and the greater the bond allocation. − Returns − Liquid asset returns at market levels, typically lower than total return target − Balance allocated to illiquid assets seeking higher returns and greater risk – real estate, private equity, venture, infrastructureϒ ALL PENSION FUNDS HAVE AN OVERALL RETURN TARGET FOR EVERY €1 OR £1 RETURNING LESS THAN THE TARGET, €1 OR £1 MUST BE INVESTED AT A LIKE RETURN ABOVE THE TARGET Sector expert investors building strategic renewable energy platforms © Copyright 2011 HgCapital 16
  • 36. Pensions & Current defined benefit plan allocation modelAllocations Infrastructure increasing – but arithmetic means higher returns Historic Average (Circa 2005) THE GILTS DILEMMA Asset Class Principle Allocation % Expected Return Cash Yield Public Equities £55,000,000 55% 8% £4,400,000 A PERFECT STORM FOR PENSIONS Bonds £36,000,000 36% 6% £1,980,000 Real Estate £6,000,000 6% 10% £600,000 Hedge Funds £0 0% 0% £0 ϒ Low interest rate policy, demand for low risk investments has Private Equity £2,000,000 2% 20% £400,000 driven gilt and bond yields to historic lows (<2% on 10-year Infrastructure £0 0% 0% £0 gilts Cash £1,000,000 1% 3% £30,000 Total Principle £100,000,000 100% £7,410,000 ϒ Low gilt yields increase pension deficits Average Return 7.41% Current Averages (Assuming no Principle Loss since 2007) ϒ Liquidity concerns do not allow significant reduction in bonds Asset Class Principle Allocation % Expected Return Cash Yield Public Equities £43,000,000 43% 6% £2,580,000 ϒ Pensions need substantially higher returns fro other assets Bonds £39,000,000 39% 4% £1,560,000 Real Estate £7,000,000 7% 7% £490,000 Hedge Funds £4,000,000 4% 25% £1,000,000ALLOCATION MODEL MOVING – SLOWLY Private Equity £4,000,000 4% 25% £1,000,000 Infrastructure £1,000,000 1% 12% £120,000BUT HIGHER RETURNS ARE NEEDED Cash £2,000,000 2% 2% £40,000 Total Principle £100,000,000 100% £6,790,000ϒ Average UK pension fund seeking 7.5% total return Average Return 6.79%ϒ Assumes no loss of principal since financial crisis Illustratrive Averages To Reach Return Target (Before Market Losses) Asset Class Principle Allocation % Expected Return Cash Yieldϒ Assumes standard 10% underfunding Public Equities £40,000,000 40% 6% £2,400,000 Bonds £38,000,000 38% 4% £1,520,000ϒ Current allocation model does not provide required returns Real Estate £7,000,000 7% 7% £490,000 Hedge Funds £4,000,000 4% 25% £1,000,000ϒ Illustrative allocation shows returns required from Private Equity £5,000,000 5% 25% £1,250,000 Infrastructure £5,000,000 5% 15% £750,000 infrastructure to fill gap Cash £1,000,000 1% 2% £20,000 Total Principle £100,000,000 100% £7,430,000 Average Return 7.43% Sector expert investors building strategic renewable energy platforms © Copyright 2011 HgCapital 17
  • 37. Pensions & Direct investors – potential and limitationsAllocations DISTRITUBTION OF UK FINAL SALARY SCHEMES 2009LIMITED UNIVERSE – MATERIAL RESTRICTIONS ϒ Circa 8000 final salary schemes ϒ £1 trillion in funds under managementϒ Only 7 “pure” direct investors presently active in EU (investors that will invest on their own) ϒ 40 largest (BT, Railpen, RBS, etc.) account for 46% of total assets − Allianz, Kirkbi, Oticon, MEAG, PensionDanmark, PGGM PKA Pension ϒ £700,000: Average size remaining schemeϒ Only the largest funds have the ability to make direct investments (in the UK this means a maximum capital pool for all infrastructure of £23 billionϒ 30% maximum ownership limits on most pension fund investments; so for each deal you need 3-4, not 1 40 Largest UK DB Plansϒ Pensions most likely to “co-invest” alongside fund £460 Remaining UK managers DB Plans £540 − 2 Hg investors have co-invested Ytterberg and Amliden − Typical in other infrastructure (Thames Water, Gas Pipelines) Source: HgCapital Research, Prequin, Towers Watson Sector expert investors building strategic renewable energy platforms © Copyright 2011 HgCapital 18
  • 38. Thank You Tom Murley Thank You HgCapital Email: tom.murley@hgcapital.com Tom Murley Phone:HgCapital +44 207 089 7962 Email: tom.murley@HgCapital.com Phone: +44 207 089 7962Sector expert investors building strategic renewable energy platforms © Copyright 2011 HgCapital 19
  • 39. Appendices• Appendix 1: Institutional Investment in EU Renewable Energy Projects – Hg Proprietary Research• Appendix 2: Fundraising Trends and Outlook• Appendix 3: Pension Fund Capital and Allocations Sector expert investors building strategic renewable energy platforms © Copyright 2011 HgCapital 20
  • 40. Investment EU renewable project equity from financial investors 2004-2012Survey Financial Investor Investment in EU Renewable Energy ProjectsSTEADY GROWTH IN INSTITUTIONAL 2004-2012 4,500INVESTMENT €3,963 4,000 3,500 Equity Invested (€Millions)ϒ 37% CAGR since 2004 3,000ϒ 2010-2011 Growth driven by 2,500 increasing participation of general 2,000 infrastructure funds due to: 1,500 €1,179 €806 €867 − Utility capital constraints 1,000 €692 €451 €550 500 €263 €348 − Rising returns 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 − Falling investment in other infrastructure sectors (transport, Financial Investor Investment in EU Renewable Energy Projects (Ex Offshore) 2004-2012 PFI) 4,500 − Projects and portfolios of sufficient 4,000 scale 3,500 Equity Invested (€Millions) 3,000 €2,785 2,500 2,000 1,500 €948 1,000 €692 €714 €451 €460 500 €263 €348 €237 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 Sector expert investors building strategic renewable energy platforms © Copyright 2011 HgCapital 21
  • 41. Investment Financial investor investment by country 2004-2012Survey Financial Investor Financial Investor Equity Investment by Country 2004-12 Equity Investment by Country 2004-12 By Capital (€MM) (Ex Offshore) By Capital (€MM) Germany Spain Spain €1,511 €1,906 €1,906 17% 27% 21% Germany €1,133 16% Sweden €231 Sweden 2% €231 UK 3% €1,459 Other 16% €644 Other 7% €644 9% UK €1,281 18% Italy €872 10% France €1,007 Italy 11% €872 Denmark 13% France €1,483 €1,007 16% 14% Sector expert investors building strategic renewable energy platforms © Copyright 2011 HgCapital 22
  • 42. Investment Financial investor investment by sector 2004-2012Survey EU Renewable Financial Investors EU Renewable Financial Investors Equity Investment by Sector 2004-12 Equity Investment by Sector 2004-12 By Capital (€MM) (Ex Offshore) By Capital (€MM) Solar PV €1,605 Solar PV 23% €1,605 17% Onshore W ind €4,187 46% Onshore W ind €4,217 61% Offshore W ind €2,173 Biomass/Biogas 24% €477 7% Solar Thermal €437 Offshore 7% Hydro Transmission Biomass/Biogas €157 €78 Hydro Solar Thermal €157 €437 €477 2% 1% 5% 2% 5% Sector expert investors building strategic renewable energy platforms © Copyright 2011 HgCapital 23
  • 43. Investment Financial investor investment by investment style 2004-2012Survey EU Renewable Financial Investors EU Renewable Financial Investors Investment by Style 2004-12 Investment by Style 2004-12 (Ex Offshore) By Capital (€MM) By Capital (€MM) Expansion Capital €544 GrowthCap/IPP 6% €1,282 14% Project Equity GrowthCap/IPP €4,631 €1,282 67% 19% Development Capital €351 Expansion Capital Project Equity 4% €544 €6,837 8% P2P 75% €100 1% Development Capital €351 5% P2P €100 1% Sector expert investors building strategic renewable energy platforms © Copyright 2011 HgCapital 24
  • 44. Market Financial investor investment by investor type 2004-2012Overview EU Renewable Financial Investors EU Renewable Financial Investors Equity Investment by Investor Type 2004-12 Equity Investment by Investor Type 2004-12 By Capital (€MM) (Ex Offshore) By Capital (€MM) Dedicated Renewable General Infra Infrastructure Dedicated Fund, €1,942, Fund, €2,462, Renewable 21% 36% Infrastructure Fund, €2,462, 27% General Infra Fund, €1,864, 27% Direct Long Term Energy Energy Investor, €2,173, Infrastructure Infrastructure 24%Fund, €548, 6% Fund, €456, 7% Direct Long Term Investor, Hedge Fund, Hedge Fund, €590, 8% €422, 5% €332, 5% General PE Fund, General PE Fund, Renewable PE €1,076, 12% €698, 10% Fund, €490, 5% Renewable PE Fund, €490, 7% Sector expert investors building strategic renewable energy platforms © Copyright 2011 HgCapital 25
  • 45. Investment Financial investor investment by revenue source 2004-2011Survey EU Renewable Financial Investors EU Renewable Financial Investors Equity Investment by Revenue Source 2004-12 Equity Investment by Revenue Source 2004-12 By Capital (€MM) (Ex Offshore) By Capital (€MM) Semi-Merchant Semi-Merchant €1,312 €1,594 19% 17% Feed In Tariff Feed In Tariff €7,289 €5,350 80% 78% Merchant Merchant €231 €231 3% 3% Sector expert investors building strategic renewable energy platforms © Copyright 2011 HgCapital 26
  • 46. Investment Financial investor investment by investment status 2004-2012Survey EU Renewable Financial Investors EU Renewable Financial Investors Equity Investment by Sector 2004-12 Equity Investment by Sector 2004-12 By Capital (€MM) (Ex Offshore) By Capital (€MM) Exited €1,147 Current Exited 17% Current €7,802 €1,147 €5,581 86% 12% 81% W ritten Off W ritten Off €11 €11 0% 0% Pending Sale Pending Sale €153 €153 2% 2% Sector expert investors building strategic renewable energy platforms © Copyright 2011 HgCapital 27
  • 47. Appendices• Appendix 1: Institutional Investment in EU Renewable Energy Projects – Hg Proprietary Research• Appendix 2: Fundraising Trends and Outlook• Appendix 3: Pension Fund Capital and Allocations Sector expert investors building strategic renewable energy platforms © Copyright 2011 HgCapital 28
  • 48. Cleantech fundraising mixed Infrastructure and Cleantech Funds Global Funds Raised 2004-2011 $50 $42.4 $45 $41 $40 $35 $32.3 $35 Infrastructure $28 Funds Raised $US Billions $30 PE with Cleantech Focus $25 Pure Cleantech $25 $19.7 $20 $16 $11.4 $15 $10 $8 $6.8 $10 $6.3 $4.3 $4.2 $4.0 $4 $3.0 $2.8 $2.3 $5 $1.5 $1.1 $0.8 $0.3 $1 $0.0 $0.0 $0 2003 2004 2005 2006 2007 2008 2009 2010 2011Source: prequin Sector expert investors building strategic renewable energy platforms © Copyright 2011 HgCapital 29
  • 49. Current Trends Amongst Key Private Equity Investors INVESTOR TYPE ANALYSIS – NEUTRAL AND GROWTH SECTORS PUBLIC PENSIONS ϒ Expected to remain the key driver as a source of capital for private equity ϒ Commitments from public pensions made up nearly 25% of capital raised in 20091 (versus 14% in 2008) ϒ Sector is estimated to be 40% under target and actively committing capital1 SOVEREIGN WEALTH ϒ Growing AUM, dominated by ME petro-dollars ($3.9tn as at Q2, 2010)1 FUNDS ϒ Over 50% of SWFs active in private equity1 − Vast majority of private equity allocation targets buyout funds (92%)1 ϒ Growing focus on directs (20% of pe-focused SWFs invest on this basis) PRIVATE PENSIONS ϒ Generally appear to have been hit harder by the denominator effect than public pensions ϒ Recently many programmes on hold but growing optimism about new allocations ϒ Generally committed to private equity and expect to remain a significant INSURANCE COMPANIES investor ϒ Uncertainty surrounding proposed regulatory change INSURANCE COMPANIES − i.e. Solvency II: unsure how this will affect European insurance companies’ ability to make private equity investments due to future capital requirements ϒ Volatility of commitments observed in market: i.e. MetLife invested $1.6bn in 2007; $300m in 2009 and will commit between $400m and 450 m in 2010Sector expert investors building strategic renewable energy platforms © Copyright 2011 HgCapital 30
  • 50. Current Trends Amongst Key Private Equity Investors INVESTOR TYPE ANALYSIS – DECLINING SECTORS FUND OF FUNDS ϒ Rapid growth in size over the last decade consistent with underlying investments ϒ Abrupt halt in late 2008 mirroring decline of mega funds and increased scrutiny by investors, especially regarding fees ϒ Many large fund of funds are currently undergoing a period of reinvention with limited investment activity FINANCIAL INSTITUTIONS ϒ Expected to significantly reduce their exposure to private equity investments as a result of the Dodd-Frank Act ϒ Volcker Rule limits the amount a banking entity can invest in private equity ϒ A recent spate of secondary activity from European banks also highlights the need to shore up capital positions (RBS, Lloyds) ENDOWMENTS ϒ Least headroom as a result of the denominator effect given historic high allocations to private equity ϒ High profile endowments suffered large losses in 2009 (i.e. Harvard down 27%)Sector expert investors building strategic renewable energy platforms © Copyright 2011 HgCapital 31
  • 51. Appendices• Appendix 1: Institutional Investment in EU Renewable Energy Projects – Hg Proprietary Research• Appendix 2: Fundraising Trends and Outlook• Appendix 3: Pension Fund Capital and Allocations Sector expert investors building strategic renewable energy platforms © Copyright 2011 HgCapital 32
  • 52. Pensions & A pension fund primerAllocationsϒ Two basic types of pension funds − Defined benefit (final salary) schemes – inflation-linked fixed pension for life regardless of investment performance–2/3 of global pension capital − Defined contribution plans (ISAs.,401k) – retiree receives contributed capital plus or minus gains or losses – 1/3 of global pension capitalϒ But very different investment styles − Defined benefit − trustee directed − long term investment horizon − invests in a wide variety of liquid and illiquid assets − Defined contribution − usually “self-directed” by employees who select investment options, can switch quarterly or semi-annually − normally, “open end” collective investment schemes (mutual funds) and almost entirely focused on liquid investments − Switching / redemption option means underlying funds must offer daily redemption, which rules out illiquid investmentsϒ Fully funded, under-funded, over funded − Fully-funded: NPV of assets reinvested at risk free rate (gilts, treasuries) = NPV of actuarially determined liabilities − Under-funded: NPV of assets reinvested at risk free rate (gilts, treasuries) < NPV of actuarially determined liabilities − Over-funded: NPV of assets reinvested at risk free rate (gilts, treasuries) > NPV of actuarially determined liabilities − All defined contribution plans are fully funded − Majority of defined contribution plans are underfunded (£222 billion in UK Schemes; $1.0 trillion US Public Schemes) Sector expert investors building strategic renewable energy platforms © Copyright 2011 HgCapital 33
  • 53. Pensions & Current defined benefit plan allocation modelAllocations Infrastructure increasing, but still small, liquid allocation not likely to significantly moveUK DEFINED BENEFIT PENSIONS AT A GLANCE EUROPEAN DEFINED BENEFIT PENSIONS AT A GLANCEϒ £1.0 trillion in funds under management (defined benefits) ϒ €1.6 trillion in funds under management (defined benefits)ϒ 1.0% average weighting to infrastructure or about £10 billion ϒ 2.0% average weighting to infrastructure or about €32 billionϒ 2.0% average weighting to private equity or about £40 billion ϒ 2.0% average weighting to private equity or about £32 billionϒ Structural bias towards equities but UK plans have generally ϒ Larger European plans have a lower bias towards equity increased the range of alternative assets allocations and make more use of illiquid and non-traditional investments Bonds 57% Bonds Listed Equities 39% 43% Real Estate Listed Equities 10% 22% Real Estate 7% Hedge Funds Infrastructure 5% 1% Hedge Funds Private Equity Cash Infrastructure Cash 2% Private Equity 4% 2% 2% 2% 4% Source: Mercer, OECD Note 1: Sample includes defined benefit plans from Austria, Belgium, Denmark, France Germany, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden and Switzerland Sector expert investors building strategic renewable energy platforms © Copyright 2011 HgCapital 34
  • 54. Pensions & UK Pensions relative to largest global pensionsAllocations Asssets 2011 Global Rank in Asssets 2011 Global Rank in Pension Fund Association Country ($US Billions) 2011 Top 300 Pension Fund Association Country ($US Billions) 2011 Top 300 Government Pension Fund Japan $1,432.1 1 Public School Employees Japan $77.6 31 Government Pension Fund N orway $550.8 2 AT&T USA $76.1 32 APG N etherlands $318.8 3 N orth Carolina USA $75.3 33 N ational Pension Korea $289.4 4 Electa Sweden $74.0 34 Federal Retirement Thrift USA $264.0 5 Future Fund Australia $73.4 35 CalPERS USA $214.3 6 O hio Public Employees USA $72.1 36 Local Government O fficials Japan $189.6 7 N ew J ersey Public Employees USA $70.8 37 Canada Pension Canada $149.1 8 Bayeriche Versorgunskammer Germany $65.3 38 Employees Provident Fund Malaysia $145.5 9 W ashington State Board USA $61.6 39 Central Provident Fund Singapore $144.8 10 O hio State Teachers USA $61.0 40 CalSTRS USA $138.8 11 BT UK $58.0 43 N ew York State Common Fund USA $133.0 12 Universities Superannuation UK $50.3 50 PFZW N etherlands $133.0 13 Royal Mail UK $43.1 66 N ational Social Security China $129.7 14 Lloyds TSB UK $41.1 69 GEPF South Africa $128.2 15 Electricity Supply Pension UK $39.9 70 Pension Fund Association Japan $124.9 16 Royal Bank of Scotland UK $35.5 84 ATP D enmark $123.7 17 British Coal UK $32.1 96 Florida State Board USA $123.3 18 Railways Pensions UK $27.8 107 N ew York City Retirement USA $115.2 19 Barclays Bank UK $27.4 108 O ntario Teachers Canada $108.1 20 British Petroleum UK $24.2 126 N ational Public Service Japan $103.9 21 N ational Grid UK $23.9 127 General Motors USA $101.5 22 British Airways UK $23.8 128 Texas Teachers USA $100.2 23 BAE UK $22.7 141 N ational Prive Brazil $92.0 24 HSBC UK $22.2 142 N ational W ealth Fund Russia $88.2 25 Unilever UK $21.3 150 Fondo D e Reserva Seguridad Spain $86.0 26 Greater Manchester UK $17.1 181 IBM USA $83.0 27 British Steel UK $17.0 185 N ew York State Teachers USA $80.3 28 Strathclyde UK $16.9 186 Boeing USA $79.4 29 Aviva UK $14.5 217 W isconsin Investment Board USA $77.8 30 BBC UK $13.7 227 Source: Towers Watson Sector expert investors building strategic renewable energy platforms © Copyright 2011 HgCapital 35