Renewable energy investing is moving into the mainstream as a common inclusion in real assets and energy portfolios, claims Mercer’s global head of infrastructure Toby Buscombe.
Mercer has a hefty $19bn invested in private markets, with about a fifth of that dedicated to real assets.
Within that subsector, the firm has about 25 per cent allocated to renewable assets – a considerable amount given the area is still considered a niche one in many corners of the alternative assets world.
Buscombe argues that the asset class has matured significantly in the past four years, and that investing there has become the norm.
He said, “Three or four years ago it [amount of capital in renewables] would be a lot lower and I would be talking about the single sector funds we had allocated to.
“Today, the capital we have invested spans across a number of renewable energy sector funds that we have allocated to as part of the sustainable investment programme that we have built for clients. But then also multi-sector funds, generalist infrastructure funds where increasingly those vehicles themselves will have an allocation to renewable energy infrastructure.
“As a sector, renewable energy has become a lot more mainstream. It is a common inclusion in a real asset or an energy portfolio. It is not seen as a niche sub-sector that only people with a strong ESG or sustainability focus feel obliged to allocate to.”
Increased capital flowing into the space has an impact on pricing and returns, however, so investors could already be finding it harder to create value.
Buscombe added, “We are seeing a lot more capital being allocated to these sorts of assets today which of course has an impact on pricing and on returns. So, that is forcing us to work frankly harder to find good opportunities and to filter out the very best investment partners we can work with in the market.
“Yielding established investments that have a relatively contained risk profile and long operating histories in developed markets around the world generally are very hotly contested today, and I think that is an evolution over the past five years or so. That is also forcing us to work harder to find good opportunities.”
Despite seeing a higher number of GPs entering the market, it is also becoming easier to identify high quality fund managers by focusing on those which have the staying power, claims Buscombe.
“We see the people who have developed a strong track record of doing those things generally developing a loyal support base and being able to raise and close funds very quickly.
“It is becoming easier to distinguish between truly high-quality managers who have been able to go out and raise their second, third and fourth fund with a genuine track record of pursuing their strategies well and everybody else.”
With less feed in tariff support-type regimes for more established technologies such as wind and solar, and investors slowly becoming more risk tolerant in the way they commit capital, the future of renewables investing looks set to continue attracting institutional capital over the years ahead, claims Buscombe.
You can see Toby Buscombe speak at the 8th Annual AltAssets Renewable Energy Investor Forum next month. For more information, please visit: altassets.net/renewables.
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