IFT Investor Day
Infratil recently held its Investor Day, providing investors with an opportunity to learn more about the company’s various businesses, including Galileo Green Energy and Longroad Energy, its European and North American renewable energy ‘platforms’.
Through Galileo and Longroad, we are particularly excited about Infratil’s ability to add tremendous social and environmental value by developing greenfield renewable energy projects around the world: they are not simply buying existing renewable energy assets, but rather developing new ones and adding capacity to the global renewable energy mix.
In contrast, large institutional and passive investors are seeking low risk, established and commercially commissioned renewable energy assets, and although we welcome investors of all risk profiles to invest in this sector, we believe that new greenfield developments provide the highest level of environmental and social contribution. This obviously comes with a heightened level of risk, but we believe that management is well placed to navigate these risks.
As shareholders in Infratil, we are providing capital to new and complex renewable energy projects that otherwise would not have been created.
It is estimated that over $4 trillion dollars will be invested over the next decade in wind and solar assets as momentum continues to decarbonise the world. This level of transformational change in the energy sector has not been seen since over a century ago when oil was introduced to the energy mix. Although there is a ‘wall of capital’ seeking to invest in completed renewable energy assets, the development and subsequent commercial commissioning of those assets are complex and requires experience and intellectual property.
The appropriate site must first be identified, materials procured for development, then construction, and finally commercial terms negotiated with end users. External passive investors must also be found. Despite the ‘wall of capital’ chasing developed assets, we believe there is a shortage of fully commissioned, high-quality renewable energy assets available and for this reason we are seeing strong development margins for select top-tier assets. We think that the take-over interest shown in Infratil by Australian Super, and take-over interest shown in Tilt Renewables, also highlights the limited supply of top tier renewable energy assets available globally.
Infratil defines its renewable energy businesses as ‘platforms’ and perhaps they are right to do so. Bill Gates defined platforms as ‘when the economic value of everybody that uses it, exceeds the value of the company that creates it’, and in the past we have discussed the term in the context of technology companies. By this definition, Microsoft Windows is a platform, whereby Microsoft captured a small portion of the total value of the Windows ecosystem. Similarly, Microsoft Azure and Amazon AWS are also platforms, whereby the majority of the value is not captured by Microsoft or Amazon, but by the users. Despite the platform companies capturing only a minority of the total value, they are still incredibly large, profitable and long-lasting due to their scale and value add to their clients.
In the context of Infratil’s renewable energy businesses, there are multiple stakeholders involved including the end user of the energy, such as the grid or large energy consumers (corporates, governments etc), investors seeking a return on their capital (such as a large institutional pension fund) and the environment. Bringing all the stakeholders together with appropriate incentives is a difficult task, but if you are able to do so and extract only a small portion of the total value on offer, then we think there is tremendous shareholder opportunity, especially given the tailwinds of the renewable energy industry. Westfield, Goodman Group and Macquarie have all successfully developed, managed and sourced investors in retail property, industrial property and unlisted infrastructure assets, and created platforms in their respective fields. It appears to us that Infratil is moving in this direction, building the capability to develop, manage and invest in renewable energy projects globally. We think Infratil is well-placed to capture a small percentage of the $4 trillion in investments required in renewable energy over the next decade, and we are excited by its future potential.
This note has been prepared by ELM Responsible Investments (‘ELMRI’) ABN 70 607 177 711 AFSL 520428, for Australian wholesale clients for the purposes of section 761G of the Corporations Act 2001 (Cth).
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