Stockholm (NordSIP) – By definition, infrastructure is a long-term investment and investing with this type of horizon requires more than the usual financial analysis. Consequences must be carefully analysed, and risks that are not immediately apparent must be taken into account. As he is approaching the final close on his first fund, Sweden-based infrastructure investment manager and founding partner Philip Ajina explains why and how his firm, Infranode, chose to focus on sustainability.
“This was an exciting project,” starts Ajina, talking about his firm’s ESG policy. “We took it bottom up and had a lot of brainstorming and workshops with the team. We wanted to come up with something that would be completely integrated in our DNA.” As an example, Ajina shows how ESG is at the heart of the firm’s investment process. “We have a traditional investment process, with an investment committee that we bring each investment case and business plan to.” But in addition, investment managers are also required to perform an ESG due diligence with what is internally called the ESG tool, a spreadsheet that identifies an array of potential challenges that each receive a score. Once an investment is approved, this list becomes a to do list. “If we are a majority owner,” Ajina adds, “we can impose improvements. If we are a minority owner, which we quite frequently are, we make our voice heard by making recommendations at the board level.”
So far, all three transactions the fund has completed with its early commitments already reflect the firm’s ESG focus. For two of its first investments, the firm chose district heating projects, in a sector where large inflows of capital are needed to modernize the existing network of municipal heating and transition from fossil- to biomass-based plants. In the first investment, Infranode invested together with a London-based renewable energy fund in a Swedish district heating company that has bought the district heating systems in some Swedish municipalities. The second district heating investment is in Norway, where Infranode co-owns a district heating company with a municipality in the Oslo region. The third investment is deployed over time with Eneo Solutions, a company who offers a full-service package for geothermal heat pumps and rooftop solar panels. “Infranode is the capital partner that finances each individual project and Eneo, as the industrial partner, handles all other business-related matters,” Ajina explains. “The planning, the construction and the management are taken care of and the end-client doesn’t have to invest.”
For Ajina, being conscious and pro-active about sustainability is naturally also part of de-risking investments. “As a 25-year buy-and-hold investor, we need to make our investments resilient for the future and we believe that an asset with ESG short-comings is likely to deteriorate in value over time,” he comments. “It is fundamental for us to consider the true long-term perspective in everything we do.”
In doing so, Infranode is not alone. The firm found inspiration amongst the largest players in the field. One of the resources available is the Long Term Infrastructure Investors Association (LTIIA), which was founded in 2014 and provides recommendations when it comes to ESG and sustainability. Large worldwide funds such as Meridiam, Callsters and Allianz, just to name a few, are part of this association. Infranode is a member of the Swedish Sustainable Investment Forum (SWESIF), but this association composed mostly of traditional liquid asset managers has not yet been able to provide strong guidance to unlisted asset managers. Infranode is also a signatory of the UN Principles for Responsible Investing (PRI). “We don’t know how far we have pushed the boundaries with our internal policy, but we have received positive feedback from our investors,” says Ajina. “In general, people have a high standard across the board in this sector.”
In fact, sustainability in this asset class is most likely a must-have. “To be honest,” Ajina says, “I don’t think we would have convinced all of our current investors without this work and commitment. Some of them really cared and were very focused on sustainability during their due diligence process.” One of the fund’s anchor investors is the European Investment Bank (EIB) who puts ESG topics at the top of its priority list when it comes to choosing the funds it invests in. The fund’s other investors are mainly local institutions who share Infranode’s long-term time horizon.
According to Ajina, institutions in the Nordics are bound to increase their allocation to infrastructure. “Across Sweden, Norway and Finland there is a sub-allocation to infrastructure.” In pension funds across Europe, the average allocation is about 4-5%, whereas in the Nordics only a limited number of institutions have an allocation of more than 2%. This gap has two complementary explanations. Historically, infrastructure has been owned and operated by the public sectors. In addition, a number of institutional investors have been restricted from investing in this area due to regulatory reasons. For example, the Swedish “APs”, the national buffer pension funds are forced to hold a very large allocation to fixed income, listed equities and real estate. Only 5% can be invested in alternatives, which are usually allocated to higher-risk opportunities to compensate for the lack of return in the traditional asset classes. These rules are likely to change in the near future. “This is an opportunity for us,” says Ajina. Infranode is offering an investment strategy focused on the Nordics, and this should fit well within the local pensions’ portfolio. “Swedish institutions have a lot of real estate,” Ajina explains. “What’s next? They prefer to invest in Nordic infrastructure, because they want to start where they are the most comfortable.” In addition, the very structure of the fund, a Swedish “AB” onshore structure with a 25-year investment period, should be aligned with the Nordic public sector’s needs.
The positive trend on the allocation side coincides well with the increasing need for capital in the Nordic public sector. Typically, municipalities have started divesting assets to raise funds by selling their residential real estate portfolio. Now they are looking at social infrastructure. The next step will increasingly be infrastructure, such as energy, telecom and transport assets. An advantage for a local player such as Infranode is being the connection between local investors and local sellers and projects. Seeing familiar names on both sides of the table is reassuring, and trust is key when signing for a 25-year commitment.
Picture (c) NordSIP