Changing energy landscape is fueling infrastructure investments

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For many investors, their energy investments have fallen short of expectations. Energy funds have been among the hardest hit real asset sectors due to falling oil and gas prices resulting from the Saudi-Russian price war and falling demand of consumers, according to a review of June’s real asset performance by Aksia for $ 21.5 billion. Orange County Employee Retirement System, Santa Ana, California

OCERS ‘real asset portfolio returned 0.7% in calendar year 2020, with its largest real asset manager, energy manager Kayne Anderson Capital Advisors LP, producing a internal rate of return of -3.8%.

At an investment committee meeting in June, CIO Molly Murphy said that when the first investments were considered, investors expected “a very private equity experience” with funds of a lasting 10 to 15 years and producing returns of eighteen.

OCERS only got single-digit numbers on these investments, affected by the drop in energy prices that have just started to rebound as well as manager selection, she said. Energy is the largest sector in OCERS ‘real asset portfolio, worth $ 822 million, as of December 31, accounting for 42%, according to Aksia’s performance review.

David Fann, vice president of OCERS real assets consultant Aksia, noted at the same OCERS meeting that oil price volatility has a lot to do with disappointing return expectations.

Investors have faced more volatility and falling prices over the past two years than they had with previous investments in the sector, Mr Fann said.

There was also faulty execution by managers and field crews in the oil field, Ms. Murphy said. In addition, some managers such as EnerVest Ltd. ended up suffering huge write-downs because they used all the investments in a fund as collateral. Lines of credit were called in by the banks that lent to the EnerVest platform, causing the platform to collapse, she said.

“We were very careful not to repeat this mistake,” Ms. Murphy said.

Scott Barrington, CEO and managing director of infrastructure and impact manager Minneapolis-based North Sky Capital, said investor demand for renewables was strong despite a brief hiatus from March 2020 to May 2020, so that investors considered the potential effects of the pandemic. Some 60% of North Sky’s $ 1.5 billion assets under management are in renewable energy infrastructure.

While there is continued interest in traditional renewables – solar, hydro and wind power generation – “the main areas of interest recently have been environmental infrastructure,” Barrington said.

These investments in sustainable infrastructure include renewable natural gas captured in landfills and wastewater treatment plants, waste recovery projects such as turning manure and poultry litter into energy and fertilizer, and water purification, he said.

Renewable natural gas strategies are relatively new and began to gain the attention of some institutional investors in mid-2020, Barrington said.

“In addition, we see opportunities in energy storage and believe it will be a long-term trend with strong political support at federal and state levels,” he added.

In addition to sustainable infrastructure, the company also has a secondary market private equity business that invests in renewable energy, including electric vehicle storage and charging infrastructure.

Although his company does not invest in oil and gas extraction infrastructure, other energy infrastructure managers use carbon sequestration – a method of reducing carbon dioxide from the atmosphere by capturing it and by storing it – in conjunction with the extraction of fossil fuels.

“The renewable energy industry is in a period of transition where the world is moving from internal combustion engine vehicles to electric vehicles” and, like many technology adoption curves, this transition will be shorter than many people. are currently waiting, Mr Barrington said.

“It will feel gradual and then all of a sudden the transition will happen at a very fast pace,” he added.


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