How Hostplus channels capital into renewables
Hostplus, one of the top performing superannuation funds in Australia, is focused on working with its fund managers to find renewable assets to invest in for stable yields, said Jordan Kraiten, head of infrastructure for the superannuation fund.
After its divestment of “significant renewable assets” a few years ago, Hostplus’s allocation to infrastructure is now less than 10% of its portfolio, Kraiten told AsianInvestor in an interview.
“But we are always looking for other opportunities to be able to invest in the space,” he said.
According to its investment holding disclosure, Hostplus’s renewable energy assets were valued at A$17.1 million ($11.85 million) at of the end of last year.
Kraiten said Hostplus’s investments in renewables are largely spread across the wind and solar sectors in Australia and Europe, primarily through outsourcing its capital to fund managers, who select the assets on its behalf.
The superannuation fund does not manage its renewable assets internally, instead co-investing with managers as well as investing in these assets directly.
Hostplus invests alongside infrastructure fund managers, such as IFM Investors, QIC Infrastructure Management and Macquarie Specialised Asset Management, according to a disclosure document at of the end of March. That’s not the only way it deploys its money, however. “We will make it known to the managers that we invest with that we would like to see opportunities that will allow us to also invest directly,” said Kraiten.
The fund also co-invests alongside fund managers to provide additional capital when the manager is not able to meet significant equity requirements on its own, he added.
POTENTIAL VOLATILITY
While the superannuation fund is more comfortable with core renewable assets – those that will provide predictable, consistent and stable returns over the long term – competition has intensified for these opportunities, meaning Hostplus may be forced to invest in riskier assets.
“In Europe, the market is much more mature and as a result, what is happening is that competition for assets is driving investors to have more merchant exposure and hence less contractor exposure,” he said.
Merchant exposure occurs where renewable assets of which the power is generated and sold by an investor. These assets do not have an off taker for the power that has been generated, such as a utility or large corporate that has agreed to buy the power at a certain price and volume.
“Selling it in the market is fine, however, it is potentially more volatile and certainly more risky than having a known contract and a known counterpart you can sell your [power] generation to,” Kraiten added.
Coupled with the fierce competition for assets are doubts about whether this generation of politicians, in Australia at least, is committed to the further growth of the renewables sector.
“Certainly in Australia, there continues to be some political uncertainties as to how supported the renewable growth is, from a generation perspective,” Kraiten said.
He remains hopeful, however, noting the “natural level of support” in Australia and believes that renewables will be a large and growing part of power generation in Europe.
Investment in the Australian renewable energy and storage projects double to A$26 billion in the year between the end of 2017 and the end of 2018 , according to data from Clean Energy Council.
INFRASTRUCTURE AS A BEDROCK
Hostplus’s investments in infrastructure assets are meant to “provide the bedrock” for its members, said Kraiten.
“We look for the infrastructure portfolio to provide stability and ... an alternative returns path to what is the more traditional type of investments in the listed space, so [we want] less volatility, less correlation and more predictability with regard to returns [from infrastructure assets],” he said.
“The range [of returns] we would be looking at would be anywhere between 8% and 12% ... with the 10% range being the central point. That would be a starting position,” said Kraiten, explaining that the superannuation fund determines the underlying revenue risks of an individual asset and decides the specific range of returns it will accept.
“In the case of a PPP investment, where you are engaging with the state government or a federal government, then you may be prepared to accept 8%,” he said. “If there's a little bit more volatility around those types of revenues, then you might look to accepting a slightly higher return.”.
He said the fund looks to other, more volatile asset classes to provide significantly larger returns than this: “We don't look for the infrastructure portolio to provide us anything in the mid to high double digits.”
This approach seems to align with the progressive strategy of the superannuation fund in asset classes such as equity and venture capital.
Around 50% of Hostplus’s default fund, Balanced MySuper fund, is invested into unlisted assets, of which 40% is in illiquid assets such as property, infrastructure and private equity, Clark said.