Posted by Macquarie Asset Management
June 30, 2021
This article was published by IPE Real Assets on 30 June 2021 and is reproduced here with the permission of the publication
Although it began back in 2005, one pivotal moment in the ‘green’ journey of the world’s largest infrastructure asset manager was the acquisition of the UK’s Green Investment Bank (GIB) in 2017. In that year, Sydney-based Macquarie paid the British Government £2.3bn (€2.7bn) for GIB and immediately renamed it Green Investment Group (GIG). It had identified the platform as a vehicle through which to grow its green-investment activities and consolidate its principal investment business in renewables.
But the acquisition also had a lasting impact on the firm’s asset management arm, enhancing the green ambitions of Macquarie Infrastructure and Real Assets (MIRA).
Leigh Harrison, the newly appointed global head of MIRA, is in full support of these ambitions. “We obviously saw the Green Investment Bank as a large and important opportunity to further catalyse our investment in renewables,” he says.
An 18-year Macquarie veteran, Harrison was previously head of EMEA and was instrumental in the launch of several European infrastructure funds. Today, he has oversight of MIRA’s entire global business, part of the extensive portfolio of assets Macquarie Asset Management manages in infrastructure.
Under Harrison’s tenure, MIRA will drive further into renewable energy and sustainable investing in-line with the asset management arm’s corporate ambition to achieve net-zero emissions across its portfolio by 2040.
As an example, in 2019 MIRA announced it would phase out investment in coal. “We already have an investment approach with respect to coal, and this affects the investments we make. We look to ensure that even if it does exist as a small part of an investment, there is a plan to transition away from the coal component within a short period of time,” Harrison says. “MIRA has had a significant focus on the decarbonisation agenda for many years now. We have focused on renewables investment from the early 2000s.”
MIRA has invested in the UK’s green-energy sector since 2005, and today manages investments in 10 offshore wind farms around the UK. These generate 2,983 megawatts (MW), contributing about 30% of the UK’s total operational offshore wind generation capacity.
“We need to consider decarbonisation of all of our assets and businesses,” says Harrison. “To drive positive change through those investments, we need to think about investing in new technology, or efficiency measures which help us decarbonise. Obviously, infrastructure has a role to play.”
Harrison says there is both an opportunity and a responsibility to contribute to addressing climate change. Part of that is in investing in renewable-energy generation.
MIRA has a portfolio of renewable-energy generation assets with a total operational capacity of 12.7 gigawatts (GW). In addition to wind, solar and hydropower, it has expanded into geothermal and biomass-energy generation.
Among its latest investments – which are agreed but not yet completed – are the A$2.3bn (€1.5bn) buyout of Australia’s largest waste management company, Bingo Industries, and the acquisition of Irish waste company Beauparc Utilities in a deal that is said to value the company at €1bn.
MIRA has also been increasing its exposure to geothermal energy. Last year, it acquired the Hudson Ranch geothermal operations in the US, a business set to be combined with Salt Lake City-based Cyrq Energy, acquired by MIRA in March. MIRA plans to create one of the largest independent geothermal renewable energy platforms in the US.
MIRA-managed funds are also invested in Energy Development Corporation (EDC), the largest renewable energy company in the Philippines. EDC has 1.5GW of generation capacity across geothermal, solar, hydropower and wind.
In February, MIRA completed fundraising for Macquarie Green Investment Group Renewable Energy Fund 2. Initially launched with a target of €1bn, the offer was upsized to €1.6bn at final close because of strong demand from 32 investors.
So far, the vehicle has acquired a 10% stake in the Gwynt y Môr offshore wind farm in the UK, and a 50% stake in a 268MW portfolio of residential rooftop solar power in the US. Harrison says MIRA is actively looking at other opportunities.
Demand for renewables is said to be creating a ‘green bubble’. Harrison will say only that there is a “significant” inflow of capital into renewables, created by what he calls a “large transition to sustainable projects occurring around the globe”. This has translated, he says, into “an incredible” opportunity to be part of that transition – and to help facilitate change.
“When we talk about ‘green’ we talk holistically about the ability, the opportunity and the responsibility to drive change,” he says. “It is not a narrow focus on renewable energy. Renewable energy is part of the solution, but we must have a much broader focus.
“The focus on green is entirely rational when you think about climate change and the potential impact that it will have on our economy and our way of life. It will be one of the most important issues in the decades ahead.”
Harrison says: “We’ve certainly seen the market for traditional core renewable-generation assets evolve over time. We’ve also obviously seen technologies continue to reduce the cost of production, which has helped make power prices more affordable.”
Leigh Harrison, Head of Macquarie Infrastructure and Real Assets
He believes that, for long-term patient capital, there are good opportunities in renewables generally. In that, he includes renewable power generation.
New developments are diversifying the sources of renewables, he says, adding that these developments, including hydrogen, are “very interesting” and that MIRA is obviously “staying tuned”.
He says: “Hydrogen is one of the many new opportunities we are looking at. We can support these new technological developments as either standalone investment opportunities or potentially through existing portfolio businesses, where the technology can be leveraged to improve the performance of existing assets.
“One of our portfolio companies is a large UK gas distribution network, Cadent. Cadent is piloting the use of hydrogen in parts of its network to both test the capability of its network and to ensure that hydrogen can be delivered in a safe and reliable way into homes and businesses.”
Another investment is Open Grid Europe, the largest independent gas transmission system operator in Germany, with a 12,000km network. Open Grid Europe is seeking to establish a Germany-wide hydrogen network working with industry to create a hydrogen backbone across Europe.
Harrison says hydrogen is just one example of a new technology being fostered, and that such technologies are transferable globally. He sees such technologies being adopted and developed in many of MIRA’s markets.
If Macquarie’s asset management business is to meet its 2040 net-zero target, it faces a big task transforming traditional infrastructure, which makes up 74% of its alternatives portfolio – versus just 9% in renewables.
“We need to think about the sustainability and resilience of assets holistically, and to work to foster change in all those assets,” Harrison says. “We believe a focus on sustainability will ultimately drive better investment performance over the long term.”
Harrison says the task ahead is to measure greenhouse gas emissions and to identify the means to reduce those emissions under the firm’s net-zero business plan. Under the Biden Administration’s US$2.3trn (€1.9trn) Green New Deal, MIRA sees an opportunity to step up investment there.
“We are encouraged by some of the policy initiatives coming out of the US – both the momentum and the size of the opportunity there,” Harrison says. “It is a very large market, made up of a mixture of federal, state and local municipalities. Each of those different levels of government are looking to drive change through their own policy agendas.”
The US is an efficient market from a capital point of view, he says, and preferred funding approaches to infrastructure upgrade and development will inherently evolve over time. It may be different to Australia’s privatisation model or the UK’s public-private partnership schemes, he says.
“The opportunity to invest private capital in the US is significant across all the sectors we invest in,” says Harrison. “We have no concern about the ability to invest in that market. We do see a role for private capital in all markets, including the US.”
With the COVID-19 pandemic wreaking havoc in some sectors of economies around the world, Harrison says MIRA’s collective portfolio has weathered the impact “well”. He says: “Our portfolio has demonstrated the resilience of the sector, although obviously there were some difficult situations with some assets, aviation in particular. Aviation has been a challenge because of government restrictions on travel.”
Despite the impact of the pandemic on the aviation sector, MIRA was able to reach a US$4.5bn agreement in June to sell Atlantic Aviation, which operates one of the largest networks of fixed-base operations in the US.
“Our focus throughout the pandemic has been on the health and safety of our people. We’ve got more than 150,000 employees and contractors working for our 150 portfolio companies.
“Our other concern has been the continued operation and the resilience of our assets, ensuring they continue to deliver critical services to communities. Pleasingly, all our assets continued to perform operationally, delivering what was required of them during what was a very challenging period for many.”
Harrison is relieved that post-pandemic recoveries are taking shape in many regions. “Whilst many challenges remain, the roll-out of vaccination programmes in many countries gives us cause for optimism,” he says “And, of course, we are pleased to see that many governments around the world, in thinking about their post-COVID recovery plans, are looking to green development. That provides us with a lot of encouragement to continue investing in support of a cleaner, and greener, economy.”
This market commentary has been prepared for general informational purposes by the authors who are part of Macquarie Infrastructure and Real Assets (MIRA), a business division of Macquarie Group (Macquarie), and is not a product of the Macquarie Research Department. This market commentary reflects the views of the authors and statements in it may differ from the views of others in MIRA or of other Macquarie divisions or groups, including Macquarie Research. This market commentary has not been prepared to comply with requirements designed to promote the independence of investment research and is accordingly not subject to any prohibition on dealing ahead of the dissemination of investment research. Nothing in this market commentary shall be construed as a solicitation to buy or sell any security or other product, or to engage in or refrain from engaging in any transaction. Macquarie conducts a global full-service, integrated investment banking, asset management, and brokerage business. Macquarie may do, and seek to do, business with any of the companies covered in this market commentary. Macquarie has investment banking and other business relationships with a significant number of companies, which may include companies that are discussed in this commentary, and may have positions in financial instruments or other financial interests in the subject matter of this market commentary. As a result, investors should be aware that Macquarie may have a conflict of interest that could affect the objectivity of this market commentary. In preparing this market commentary, we did not take into account the investment objectives, financial situation or needs of any particular client. You should not make an investment decision on the basis of this market commentary. Before making an investment decision you need to consider, with or without the assistance of an adviser, whether the investment is appropriate in light of your particular investment needs, objectives and financial circumstances. Macquarie salespeople, traders and other professionals may provide oral or written market commentary, analysis, trading strategies or research products to Macquarie’s clients that reflect opinions which are different from or contrary to the opinions expressed in this market commentary. Macquarie’s asset management business (including MIRA), principal trading desks and investing businesses may make investment decisions that are inconsistent with the views expressed in this commentary. There are risks involved in investing. The price of securities and other financial products can and does fluctuate, and an individual security or financial product may even become valueless. International investors are reminded of the additional risks inherent in international investments, such as currency fluctuations and international or local financial, market, economic, tax or regulatory conditions, which may adversely affect the value of the investment. This market commentary is based on information obtained from sources believed to be reliable, but we do not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in this market commentary. Opinions, information, and data in this market commentary are as of the date indicated on the cover and subject to change without notice. No member of the Macquarie Group accepts any liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this market commentary and/or further communication in relation to this market commentary. Some of the data in this market commentary may be sourced from information and materials published by government or industry bodies or agencies, however this market commentary is neither endorsed or certified by any such bodies or agencies. This market commentary does not constitute legal, tax accounting or investment advice. Recipients should independently evaluate any specific investment in consultation with their legal, tax, accounting, and investment advisors. Past performance is not indicative of future results.
This market commentary may include forward-looking statements, forecasts, estimates, projections, opinions and investment theses, which may be identified by the use of terminology such as “anticipate”, “believe”, “estimate”, “expect”, “intend”, “may”, “can”, “plan”, “will”, “would”, “should”, “seek”, “project”, “continue”, “target” and similar expressions. No representation is made or will be made that any forward-looking statements will be achieved or will prove to be correct or that any assumptions on which such statements may be based are reasonable. A number of factors could cause actual future results and operations to vary materially and adversely from the forward-looking statements. Qualitative statements regarding political, regulatory, market and economic environments and opportunities are based on the authors opinion, belief and judgment.
Other than Macquarie Bank Limited ABN 46 008 583 542 (MBL), none of the entities noted in this document is an authorized deposit-taking institution for the purposes of the Banking Act 1959 (Commonwealth of Australia) or banking legislation in other jurisdictions. The obligations of these entities do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of these entities.