In late April 2021, UK Minister for Trade Gerry Grimstone revealed to the Financial Times government plans to tempt a host of state-owned investors to participate in the country’s major energy transition projects.
Sovereign wealth funds and state pension funds are being targeted to provide funding for ‘low-emission projects’, which include gigafactories to support the UK automotive industry, new offshore wind farms, carbon capture projects and hydrogen production facilities.
The head of infrastructure investment at a leading insurance company told Investment Monitor that the comments from Grimstone were very much in keeping with the government’s “push to engage with investors, especially overseas investors, to bring inward investment to the UK”.
State-owned investors have invested heavily in UK infrastructure over the past decade, but activity has been erratic and driven largely by mergers and acquisitions deals rather than greenfield foreign direct investment. Since 2015, investment levels have also been consistently falling.
So how likely is it that the government’s promised green industrial revolution will tempt state-owned investors to invest more in the UK?
Canadian pension funds like the UK market
Since 2015, 40% of investment in UK infrastructure from state-owned investors has come from Canadian pension funds. These investors tend to be conservative in their risk appetite, preferring regulated assets in established asset classes.
Kuwait Investment Authority (KIA) and China Investment Corporation have been the two most active sovereign wealth funds in UK infrastructure over the past five years, and like pension funds have favoured operational transport and utility assets over construction projects in the energy sector.
One of the largest foreign investments in UK infrastructure in recent years was the £2bn acquisition of London City Airport in 2017. The acquiring consortium included Canadian pension funds Ontario Municipal Employees Retirement System, Alberta Investment Management Corporation, and Ontario Teachers Pension Plan (OTPP) alongside KIA.
OTPP also owns stakes in Bristol Airport and Birmingham Airport, while Caisse de Dépôt et Placement du Québec, Singapore’s GIC and Qatar Investment Authority all hold stakes in Heathrow Airport.
The Covid-19 pandemic has devastated the revenues of airports around the globe, however, halting investment in the sector. US-based private investor Global Infrastructure Partners said it was ready to sell its stake in Edinburgh Airport in 2019, and would likely have attracted sovereign wealth funds and state pension funds to any auction, before Covid-19 froze the market.
With the attractiveness and availability of airport assets decreasing, the UK government is hoping it can tap growing global appetite for investments that meet ESG and sustainability targets.
What is the appetite for ‘green infrastructure’?
Daniel Brett, head of research and data at Global SWF, which provides data and analysis on state-owned investors, anticipates a growing appetite for renewable energy and other energy transition assets from state-owned investors.
“They can fulfil various aspects of these investors’ typical mandates, being long-term assets, appreciating over the long term, providing a dividend, and having a dependable flow of income,” he says.
Investments by state-owned investors in UK renewables have been limited to date however, accounting for just 10% of total investment since 2015.
While the UK offshore wind sector is maturing, state-owned investors have not been the primary backers of projects in this sector. With a greater ability to absorb construction risk, energy utility companies invested in the first wave of offshore wind farms, while the most recent auction round has seen major oil companies BP and Total back successful bids.
Brett explains that many state-owned investors have instead targeted renewable energy assets in emerging markets such as India, which are still industrialising and where “the demographic demands of their consumption patterns demand” more power capacity.
Assets such as offshore wind farms are becoming much more commercially viable though as this sector matures. With a growing volume of capital chasing a limited number of operational assets, conservative investors may be tempted more by construction projects.
Norway’s sovereign wealth fund made its first investment in renewables in April 2021, an offshore wind farm in the Netherlands. It has committed 2% of its $1.3trn (NKr10.8trn) in capital to renewable energy assets, which will further flood an already deep investor pool.
Not all state-owned investors are the same
The appetite of state-owned investors to fund the construction of new asset types such as gigafactories or hydrogen production facilities is entirely untested in the UK market.
There are some investors who are strongly focusing on these types of assets. The United Arab Emirates wants to be a leader in hydrogen and carbon capture, and Abu Dhabi’s sovereign wealth fund, Mubadala, may prove a good fit for the UK.
Mubadala signed a sovereign investment partnership with the UK in March 2021, with an initial focus on investment in the life science sector but with intentions to broaden the partnership to other areas. Another Abu Dhabi state-owned investor, TAQA, is already involved in the Porthos carbon capture and storage project in the Netherlands.
Brett notes that many sovereign wealth funds have only invested in green energy projects in their domestic markets to date, however. State investors also have many other ways to gain exposure to the global green economy, such as infrastructure funds, green bonds or venture capital in green technology companies.
Brett says that for many investors, “it not necessarily going to be through buying a 40–50% chunk in wind farms but perhaps other types of exposure” that they meet ESG and responsible investment targets. This will not deter the UK government from targeting state-owned investors to take out a large stake in the country’s low-emission projects, however.