Pension funds are generally regarded as ultra-conservative investors with a preference for long-term bonds. But with bond yields at historically low levels of return, fundholders are diversifying their portfolios. Infrastructure is increasingly popular for its long-term nature, with most pension funds flowing through fund managers investing in a variety of assets.
While PensionDanmark invests heavily in sovereign bonds and infrastructure funds, it has pioneered direct investment into wind projects to an extent that has pushed its CEO, Torben Möger Pedersen, into Windpower Monthly's list of leading industry influencers.
The firm's first move into the sector was in 2010, when it acquired 50% ownership of Dong Energy's 166MW Nysted offshore wind farm for DKK 700 million (EUR 93.85 million). Its latest investment, in December 2013, was to take a 49% share for approximately EUR 185 million of six onshore UK wind projects owned by the Italian renewable energy group Falck. PensionDanmark's wind investments now amount to more than EUR 1 billion in debt and equity and the fund plans to invest a further EUR1.5 billion in infrastructure by 2017, mostly in wind.
Perhaps because he works in the country considered the birthplace of the modern wind industry, Pedersen talks about wind investment with an ease that suggests it is the natural route for a pension fund.
"We need an alternative (to low bond yields), and we are looking for assets that can provide us with stable, predictable returns," he says. "A number of offshore-wind assets provide us with these features because of the regulatory regimes that support them."
For Pedersen, as long as there is some form of guaranteed revenue, either through feed-in tariffs or long-term power purchase agreements, PensionDanmark will consider a project for investment. Pedersen sees offshore as more likely to meet the firm's investment criteria because it now has a minimum investment level of EUR 100 million for wind projects. "We don't want investments where the ticket size is smaller than EUR 100 million because we need the scale," he says. He adds that investments need to be that large because of the duediligence costs that come with each direct investment.
The fund prefers joint ownership and generally lends as part of a group, so it has to consider projects with a capital value of at least EUR200 million to achieve a ticket size of EUR 100 million. Large offshore projects are the obvious choice for European investments. This is not the case in the US, where bigger project investments can be made onshore. In October 2012 the fund acquired 50% stakes in three E.on onshore projects — two in Texas, one in Pennsylvania - with a combined capacity of 433MW. While PensionDanmark's investment value for these projects remains secret, their size suggests their value would be similar to its total equity investments in European offshore wind to date (see box, bottom).
PensionDanmark has also lent funds to two other offshore projects and one onshore. In mid-2013 it announced it would provide $200 million in mezzanine debt to the Cape Wind project planned off the Massachusetts coast. Mezzanine debt represents a halfway house between equity investment and major loans, with the mezzanine debt holders behind the main debt holders but ahead of equity investors in the queue for payments if an asset goes bankrupt. The increased risk taken on by mezzanine debt holders gives them greater returns than traditional lenders because they charge higher rates of interest. "We make investments in the whole range of risk return assets," says Pedersen. "Mezzanine is a little less risky than equity and that feeds into our total portfolio structure.
The other loans have been made in partnership with Danish export credit agency EKF, which supports projects using Danish products. PensionDanmark has agreed to provide EKF with DKK 10 billion (EUR 1.3 billion) to fund Danish export orders, largely in the wind industry. So far the scheme has lent money to two wind farms using Vestas V122-3MW turbines.
Pedersen says turbine quality is as important as a stable regulatory regime and a big ticket size. "We have a preference for well-known technology," he says. The projects the fund has invested in all use turbines from the industry's top players.
PORTFOLIO PENSIONDANMARK'S WIND INVESTMENTS SO FAR
- - 50% of Nysted offshore wind farm, Denmark (166MW) - EUR94 million
- - 30% of Anholt offshore wind farm, Denmark (400MW) - EUR482.65 million
- - 50% of Stony Creek, Papalote Creek l and ll, US (433MW) - undisclosed
- - 49% of six Falck-owned wind farms, UK (273MW) - EUR185 million
- - Mezzanine loan to Cape Wind offshore wind farm, US - EUR157 million
- - Loan via EKF to Jadraas wind farm, Sweden - EUR134 million
- - Loan via EKF to Northwind offshore wind farm, Belgium - EUR34 million