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Identifying assets and improving returns

EUROPE: Established in 2010, Quercus Investment Partners is rapidly closing in on a place as one of Europe's top three renewable infrastructure funds.

Spread out… Quercus’s assets include the 17.5MW Energia Verde 21 wind farm in Romania and the 5.1MW Ekovat solar PV project in Bulgaria
Spread out… Quercus’s assets include the 17.5MW Energia Verde 21 wind farm in Romania and the 5.1MW Ekovat solar PV project in Bulgaria

CEO Diego Biasi talks about maximising the investment potential of European onshore wind and solar PV.

Launching a fund manager when markets are still wobbling from the aftershocks of the global financial crisis, could be seen as a risky move.

But that's what Diego Biasi and Simone Borla did when they established Quercus Investment Partners in 2010, a rare beast among European fund managers in that it specialises solely in renewable-energy infrastructure assets.

The two first met in 2006, when Biasi was working in investment banking and Borla in hedge funds. Their paths crossed again three years later.

"We both knew we wanted to do something new," says Biasi, now Quercus's CEO. "A friend of mine was selling a permit in a PV plant and I visited the asset, purely as an observer. Meanwhile, Simone's brother was making an investment in a 1MW solar PV plant.

"We discussed the idea of investing in solar PV over lunch. Between us, we had a contact book of banks, insurers and pension funds, and investors were looking for something stable in the long run, especially after 2008 and 2009," he says.

The pair saw an opportunity to create a financial instrument, backed by renewable-energy assets, that would serve as a yearly investment fund for institutional advisers. "We saw a new asset class emerging, and a gap in the market for a specialist player," says Biasi.

"We started with friends, family and institutional investors that we'd known for many years to put together the seed capital. The first fund was purely solar PV assets in Italy, because we both had Italian client portfolios," he recalls.

Quercus's first two funds together raised €200 million, exceeding targets and deploying all capital.

Diversified portfolio

In 2014, following Borla's death from cancer, Biasi lunched a new project to look "at the potential for expanding to other renewable-energy asset classes and other markets in Europe".

The company put together three funds, with a total value of €500 million, diversifying its portfolio technologically and geographically.

One focuses on Italian solar PV assets, another on Italian wind-power projects, and a third encompasses a mix of renewable-energy technologies — wind, solar, biomass and hydropower — across northern Europe, including Germany, Scandinavia and the UK.

Cuts in subsidy support are changing the renewable-energy scene from a market led by new project development to one that is ripe for consolidation, with many asset-management firms and fund managers having moved into the sector.

"Competition, does it concern me? What we offer investors is not simply speculation in the renewables sector. Experience and a long track record counts for a lot. The first two funds are doing well. With these other three under way we are moving quite fast," says Biasi.

Italy's combined wind and solar PV sector is one of the biggest and most active secondary (the trading of operational plants and portfolios) renewable-energy markets in Europe. More than 9GW of wind and 19GW is installed the country.

Quercus's Italian wind and solar funds amount to €150 million apiece, and the fund for mixed technologies across northern Europe is €200 million.

"On paper, we're trying to keep the same return," Biasi says. "Conceivably, if we invested more in biomass, for example, it could increase the return, but then we are exposed to more risk, compared with wind and PV."

Quercus acquires assets between the second and fifth year of the renewable-energy plant's operation. The funds are kept in the assets until the end of its life.

"I haven't ruled out opening new funds in the future and flipping assets into these if investors want," he says. "And the operational lifetime of existing assets can be extended through repowering."

The mortality ratio in the renewables secondary market is quite high. "We do tight due diligence, and I would say out of every hundred plants, ten might be OK," says Biasi.

"It depends on the specific country. In the UK the mortality rate is lower than for Italy. But on average, not more than 10% of what we look at is good enough to purchase."

Adding value

In 2015 Quercus appointed a new chairman. Vito Gamberale came with a 40-year career spanning chief executive roles at Italian industrial groups, including Telecom Italia.

Before joining Quercus, he founded F2i, a European infrastructure fund with more than €2.5 billion of assets under management. He also created F2i Energie Rinnovabili and E2i, leading solar PV and wind farm operators in Italy.

"With him in the picture, it gives huge comfort to investors," says Biasi.

Quercus has been taking advantage of merger and acquisition opportunities and currently owns or has shares in about 305MW of mainly solar PV assets. In April 2016, in a joint venture with Swiss Life Asset Managers, the firm closed a deal to acquire an Italian solar PV portfolio.

There are even more opportunities in Italian wind, where half the wind farms are owned or controlled by small operators.

Quercus is negotiating a joint venture to create a large wind platform in Italy, which will comprise about 500MW. The firm is also reviewing potential wind-power acquisitions in the UK, Germany and Scandinavia.

"Half the job is about identifying assets and negotiating the right purchase price. The other half is all about improving the assets' return," says Biasi.

There are two main ways to do this: first, through debt restructuring; second, by reducing operational expenditure (Opex) and creating value through operational improvements.

Quercus has cut Opex by up to 18% across some of its PV assets, taking them down from €80,500/MW to €66,400/MWh a year.

Integrating administrative functions in-house cut the cost of external consultants, and the renegotiation of operations and maintenance (O&M) contracts with a competitive tender and regional clustering of servicing operations improved O&M economics.

Biasi believes equivalent savings are possible with the wind-power assets the firm plans to acquire. "You need scale. Typically, the manufacturers that supplied the turbines are servicing them. They know the machines, but they are expensive," he says.

"If you have 10MW, 50MW, even 100MW, the cost of O&M is high. But once you have several hundred megawatts you can go out to tender a new contract and then select the most competitive bid.

These days, turbine manufacturers are increasing their O&M competencies, acquiring third-party members, gaining experience of different machines. You can leverage scale to take advantage of that."

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