Yield-hungry investors show appetite for wind


July 24, 2017

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The global hunt for yield continues, and I’m sure you know the reason why. If you don’t then, honestly, where have you been for the last nine years?!

In late 2008, central banks in the UK, Europe and the US dropped interest rates to encourage lending while the financial crisis raged, and they ended up at historic low levels. The US Federal Reserve recently started raising its rate, from 0.25% in late 2015 to 1.25% this June; the European Central Bank’s rate is still 0%; and the Bank of England cut the UK’s measly to 0.5% to 0.25% last year after the Brexit vote.

This has made assets like government bonds look particularly unattractive – even ten-year US Treasury notes currently only return around 2.3% annually – and helped ‘real assets’ like wind farms. Even a steady income-producing project in an established market can offer an investor annual returns of 4%-6%.

This hunt for yield is increasingly bringing institutional investors to renewables. For evidence of this, we can look at three headline-grabbing fundraisings this month.

In July, global fund manager BlackRock has announced two major fundraisings, on both sides of the Atlantic. First, BlackRock Real Assets completed a final close of its Global Renewable Power II fund after securing almost $1.7bn in commitments from 67 institutional investors in North America, Europe and Asia. Almost 20% of the fund has been invested, in five wind and solar projects in the US, Norway and Japan.

Following this, BlackRock Real Assets announced that it had secured an additional £475m of commitments for its Renewable Income UK fund, to take it to over £1.1bn. BlackRock has already invested over £600m of the fund in wind and solar projects in the UK, which it said showed that the UK is still an attractive market.

Separately, Copenhagen Infrastructure Partners said this month that it had achieved a third close of its Copenhagen Infrastructure III fund, to take total commitments to €1.9bn. It is set to invest mainly in large offshore wind farms, and other renewables.

Now, as interesting as these fundraisings are, what grabbed us most is the numbers that come with them. BlackRock highlighted its 2017 Global Rebalancing Survey, in which it polled 240 of its largest institutional clients, representing assets worth over $8tn.

It reported that 61% of the investors polled said they intended to grow their exposure to assets, including wind farms, to generate sufficient returns. The figure is marginally higher in the UK, where 63% of institutional investors said they planned to do so.

BlackRock added that renewable energy was now “one of the most active sectors for deal flow in the growing infrastructure asset class”. As well as low returns from government bonds, other reasons these funds are proving attractive include an acceptance from more investors that wind farms are economically viable.

And the prospects for continued activity in this part of the market look strong for the next few years. The ECB is unlikely to raise rates quickly because of concerns about the fragility of Europe’s economy, and the BoE is rightly nervous about the potential impact of Brexit on the UK: the performance of Prime Minister Theresa May and her government before and since last month’s election has inspired more derision than confidence.

Institutional investors will continue to hunt for yield and, as interest rates stay low for the next couple of years, they should continue to find it in wind. At present, the main threat to yields is that too much institutional interest for assets will drive up prices. For those involved in development, that would be a good problem to have.

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