The Dutch pension asset manager's Asia Pacific head of real estate says his team has just had one of its busiest years ever and that 2021 is looking similarly promising.
We spoke to them about their plans. In part 1 of this interview, they outline their fund strategy. In part 2, to be published tomorrow, they will discuss the environment in Asia and describe how the issue of carbon and global warming fit into the overall picture.
What clean areas will you focus on from an investment standpoint?
Wilkinson: When people use the term ægreenÆ, it covers a variety of areas. To sum up our universe, we would cover four areas, starting with clean energy, which is everything from solar to wind to natural gas, nuclear and biofuels. Secondly water, its supply, treatment, purification and distribution. Thirdly, waste management, which is the conversion of waste into energy in all its formats. This is quite a small space at the moment, but we think it has high growth prospects. Lastly, we look at environment technology, which is everything from clean coal to light emitting diodes.
What are the plans for growing and staffing the fund?
Wilkinson: We currently have assets under management of $11 million seeded by CLSA, along with some of our own money. We aim to soft close at $200 million at which point we will staff up the fund with more analysts and traders and then plan to hard close at $500 million. WeÆd expect to launch further funds in the future, focusing for example on water.
How do you go about assessing your fund assets as being viable; both from an operational and an investment point of view?
Pidden: Firstly, weÆre not a private-equity fund. We operate in two investment classes of shares, one is in the shares of listed companies, and one is in the shares of listed companies with a 20% private equity side-pocket. In the four sub-categories we are looking at, the spectrum of opportunity is actually wider in the listed equity world than it is in the private equity world
Wilkinson: Right now we have exposure in water and waste, environmental technology, natural gas/LNG, biofuels and solar. WeÆre not trying to add too much exposure in one country or one segment. We do a large amount of due diligence before we invest, especially if we plan to have a full weighting of 5% of the fund. WeÆd write a report on such companies to convince ourselves on issues such as competitive advantage, margin, valuation, balance sheet, creditworthiness et-cetera.
Will you set IRR targets for private equity investments?
Wilkinson: We will do when we do our first private equity investment. For the listed companies, we work out our entry and exit price before we go in.
Pidden: We look at 280 companies in Asia with market capitalization of over $800 billion, and about 100 of those are small cap in size and not well covered by sell-side research houses, so we have do the research in-house. With our advantage is that we do have specialist knowledge in this area, we look to discover pure plays, companies that are really focused in these areas, that are already experiencing high demand for their products and are looking aggressively to expand. We can talk to them directly and thereÆs no broker between us and them. We think thereÆs a large universe of companies that are doing their thing without too much acknowledgement.
What are the primary risk factors with these companies?
Wilkinson: Execution risk, that being the ability, or inability, of the management to deliver on their strategy. ThereÆs been a couple of cases where weÆve seen that happen already. WeÆll be long/short, but as a fund weÆre dedicated to having a net long bias most of the time.
Pidden: WeÆd look at three areas in which we might take short positions. The first is high pollution risk, though weÆre not going out of our way to examine every stock in Asia that might be polluters, though we do come across companies that have failed to see that weÆre in a changing world, and perhaps those who may have to pay a lot of money for carbon credits in future. Secondly, we would look to short over-valued companies, or those that are making a complete mess of their delivery. So, if you took the area of, say, solar panels, which has been very hyped over the last year, then there are parts of that process which are cheap and parts which are expensive, so we donÆt mind being short on the expensive side.
Thirdly, as an absolute-return fund, if youÆre in an environment where equity markets are breaking down for macro reasons, then we will use instruments like futures to protect capital in those times.
We have to think where we are going in the medium term, and its our belief that within five years, Asia is going to be carbon-constrained, and there will be an even greater demand for energy in Asia than there is right now and that will have to come from increasingly cleaner forms and there will be a massive acknowledgement of the water problem being faced by China and globally. A huge amount of investment will pour into these areas because Asian people want the basic services and resources that OECD citizens already have.
Will environmentally related shares be the next big growth stocks, like the internet once was?
Pidden: If you look at the multiple drivers behind the investment theme, youÆve clearly got a desire across Asia for energy security, which means diversification of energy sources. You can see that in government policy already. In China thereÆs an acknowledgment that the pollution issues they are facing are a problem for long term social stability. The Chinese people are sick of it. In north east China thereÆs a problem with water supply, the amount of water being pumped out of underground aquifers and the amount of pollution being dumped into the rivers. Drops in costs of production for cleaner energy sources are now starting to take place, so people are focusing on it across the world.
If you put all that into the mix, then yes, we do think this will be a new asset class. Strangely though, oil prices which have led people to look closer at this, are one of the least effective drivers, because that is really focused on transportation not power generation. Cheap oil, if it recurs, is very unlikely to derail our investment thesis.
Wilkinson: Power generation in Asia is about 2.5% oil-fired; the vast majority is coal-fired. So the oil price has no impact on that at all. Chinese coal-fired power plants are the biggest polluters in Asia.
With our investment angles, we are looking a lot at upstream activities in each segment. For example, weÆve been focused on silicon and wafer production as we think there is an oligopoly of 4-5 companies in the world, a couple of which are in Asia that we think have a price advantage. On the biofuel side weÆre interested in companies with crude palm oil acreage that is being used for biofuels manufacturing rather than companies which are building biodiesel production capacity. We think the latter is moving towards an over-supply situation due to the amount of money being thrown at it by private equity investors around Asia.
How do you distinguish between a company that will endure in this sector, and ones that is a flash in the pan?
Pidden: That can take quite a lot of work and focus, and thatÆs one reason why we decided to specialise in this area. I went back to school a few years ago to do a Masters in environmental technology, so that I could learn to analyse technologies that might look terrific, but would not turn out to be commercially applicable. What weÆve found you canÆt do is rely on outside research to differentiate in the small to mid-cap space. It often boils down to meeting the management and understanding where they have come from.
WeÆve got people walking round Asia trying to raise money for biofuel or waste energy, and saying they have a lot of contracts lined up.
WeÆre a bit more hesitant there and prefer to meet companies that own intellectual property or a manufacturing technique that gives them an edge, they have a secure manufacturing plant somewhere in Asia and have been doing this for ten years evolving as they go along, then we see longevity and applicability going forward. Appraising the management in this way is no different to orthodox high quality fund management.
CLSA and ourselves became committed to this because there is no cost to going green, in fact there is an incremental gain.
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