attracting and maintaining institutional investment in renewable energy

Market of opportunity

A workshop on attracting and maintaining institutional investment in renewable Energy

London

2 July 2012

Welcome and introduction

Chair:

Michelle T Davies

Head of Clean Energy and Sustainability

Eversheds

Resource Revolution: Meeting the world’s energy, materials, land and water needs

McKinsey Global InstituteSustainability and Resource Productivity Practice

CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited

Eversheds presentationJuly 2, 2011

McKinsey & Company | 1

Main messages

▪ The resource challenge of the next 20 years will be quite different from any we have seen in the past in five main ways

1. 3 billion new middle class consumers2. Increasingly challenging and expensive sources of new supply3. Increasing linkages between resources4. Environmental factors creating negative feedback loops5. Growing concern about resource access of the poorest

households

▪ This new resource era creates large upside and downside risks for renewables

– Large emerging market demand– New technological innovations such as shale gas could reduce

penetration of renewables– Uncertain learning curves for renewables, highly dependent on

manufacturing and supply chain efficiencies– Policy framework which is uncertain and shifting from climate

concerns, to other issues such as energy cost, access and jobs


Contents

What are the emerging resource trends?

What are the implications for the energy sector?


40

60

80

100

120

140

160

180

200

220

240

260

201120009080706050403020101900

Commodity prices have increased sharply since 2000McKinsey Commodity Price Index

Resource markets are changing fundamentally

SOURCE: Resource Revolution

World War I

Post-wardepression

Great depression

World War II

1970soil shock ▪ Prices are

increasing▪ Resource

prices are becoming more volatile

▪ Resources are increasingly inter-linked


The emergence of 3 billion middle-class consumers w ill fuel future demandGlobal middle class 1, Billions of people

Middle East and North Africa

Sub-Saharan Africa

2030

4.88

3 billion

Asia-Pacific

Europe

North America

3.23

0.68

0.32

0.310.23

0.11

2020

3.25

1.74

0.70

0.330.25

Central and South America

0.06

2009

1.85

0.53

0.17

0.340.18

0.11 0.03

0.66

1 Based on daily consumption per capita ranging from $10 to $100 (in purchasing power parity terms)

SOURCE: OECD McKinsey & Company 4|


0

50

100

150

200

250

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000

Per capita GDPReal 2005 $PPP per person

Per capita energy consumption, 1970–2008, projected to 2030 for India and ChinaMillion British thermal units per person

Many countries have shown that as incomes rise, demand for resource increases—and a similar curve is likely in China and India

SOURCE: IEA; Global Insight; McKinsey analysis

ENERGY EXAMPLE

2030 projected

2030 projected

India

China

South Korea Japan

Germany

France

United Kingdom

United States

Australia

Historical range for energy consumption evolution

Historic (1970-2008)

Projected


90858075706560555045403530

Breakeven price 1

$/bbl (real 2008$), WTI

120

110

100

90

80

70

60

50

40

30

20

120115110105100950 2015105

10

25

1 Assumes an IRR of 10% for new capacity additions and cash break-even for existing production capacity2 Includes 3 mbpd and 3 mbd incremental capacity from Iraq and deepwater, respectively

Nex

t pha

se o

f ex

istin

g oi

l san

ds

Oil

shal

e

Gas

to li

quid

s

Coa

l to

liqui

ds

New

offs

hore

New

Iraq

SOURCE: Wood Mackenzie; BP Stat; IOGCC; McKinsey Oil Supply Model team analysis

-2CapacityMbpd

2030 demand:104 Mbpd

2010 demand:87 Mbpd

2020 demand:96 Mbpd

There is a significant risk of real price increases and greater volatility as we approach short-term su pply limits2020 cost curve – maximum production potential

Major new drivers of production to 2020


Commodity price movements have become more closely linked

-0.07

-0.11

-0.01

-0.52

-0.01

Correlation with oil prices

1980–1999 2000–04 2005–11

0.32

0.67

0.99

0.75

0.96

0.59

0.74

0.91

0.99

0.74

0.61

0.94

0.96Maize

Wheat

Rice

Beef

Steel

Timber

SOURCE: McKinsey analysis


Governments care about these resource issues for di fferent reasons

Description Examples

Firm competitiveness

▪ Risks to competitiveness of local firms in face of rising input costs and constraints on resource access

New growth opportunities

▪ Potential for local firms to capture global resource productivity growth opportunities

Public finances▪ Rising cost of government subsidies in

the face of higher resource prices

Environmental resilience

▪ Concerns with resource trends on environmental factors

Inflation▪ Resource prices raising the cost of living

for households and putting pressure on inflation and growth

▪ Threats to access to critical inputs (e.g., water, rare earth metals, etc)Resource

security


Contents

What are the emerging resource trends?

What are the implications for the energy sector?


Four major uncertainties

The shale gas revolution

Learning curves of renewable technologies

Regulatory frameworks

2

2

3

Emerging market energy demand1


In energy, the developing world will account for ov er 90% of the growth in energy demand by 2030 with 60% coming fro m China and India

94 98

81 81 81

170 195222

3957100

148

173

101

USA

Rest of OECD

Rest of Non-OECD

India

China

2030

664

2020

587

Global27 29

2010

25

24

494

2.8

4.3

0.3

1.3

SOURCE: McKinsey analysis (Cost Curve v3.0); McKinsey Global Energy Perspective (GEP)

43

19

4

31

Primary energy demand; QBTU CAGR, 2010-30%

Share of growth%

Developed

Developing

* Includes cross-border energy use, e.g., sea, air travel

1.0 3

EMERGING MARKET DEMAND GROWTH

>0.1 >1

1


In the US, cheap gas displaces coal, becoming the majority fuel at a price of between $3/MMBTU and $4 /MMBTU

3.5

3,765

1,653

843

799

26444

Coal

Gas

Nuclear

Petroleum

Renewables1

2012 2020 2030

1,766 1,768 1,6191,235

555555558567

3

4,061

848

0

4

4,011

1,423975

848

14

6

3,947

746

848

27

10

3,823

615

848

27

1,797 1,820 1,6151,162

888793

727 727

3

4,476

4

4,421

1,2071,715

6

4,336

872

0

872

0

823

872

28

657

10

4,243

872

29

1 Including hydro

SOURCE: EIA, US Low Carbon Economics Tool

2Power sector generation by fuel; Henry Hub price, TWh; $/MMBTU

SHALE GAS


Depending on the learning curve improvements of dif ferent renewable technologies, they could become cost competitive in next 5-10 years

0102030405060708090

100110120130140150160170180190200

LCOEEUR/MWh

Year2520 2416 1914 22 2321132011 15 181712

1 CO2 price in Europe today at 10 EUR/tonSOURCE: IEA; Eurostat; Platt’s; EIA; Team analysis

9

3

5

1

Coal US

CCGT US1

CCGT Europe1

Coal Europe

Solar PV

Wind offshore

Wind onshore

Biomass

xAnnual average cost reduction 2011-2025

Coal/gas today

LCOE at 7% WACC

LEARNING CURVES

3


Across several technologies, performance improvemen t levers result primarily from manufacturing & SC maturing and tech nology gains

25%

~0%

0%

13%

38%

Biomassgreenfield

Cost reduction potential until 2025

Batteries for vehicles

23%

71%

30%

0%

18%

PV(until 2020)

Technologyimprovement 24%

O&M 0%

Materials 11%

Manufacturing& SupplyChain

31%

Total improvement

66% 50%

30%

0%

10%

10%

Windoffshore

2%

5%

0%

12%

18%

Windonshore

PRELIMINARY ESTIMATESRelative improvement of LCOE

SOURCE: Solar KIP, Battery KIP, Wind onshore & offshore model; Biomass model; Team analysis

Lever with highest impact

LEARNING CURVES

3


Climate and energy policies are seen to be largely driven by energy costs, energy security and local jobs, rather than GHG mitigation

Increasing energy security

Increasing physical security (e.g., avoiding nuclear power)

5%

Reducing local air pollution 9%

Reducing GHG emissions & global warming 11%

Promoting local jobs and investments 21%

21%

Lowering energy costs 31%

SOURCE: Global McKinsey Quarterly survey, November 2011

World

2%

25%

16%

16%

16%

24%

ChinaNorth America

1%

3%

6%

27%

27%

33%

9%

8%

14%

17%

21%

31%

Europe

0%

4%

12%

30%

16%

38%

Policy makers world total

148N = 1.0821.409 803.954

Which of the following policy priorities are the most important in determining your country'sfuture climate and energy policies over the next ten years?

4POLICY UNCERTAINTY


For those companies that use a CO2 price, the avera ge assumption is 31-36 USD/tCO2 by 2020, and 37-42 USD/tCO2e by 2030 ac ross regions

Average CO2 price for the US market

Average CO2 price for the EU market

Average CO2 price for the Chinese market

Energy sector Europe

Energy sector dev. markets incl.

China and India

Energy sector North America

If you use a CO2 price what level of CO2 price do you use when planning for future investment decisions, in each economy by 2020? Between 2020-2030?

Energy sectorAsia Pacific

OECD countries

SOURCE: Global McKinsey Quarterly survey, November 2011

N = N = N =

43

32

34

36

Ø 36

41

32

36

34

Ø 36

37

34

25

30

Ø 31

41

38

42

43

Ø 41

Avg. price USD / tCO2e by 2020

Avg. price USD / tCO2e 2020-2030

46

41

41

41

Ø 42

40

41

29

38

Ø 37

1110

8

13

13 11

432

20

11

11 5

720

13

31

30 7

37

4

4

4 3

4POLICY UNCERTAINTY

Institutional Investment Trends in EU RenewablesandA Pension Fund Primer

EVERSHEDS WORKSHOP:Attracting and Maintaining InstitutionalInvestment in Renewable Energy

London, 2 July 2012

Tom Murley, Director & Head of Renewable Energy, HgCapital

Jens Thomassen

© Copyright 2011 HgCapital 2Sector expert investors building strategic renewable energy platforms

Introduction to HgCapital RPP and HgCapitalHgCapital

FIRM SNAPSHOT

ϒ Europe’s largest pure-play renewable energy infrastructure investor

ϒ Over €900 million of dedicated renewable institutional equity capital raised since 2006

ϒ Backed by over 30 leading global institutional investors

ϒ Invested in over 70 European renewable projects valued >€1.7 billion

ϒ Largest financial investor in Nordic onshore wind

ϒ Dedicated team with over 75 years power sector experience

ϒ Part of HgCapital, a leading European Private Equity Firmw

ϒ Founded in 1989champions

ϒ Over €5 billion of capital committed across nine funds

ϒ Equity for growth buyouts and renewable energy infrastructure

ϒ Large team: more than 90 people in two offices (London and Munich)

ϒ Independent: owned by its Partners

INVESTMENT STRATEGY:

“Sector expert investors building strategic renewable energy platforms.”

THE EU ENERGY FINANCE GAP (the numbers)€1 Trillion: The required investment in European power infrastructure to 2020

€600 billion: The finance gap, that utilities and Governments are seeking to bridge with private institutional capital €400 billion: The estimated finance capacity of the EU electric utilities to 2020,

HGCAPITAL RENEWABLE POWER PARTNERS – BRIDGING THE GAPHgCapital supplying equity to over €1.5 billion in EU renewable projects. Not only are we a proven partner for developers, but our experience, track record, exclusive focus EU renewable energy and access investment opportunities makes HgCapital the leading bridge to the institutional investor market.

Our goal is to be the investor of choice for EU renewable energy projects


RPP Investments as of 10 January 2012

HgCapital >€900 AUM, largest dedicated EU renewable energy investorSupporting over 1200MW of EU renewable energy projects

ϒ 3 operating / construction wind farms – 120MW

ϒ 10+ development wind farms - >250MW

ϒ 6 operating wind farms -113MW

ϒ 2 wind farms in construction - 44MW

ϒ 3 Permitted wind farms - 48MW

ϒ 5+ wind farms in development - >250MW

ϒ 34 operating hydro electric projects - 130MW

ϒ 2 hydro projects in construction - 10MW

ϒ 7 operating solar PV plants - 61MW

ϒ 2 operating wind farms -140MW

ϒ 1 wind farms in construction - 50MW

ϒ 2 operating wind farms - 24MW

ϒ 4 wind farms in planning - 120MW


Who are our investors?HgCapital

ϒ Jean Frazier

ϒ Indiana University Teaching Degree, 1946 (Delayed due to working a drill press in an aircraft factory 1942-1945)

ϒ 35 Years 6th grade schoolteacher in Los Angeles

ϒ Recognized as a California “Master Teacher” from 1965 until retirement in 1981

ϒ 91 years old, lives in Laguna Woods California

ϒ Pension paid by California State Teachers Retirement System, an investor in RPP Fund 1 and RPP Fund 2

ϒ One of 856,000 members and beneficiaries of a pension fund with $150 billion in investments - the second largest pension fund in the United States


7,3688,071

12,301

16,432

12,469

16,995

19,483

22,378

6,862

18,486

15,647

7,949

10,73711,793

21,946

11,975

17,362

12,941

10,910

8,956

2,942

0

5,000

10,000

15,000

20,000

25,000

Q1 2007

Q2 2007

Q3 2007

Q4 2007

Q1 2008

Q2 2008

Q3 2008

Q4 2008

Q1 2009

Q2 2009

Q3 2009

Q4 2009

Q1 2010

Q2 2010

Q3 2010

Q4 2010

Q1 2011

Q2 2011

Q3 2011

Q4 2011

Q1 2012

€M

illion

s

RefinancingM&ANew Build

EU Renewable Project InvestmentResilience being tested; infrastructure investment falling

Source: Bloomberg / New Energy Finance

EU RENEWABLE PROJECT INVESTMENT – NEW BUILD AND EXISTING ASSETS, DEBT, EQUITY, M&A, REFINANCING2007-2012

EU RE Market


OBJECTIVE ϒ Map institutional / financial investor equity investment activity in EU renewable energy projects and companies from 1 Since 2004

DATA COLLECTED AND ANALZED

ϒ 263 investments, €9.1 billion equity investments by 38 active investors, including

ϒ Dedicated renewable infrastructure funds

ϒ Dedicated renewable private equity funds

ϒ General infrastructure funds

ϒ Hedge funds

ϒ General private equity funds

ϒ Direct investors – pension funds, family offices and insurance companies

ϒ Excluded

ϒ German and Danish retail investor funds

ϒ Regional and small sector funds with <€75m or less in capital (e.g. small solar funds)

SOURCES AND METHOLOGIES

ϒ Sources: Prequin, Bloomberg New Energy Finance, New World Energy Network, Sparkspread, Infrastructure Journal, Fund Manager Websites, HgCapital discussions, Fund manager conference presentations

ϒ Equity invested based on reported data sources, or if not reported using standard industry comparable (e.g. average selling price of German wind farms circa€1.6m/MW and 75% average gearing, average Italian solar pv deal equity circa €600k per MW). +/- 10% error on deployment.

ϒ Certain ungeared investors to geared basis assuming 25% equity

Institutional Equity Investment in EU Renewables 2004-2011Dataset and methodology

Investment Survey


4%

2% 2% 1% 1%2% 2%

8%

11%

0%

2%

4%

6%

8%

10%

12%

2004 2005 2006 2007 2008 2009 2010 2011 2012

Financial Investor Equity Investment in EU RE Proje cts % of Total Debt and Equity Investment

2004-2012

€263 €348 €451 €550 €692 €806€1,179

€3,963

€867

€0

€1,000

€2,000

€3,000

€4,000

€5,000

2004 2005 2006 2007 2008 2009 2010 2011 2012

Equi

ty In

vest

ed (€

Milli

ons)

Financial Investor Equity Investment in EU RE Proje cts2004-2012

EU Renewable Project Equity From Financial Investors 2004-2012

ϒ 37% CAGR since 2004

ϒ From 2% to 8-11% of total EU asset investment since 2009

ϒ 2010-2011 growth driven by investments by general infrastructure funds and pensions and insurance companies in:

– Single large operating assets (solar thermal and offshore wind); and

– Large operating portfolios (onshore wind and solar PV)

ϒ Coincides with reduced utility activity due to balance sheet constraints and an increase in ungeared investment as lending falls

STEADY GROWTH IN INSTITUTIONAL INVESTMENT

Source: HgCapital Research

Investment Survey


263 348451 550

692806

1,179

3,963

867

€0

€500

€1,000

€1,500

€2,000

€2,500

€3,000

€3,500

€4,000

€4,500

2004 2005 2006 2007 2008 2009 2010 2011 2012

Equi

ty In

vest

ed (€

Milli

ons)

Financial Investor Investment in EU Renewable Energ y Projects2004-2012 by Country

OtherSwedenItalyFranceUKSpainGermany

EU renewable project equity from financial investors 2004-2011Investment Survey

ϒ Leading destinations

− Germany

− Spain

− France

− UK

− Italy

ϒ Destination conclusions

− Preference for feed in tariffs

− Higher returns outweigh PIGS and regulatory risks

− Nordics emerging but limited market to date

INVESTMENT BY COUNTRY



263 348451

550692

806

1,179

3,963

867

€0

€500

€1,000

€1,500

€2,000

€2,500

€3,000

€3,500

€4,000

€4,500

2004 2005 2006 2007 2008 2009 2010 2011 2012

Equi

ty In

vest

ed (€

Milli

ons)

Financial Investor Investment in EU Renewable Energ y Projects2004-2012 by Investor Type

Renewable Infra Fund

Direct Investor

General Infra Fund

General PE Fund

Energy Infra Fund

Renewable PE Fund

Hedge Fund

EU Renewable Project Equity From Financial Investors 2004-2012

ϒ Investment entry points

– Renewable Infra – development > operation

– Direct investors – operation

– General infra – construction – operation

– General and Renewable PE – development

– Energy Infra – construction> operation

– Hedge Fund – development>construction

ϒ What it means?

– Directs and general infrastructure emerging as buyers of mature assets

– Large infrastructure likely to be exiting investments in 2015-17

RENEWABLE INFRASTRUCTURE, DIRECT INVESTORS AND GENERAL INFRASTRUCTURE LEAD


Investment Survey


EU renewable project equity from financial investors 2004-2011Investment Survey

ϒ Q3 2011 driven by large Spanish transactions and not likely to be repeated

ϒ Removing Offshore wind investments shows real underlying trend

. . . BUT NEGATIVE RECENT QUARTERLY TREND

Q1

2008

Q2

2008

Q3

2008

Q4

2008

Q1

2009

Q2

2009

Q3

2009

Q4

2009

Q1

2010

Q2

2010

Q3

2010

Q4

2010

Q1

2011

Q2

2011

Q3

2011

Q4

2011

Q1

2012

Offshore Wind € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 0 € 53 € 52 € 26 € 0 € 800 € 378 € 0 € 630

Other Technologies €134 €308 €76 €168 €76 €336 €54 €340 €72 €381 €65 €515 €308 €766 €1,071 €626 €173

€0

€200

€400

€600

€800

€1,000

€1,200

€1,400

€1,600

€1,800

€M

illion

s

Institutional Equity in EU Renewable Projects 2008-2012

€ Millions



Not all investors are looking for the same thingInvestment

Survey



Institutional investor appetite for EU renewable marketsPIGS out, CEE a question, UK and Nordics in flux

ϒ Fully open to institutional investment

ϒ Open to institutional investment but changes could make less attractive

ϒ Limited attractiveness to institutional investment, high returns expected

ϒ Potentially closing to institutional investment

ϒ Closed to institutional investment

EU RE Market


$50

$60 $9

9 $141 $164

$273

$166

$84

$97

$206

$345

$535

$645

$627

$246

$225 $2

63

$0

$100

$200

$300

$400

$500

$600

$700

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Fina

l Clis

ings

$ B

illion

s

Private Equity / Alternative Funds Global Funds Raised 1995-20010

$97

$206

$345

$535

$645

$627

$246

$225

$263

$1

$4

$8

$25

$41

$35

$10

$28

$16

$-

$100

$200

$300

$400

$500

$600

$700

2003

2004

2005

2006

2007

2008

2009

2010

2011

Fina

l Clio

sings

$ B

illion

s

Global PE and Infrastructure Fundraising2003-2011

PE FundsInfrastructure Funds

Global infrastructure and private equity fund fundraisingHard hit by financial crisis, history suggests slow recovery

Fundraising Environment

Source: Prequin, Venture Economics, Thomson Reuters


FUND FUND TYPE TARGET

CAPITAL

RAISED

% OF TARGET

RAISED

MONTHS IN

FUNDRAISING STATUS

HgCapital RPP Private € 500 € 545 109% 22 Final Close

Fund 1 Private € 200 € 230 115% 12 Final Close





Fund 6 Private € 500 € 320 64% 18 First Close



Fund 9 Private € 300 € 69 23% 29 Second Close

Fund 13 Private € 1,100 € 200 18% 14 First Close


Fund 11 Private € 500 € 15 3% 24 Launched

Fund 14 Private € 400 € 0 0% 13 Launched


Fund 16 Public € 230 € 0 0% 4 Abandoned

Fund 17 Public € 700 € 0 0% 9 Abandoned

Fund 15 Private € 200 € 0 0% 24 Abandoned



EU RENEWABLE ENERGY PROJECT FUNDS FUNDRAISING RECORDEU RENEW ABLE ENERGY PROJECT FUNDS FUNDRAISING RECO RD

Challenging fundraising environment

Source: Prequin, HgCapital Research

Investment

Survey

ϒ Fundraising since 2008

ϒ Average time to first close 12 months

ϒ Average time to final close 24 months

ϒ Average fund 61% of target

ϒ Several funds abandoned

ϒ New funds face general fundraising environment and first time fund hurdles

FUNDRAISING:

LONGER; LESS FUNDS


US$6,914

UK$933

Switzerland$416

Australia$247

Germany$94

Netherlands$73

JPN, CN, FR, IE$172

US$9,166

Japan$3,266

UK$1,460

Canada$1,251

Australia$1,054

Netherlands$973DE, CH, FR, IE

$868

US, EU & JAPAN DEFINED BENEFIT PLANS - $18.9 TRILLION

ϒ Longer investment horizon

ϒ Trustee directed

ϒ Declining market share

ϒ Structurally more likely to invest in illiquid assets

Source:: Towers Watson

US, EU & JAPAN DEFINED CONTRIBUTION PLANS - $9.0 TRILLION

ϒ Shorter investment horizon

ϒ Beneficiary directed

ϒ Increasing market share

ϒ Structurally less likely to invest in illiquid assets

Where is the real money?Defined benefit plans and the US

Pensions & Allocations


ϒ FIRST, DETERMINE THE REQUIRED RATE OF RETURN

− Determine inflows (contributions) and outflows (ben efits) over life of fund (40-100 years)

− Value current assets

− Arithmetic will tell you how much return you need – typically 7-9% on all investments

ϒ SECOND, MAKE CAPITAL ALLOCATIONS BASED ON RETURN R EQUIREMENTS AND LIQUIDITY NEEDS

− Liquidity

− 70-80% of investment will always be in tradeable/li sted bonds and equities.

− The more mature the plan, the greater the listed al location and the greater the bond allocation.

− Returns

− Liquid asset returns at market levels, typically lo wer than total return target

− Balance allocated to illiquid assets seeking higher returns and greater risk – real estate, private equ ity, venture, infrastructure

ϒ ALL PENSION FUNDS HAVE AN OVERALL RETURN TARGET

FOR EVERY €1 OR £1 RETURNING LESS THAN THE TARGET,

€1 OR £1 MUST BE INVESTED AT A LIKE RETURN ABOVE TH E TARGET


How pensions allocate capital


Asset Class Principle Allocation % Expected Return Cash YieldPublic Equities £55,000,000 55% 8% £4,400,000Bonds £36,000,000 36% 6% £1,980,000Real Estate £6,000,000 6% 10% £600,000Hedge Funds £0 0% 0% £0Private Equity £2,000,000 2% 20% £400,000Infrastructure £0 0% 0% £0Cash £1,000,000 1% 3% £30,000Total Principle £100,000,000 100% £7,410,000Average Return 7.41%

Asset Class Principle Allocation % Expected Return Cash YieldPublic Equities £43,000,000 43% 6% £2,580,000Bonds £39,000,000 39% 4% £1,560,000Real Estate £7,000,000 7% 7% £490,000Hedge Funds £4,000,000 4% 25% £1,000,000Private Equity £4,000,000 4% 25% £1,000,000Infrastructure £1,000,000 1% 12% £120,000Cash £2,000,000 2% 2% £40,000Total Principle £100,000,000 100% £6,790,000Average Return 6.79%

Asset Class Principle Allocation % Expected Return Cash YieldPublic Equities £40,000,000 40% 6% £2,400,000Bonds £38,000,000 38% 4% £1,520,000Real Estate £7,000,000 7% 7% £490,000Hedge Funds £4,000,000 4% 25% £1,000,000Private Equity £5,000,000 5% 25% £1,250,000Infrastructure £5,000,000 5% 15% £750,000Cash £1,000,000 1% 2% £20,000Total Principle £100,000,000 100% £7,430,000Average Return 7.43%

Historic Average (Circa 2005)

Current Averages (Assuming no Principle Loss since 2007)

Illustratrive Averages To Reach Return Target (Befo re Market Losses)


Current defined benefit plan allocation modelInfrastructure increasing – but arithmetic means higher returns

ϒ Average UK pension fund seeking 7.5% total return

ϒ Assumes no loss of principal since financial crisis

ϒ Assumes standard 10% underfunding

ϒ Current allocation model does not provide required returns

ϒ Illustrative allocation shows returns required from infrastructure to fill gap

ALLOCATION MODEL MOVING – SLOWLY

BUT HIGHER RETURNS ARE NEEDED

ϒ Low interest rate policy, demand for low risk investments has driven gilt and bond yields to historic lows (<2% on 10-year gilts

ϒ Low gilt yields increase pension deficits

ϒ Liquidity concerns do not allow significant reduction in bonds

ϒ Pensions need substantially higher returns fro other assets

THE GILTS DILEMMA

A PERFECT STORM FOR PENSIONS



Source: HgCapital Research, Prequin, Towers Watson

Direct investors – potential and limitations

ϒ Circa 8000 final salary schemes

ϒ £1 trillion in funds under management

ϒ 40 largest (BT, Railpen, RBS, etc.) account for 46% of total assets

ϒ £700,000: Average size remaining scheme

DISTRITUBTION OF UK FINAL SALARY SCHEMES 2009

ϒ Only 7 “pure” direct investors presently active in EU (investors that will invest on their own)

− Allianz, Kirkbi, Oticon, MEAG, PensionDanmark, PGGM PKA Pension

ϒ Only the largest funds have the ability to make direct investments (in the UK this means a maximum capital pool for all infrastructure of £23 billion

ϒ 30% maximum ownership limits on most pension fund investments; so for each deal you need 3-4, not 1

ϒ Pensions most likely to “co-invest” alongside fund managers

− 2 Hg investors have co-invested Ytterberg and Amliden

− Typical in other infrastructure (Thames Water, Gas Pipelines)

LIMITED UNIVERSE – MATERIAL RESTRICTIONS

40 Largest UK DB Plans

£460 Remaining UK DB Plans

£540


Thank You

Tom MurleyHgCapital

Email: [email protected]: +44 207 089 7962

Thank You

Tom MurleyHgCapital

Email: [email protected]: +44 207 089 7962


Appendices

• Appendix 1: Institutional Investment in EU Renewable Energy Projects – Hg Proprietary Research

• Appendix 2: Fundraising Trends and Outlook

• Appendix 3: Pension Fund Capital and Allocations


€263 €348 €451 €460€692 €714

€948

€2,785

€237

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2004 2005 2006 2007 2008 2009 2010 2011 2012

Equi

ty In

vest

ed (€

Milli

ons)

Financial Investor Investment in EU Renewable Energ y Projects(Ex Offshore) 2004-2012

€263 €348 €451 €550€692 €806

€1,179

€3,963

€867

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2004 2005 2006 2007 2008 2009 2010 2011 2012

Equi

ty In

vest

ed (€

Milli

ons)

Financial Investor Investment in EU Renewable Energ y Projects2004-2012

EU renewable project equity from financial investors 2004-2012

ϒ 37% CAGR since 2004

ϒ 2010-2011 Growth driven by increasing participation of general infrastructure funds due to:

− Utility capital constraints

− Rising returns

− Falling investment in other infrastructure sectors (transport, PFI)

− Projects and portfolios of sufficient scale

STEADY GROWTH IN INSTITUTIONAL INVESTMENT

Investment Survey


Spain€1,906

27%

Germany€1,133

16%

UK€1,281

18%

France€1,007

14%

Italy€87213%

Other€6449%

Sweden€2313%

Financial Investor

Equity Investment by Country 2004-12

(Ex Offshore) By Capital (€MM)

Spain€1,906

21%

Germany€1,511

17%

UK€1,459

16%

France€1,007

11%Denmark€1,483

16%

Italy€87210%

Other€6447%

Sweden€2312%

Financial Investor

Equity Investment by Country 2004-12

By Capital (€MM)

Financial investor investment by country 2004-2012Investment Survey


Onshore Wind€4,217

61%

Solar PV€1,605

23%

Biomass/Biogas€4777%

Solar Thermal€4377%

Hydro€1572%

EU Renewable Financial Investors

Equity Investment by Sector 2004-12


Onshore Wind€4,187

46%

Solar PV€1,605

17%

Offshore Wind€2,173

24%

Biomass/Biogas€4775%

Solar Thermal€4375%

Hydro€1572%

Offshore Transmission

€781%



By Capital (€MM)

Financial investor investment by sector 2004-2012Investment Survey


Project Equity€4,631

67%

GrowthCap/IPP€1,282

19%

Expansion Capital€5448%

Development Capital€3515%

P2P€1001%


Investment by Style 2004-12 (Ex Offshore)

By Capital (€MM)

Project Equity€6,837

75%

GrowthCap/IPP€1,282

14%

Expansion Capital€5446%

Development Capital€3514%

P2P€1001%


Investment by Style 2004-12

By Capital (€MM)

Financial investor investment by investment style 2004-2012Investment Survey


Dedicated

Renewable

Infrastructure

Fund, €2,462,

36%

General Infra

Fund, €1,864,

27%

Direct

Long Term

Investor,

€590, 8%

General PE Fund,

€698, 10%

Renewable PE

Fund, €490, 7%

Hedge Fund,

€332, 5%

Energy

Infrastructure

Fund, €456, 7%


Equity Investment by Investor Type 2004-12


Dedicated

Renewable

Infrastructure

Fund, €2,462,

27%

General Infra

Fund, €1,942,

21%

Direct Long Term

Investor, €2,173,

24%

General PE Fund,

€1,076, 12%Renewable PE

Fund, €490, 5%

Hedge Fund,

€422, 5%

Energy

Infrastructure

Fund, €548, 6%


Equity Investment by Investor Type 2004-12

By Capital (€MM)

Financial investor investment by investor type 2004-2012Market Overview


Feed In Tariff€7,289

80%

Semi-Merchant€1,594

17%

Merchant€2313%


Equity Investment by Revenue Source 2004-12

By Capital (€MM)

Feed In Tariff€5,350

78%

Semi-Merchant€1,312

19%

Merchant€2313%


Equity Investment by Revenue Source 2004-12


Financial investor investment by revenue source 2004-2011Investment Survey


Current€7,802

86%

Exited€1,147

12%

Written Off€110%

Pending Sale€1532%



By Capital (€MM)

Current€5,581

81%

Exited€1,147

17%

Written Off€110%

Pending Sale€1532%




Financial investor investment by investment status 2004-2012Investment Survey


Appendices





$1

$4

$8

$25

$41

$35

$10

$28

$16

$0.0

$3.0 $4

.2

$11.

4

$19.

7

$42.

4

$1.1

$32.

3

$4.0

$0.0

$0.3

$0.8 $2

.3

$6.3

$6.8

$1.5 $2

.8 $4.3

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

2003 2004 2005 2006 2007 2008 2009 2010 2011

Fund

s Rai

sed

$US

Billio

nsInfrastructure and Cleantech Funds

Global Funds Raised 2004-2011

Infrastructure

PE with Cleantech Focus

Pure Cleantech

Cleantech fundraising mixed

Source: \prequin


Current Trends Amongst Key Private Equity Investors

INVESTOR TYPE ANALYSIS – NEUTRAL AND GROWTH SECTORS

PUBLIC PENSIONS

SOVEREIGN WEALTH FUNDS

PRIVATE PENSIONS

INSURANCE COMPANIES

ϒ Expected to remain the key driver as a source of capital for private equity

ϒ Commitments from public pensions made up nearly 25% of capital raised in 20091 (versus 14% in 2008)

ϒ Sector is estimated to be 40% under target and actively committing capital1

INSURANCE COMPANIES

ϒ Growing AUM, dominated by ME petro-dollars ($3.9tn as at Q2, 2010)1

ϒ Over 50% of SWFs active in private equity1

− Vast majority of private equity allocation targets buyout funds (92%)1

ϒ Growing focus on directs (20% of pe-focused SWFs invest on this basis)

ϒ Generally appear to have been hit harder by the denominator effect than public pensions

ϒ Recently many programmes on hold but growing optimism about new allocations

ϒ Generally committed to private equity and expect to remain a significant investorϒ Uncertainty surrounding proposed regulatory change

− i.e. Solvency II: unsure how this will affect European insurance companies’ ability to make private equity investments due to future capital requirements

ϒ Volatility of commitments observed in market: i.e. MetLife invested $1.6bn in 2007; $300m in 2009 and will commit between $400m and 450 m in 2010


Current Trends Amongst Key Private Equity Investors

INVESTOR TYPE ANALYSIS – DECLINING SECTORS

FUND OF FUNDS

FINANCIAL INSTITUTIONS

ENDOWMENTS

ϒ Rapid growth in size over the last decade consistent with underlying investments

ϒ Abrupt halt in late 2008 mirroring decline of mega funds and increased scrutiny by investors, especially regarding fees

ϒ Many large fund of funds are currently undergoing a period of reinvention with limited investment activity

ϒ Expected to significantly reduce their exposure to private equity investments as a result of the Dodd-Frank Act

ϒ Volcker Rule limits the amount a banking entity can invest in private equityϒ A recent spate of secondary activity from European banks also highlights

the need to shore up capital positions (RBS, Lloyds)

ϒ Least headroom as a result of the denominator effect given historic high allocations to private equity

ϒ High profile endowments suffered large losses in 2009 (i.e. Harvard down 27%)


Appendices





A pension fund primer

ϒ Two basic types of pension funds

− Defined benefit (final salary) schemes – inflation-linked fixed pension for life regardless of investment performance–2/3 of global pension capital

− Defined contribution plans (ISAs.,401k) – retiree receives contributed capital plus or minus gains or losses – 1/3 of global pension capital

ϒ But very different investment styles

− Defined benefit

− trustee directed

− long term investment horizon

− invests in a wide variety of liquid and illiquid assets

− Defined contribution

− usually “self-directed” by employees who select investment options, can switch quarterly or semi-annually

− normally, “open end” collective investment schemes (mutual funds) and almost entirely focused on liquid investments

− Switching / redemption option means underlying funds must offer daily redemption, which rules out illiquid investments

ϒ Fully funded, under-funded, over funded

− Fully-funded: NPV of assets reinvested at risk free rate (gilts, treasuries) = NPV of actuarially determined liabilities

− Under-funded: NPV of assets reinvested at risk free rate (gilts, treasuries) < NPV of actuarially determined liabilities

− Over-funded: NPV of assets reinvested at risk free rate (gilts, treasuries) > NPV of actuarially determined liabilities

− All defined contribution plans are fully funded

− Majority of defined contribution plans are underfunded (£222 billion in UK Schemes; $1.0 trillion US Public Schemes)



Listed Equities22%

Bonds57%

Real Estate10%

Hedge Funds5%

Private Equity2%

Cash2%

Infrastructure2%

Listed Equities43%

Bonds39%

Real Estate

7%

Hedge Funds4%

Private Equity4%

Cash2%

Infrastructure1%

UK DEFINED BENEFIT PENSIONS AT A GLANCE

ϒ £1.0 trillion in funds under management (defined benefits)

ϒ 1.0% average weighting to infrastructure or about £10 billion

ϒ 2.0% average weighting to private equity or about £40 billion

ϒ Structural bias towards equities but UK plans have generally increased the range of alternative assets

Source: Mercer, OECDNote 1: Sample includes defined benefit plans from Austria, Belgium, Denmark, France Germany, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden and Switzerland

EUROPEAN DEFINED BENEFIT PENSIONS AT A GLANCE

ϒ €1.6 trillion in funds under management (defined benefits)

ϒ 2.0% average weighting to infrastructure or about €32 billion

ϒ 2.0% average weighting to private equity or about £32 billion

ϒ Larger European plans have a lower bias towards equity allocations and make more use of illiquid and non-traditional investments


Current defined benefit plan allocation modelInfrastructure increasing, but still small, liquid allocation not likely to significantly move


Pension Fund Association Country

Asssets 2011

($US Billions)

Global Rank in

2011 Top 300 Pension Fund Association Country

Asssets 2011

($US Billions)

Global Rank in

2011 Top 300Government Pension Fund Japan $1,432.1 1 Public School Employees Japan $77.6 31Government Pension Fund Norway $550.8 2 AT&T USA $76.1 32APG Netherlands $318.8 3 North Carolina USA $75.3 33National Pension Korea $289.4 4 Electa Sweden $74.0 34Federal Retirement Thrift USA $264.0 5 Future Fund Australia $73.4 35CalPERS USA $214.3 6 O hio Public Employees USA $72.1 36Local Government O fficials Japan $189.6 7 New Jersey Public Employees USA $70.8 37Canada Pension Canada $149.1 8 Bayeriche Versorgunskammer Germany $65.3 38Employees Provident Fund Malaysia $145.5 9 W ashington State Board USA $61.6 39Central Provident Fund Singapore $144.8 10 O hio State Teachers USA $61.0 40CalSTRS USA $138.8 11 BT UK $58.0 43New York State Common Fund USA $133.0 12 Universities Superannuation UK $50.3 50PFZW Netherlands $133.0 13 Royal Mail UK $43.1 66National Social Security China $129.7 14 Lloyds TSB UK $41.1 69GEPF South Africa $128.2 15 Electricity Supply Pension UK $39.9 70Pension Fund Association Japan $124.9 16 Royal Bank of Scotland UK $35.5 84ATP Denmark $123.7 17 British Coal UK $32.1 96Florida State Board USA $123.3 18 Railways Pensions UK $27.8 107New York City Retirement USA $115.2 19 Barclays Bank UK $27.4 108O ntario Teachers Canada $108.1 20 British Petroleum UK $24.2 126National Public Service Japan $103.9 21 National Grid UK $23.9 127General Motors USA $101.5 22 British Airways UK $23.8 128Texas Teachers USA $100.2 23 BAE UK $22.7 141National Prive Brazil $92.0 24 HSBC UK $22.2 142National W ealth Fund Russia $88.2 25 Unilever UK $21.3 150Fondo De Reserva Seguridad Spain $86.0 26 Greater Manchester UK $17.1 181IBM USA $83.0 27 British Steel UK $17.0 185New York State Teachers USA $80.3 28 Strathclyde UK $16.9 186Boeing USA $79.4 29 Aviva UK $14.5 217W isconsin Investment Board USA $77.8 30 BBC UK $13.7 227

UK Pensions relative to largest global pensions

Source: Towers Watson


attracting and maintaining institutional investment in renewable energy

Business

resource prices

resource access

resource increasesand

resource markets

energy cost

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jobsmckinsey company

energy consumption