Asset managers and funds look to Ireland as new tax efficient home.

Ireland is changing the rules in a bid to entice renewables investors.  Ray O’Neill, CEO at Fincovi, sets out the 5 changes you should be most aware of. 

Competition in the market is driving top quartile renewable energy funds to look at domiciling their assets in Ireland. The revision of the Irish Investment Limited Partnership (“ILP”) laws, as outlined in the draft bill published in June 2019, has already caught the attention of fund managers who are serious about growing their funds, attracting new investors and increasing yield.

The Irish Government has an ambition to attract 5% of the $3.3 tn global private equity (“PE”) market, with a focus on green finance. Indeed, it has been suggested that jurisdictions such as Luxembourg anticipate nervously a steady flow of up to 25% of their PE funds to relocate to the Emerald Isle in the next 24 months. Money talks.

The bill will introduce several changes to the current legislation of particular significance to wind investors:

1. Segregated liability

The bill allows ILPs to establish an umbrella fund, with segregated liability between the sub-funds. This gives lots of flexibility for investors to get access to different asset classes at different stages of their development while putting a comforting ring-fence on the liability of each sub-fund.

2. A safer harbour for Limited Partnerships (“LPs”)

The same bill gives more certainty and clarity around the activities a limited partner can     and cannot undertake, without increasing liabilities. 

3. Simpler to change

LPs can participate in advisory committees and vote on changes to the partnership agreement, now with only a simple majority, and without losing their limited liability status.

4. Dual naming

ILPs operating in a non-English speaking jurisdiction can register a “dual foreign name” to facilitate translation requirements.

5. Limited Partner Obligations

It is likely that partners will not be required to contribute to the capital of the partnership going forward, save for the prescribed terms of the partnership agreement.

From wings and engines to blades and turbines

Ireland is already an attractive place to establish an investment platform. It’s legal, regulatory and tax environment could be beneficial to any renewable energy fund. Irish corporation tax allows for neutral treatment, provided certain conditions are met. It also has a wide and expanding tax treaty network, second to none, with an established world-beating aviation section already taking full advantage of the tax regime and local expertise.

With over 60% of global leased aircraft being leased out of Ireland, the government and financial services industry is now ramping up its green finance offer to mirror its longstanding success in aviation.

Once you’ve moved in

Renewable energy fund managers are subject to increasing regulatory requirements, rising costs and pressures to reduce fees. Jurisdictional tax efficiencies i.e. moving your fund to Ireland, is certainly one way to compete. But success will also hinge on the effectiveness of the manager’s infrastructure, in-house operations and outsourcing strategies. Trending in the industry – and Ireland is no different – is to outsource financial management, reporting and portfolio reviews.  As well as securing good savings, fund managers that embrace administrative and governance outsourcing reduce the risks associated with old “organically” developed in-house processes. No more Excel files everywhere!

Fund managers need to show investors how they can systematically cut costs, enhance governance and speed up the data cycle, so that they can achieve sustainable returns. Anything that can help add depth to this element of the investor pitch is worth more than consideration. It’s an imperative.  As your new home from home, Ireland stands ready to assist.

Renewable Energy Fact Sheet

Ireland

  • Today 5 GWs of renewable energy installed
  • 350+ wind farms
  • Further 2.2GW of consented solar farms ready to build
  • National renewable energy target (RES-E) is 70% by 2030 up from 40% in 2020
  • €11.2 billion of investment required to hit Irish 2030 target

Europe

  • Today 189 GWs of wind energy and 120 GW of solar energy installed
  • Further 310 GW of solar energy to be installed by 2030
  • Average EU renewable energy target (RES-E) is 49% by 2030
  • €500 billion + of investment required to hit EU 2030 target

12 Performance enhancing steps for optimising renewable energy IRRs

The job of any good asset owner or fund manager is to buy under-valued cash flows (i.e. the future income from a wind or solar farm) and enhance the income stream to improve the value/returns for investors. Let’s take a look at how this can be achieved.

Activity
Asset financial admin costs
Each SPVs comes with financial admin. It starts with finding the right partner to outsource the procure to pay, order to cash and record to report activities plus setting the right SLAs for the outsourced partner. The banking reports, a 2-day exercise for each SPV, can also be outsourced to a specialist to save on costs. 
Right sizing the leverage
In conjunction with the financing costs, the leverage can be tailored to increase equity returns. To be proactive about this activity a data management system is required.
Cost of the debt financing
Wholesale finance markets can be a source of cheaper finance for your projects. Reduce the cost of the debt can have a significant impact on the equity returns. To be proactive about this activity a data management system is required.
Technical performance of the asset
A data driven approach to ensuring availability numbers are as high as possible, maintenance is performed to a high standard and the power-curve warranty is met or exceeded can add up over time.
Asset life
Getting the asset to a 25-year life and beyond, limiting the performance degradation, limiting the cost of spares etc. can add value to the asset as it delays repowering costs and/or decommissioning costs.
Hedging Income
This can be achieved in several ways, one of which is a merchant PPA. The certainty of a floor price while out of any FIT/CFD scheme will reduce risk and can increase returns.
As balancing markets become more unstable due to the increase of asynchronous renewable energy on the system and roll off of fossil fuel capacity, hedging balancing costs, at the right price, is another way to improve returns and de-risk profit erosion.
Asset operating costs
There can be significant various across a portfolio of assets in the operating costs. Benchmarking costs and procuring services and insurance at a portfolio level can drive down costs.
Hedging Weather
Obviously weather conditions and predictability of same have a massive impact on the performance of a renewable energy project. Weather derivatives can be used to hedge an asset or portfolio of assets to offset some of the weather risk.
Hedging Interest Rates
Interest rates fluctuate of the long term and right sizing the hedge/swap over the optimum period can safeguard against profit erosion.
Technology Expansion
As battery storage and inverter technology gets cheaper/better it’s worth keeping an eye out to see where it can add value to the existing asset.
Lease/Planning extensions
Longer leases, with longer planning can add value to a project if the current lease/options situation is short or the plan is to repower the site. The challenge is justifying any additional cost outlay today for the future benefit.
Sale of Carbon Certificates
As the carbon markets spring back into action and target carbon pricing is set, the forward selling of carbon certificates to corporates (i.e. data centres) can add a significant lump sum or underwritten revenue stream to the project. For each €10 increase in carbon prices the income for a wind farm could increase by as much as €2 per MWh. 

What differentiates a top quartile renewable energy asset manager/fund?

Renewable energy asset performance management is maturing as the industry develops with yield/returns top of everyone’s mind. Every asset manager and fund manager in the sector is striving to grow their assets under management (AuM) by raising more funds an acquiring more assets. The difference between the top quartile and the rest is related to their capacity to deliver growth in their asset base while at the same time creating efficient scalable processes and systems to deliver sustainable target returns to investors at the expected risk levels.

Specifically, the best in class devote time and resources on:

  • Strategy: They adopt and articulate a clear strategy. Many non-top-quartile asset managers/funds do not have a crisp clear strategy and are thus subject to making ad hoc decisions. The latter approach destroys trust with investors.
  • Product: The instil a rigorous ROI focus within their organisations, with proactive portfolio maintenance a norm. This is in contrast to an AuM focused organisation with reactive portfolio reviews.
  • Investment Management: The best-in-class develop advanced data analytics and make them central to decision naming. This is in contrast to the siloed investment decision making approach.
  • Operations: Top performers adopt key metrics like AuM per employee. This drives process automation and outsourcing, as it’s everyone’s’ job to keep head-count lean. 
  • Technology and Data:  Not only is data seen as strategic asset within top performers, but it’s secured on a modern technology stack with built in controls and compliance functionality. Often data is across multiple sources, conflicts within each other and is incomplete. Recording information on MS Excel creates resource dependency, creates audit issues and is simply a poor choice to run a regulated business on.
  • Organisation & Talent: There is a trend that not all staff working for asset managers/funds need to be finance people with investment career paths. The talent required for a successful operation needs to have a diversity of capabilities, with the demand for tech talent to work in cross-functional teams on the rise.

fincovi provides financial services to the renewable energy industry including specialist BPO services, asset optimisation and advisory. Please drop us a line if you want to know more about how we can help you become a top performer.

*PWC Asset Management Benchmarking | Alternatives