Renewables, infrastructure and international equity: Bernard Fairman, Foresight Group

Well, it's never all in the plan, is it? I mean, you look at the world in front of you and try to figure out what is the best strategy. What I think has got us to where we are today is having good strategies. For a long time we pursued a losing strategy that no one wanted, namely venture capital. No one in the UK wanted anyway; it's changed a bit now but not a lot. Go to the West Coast still, frankly. Back in those days in the 80s, when we started, we spent a lot of time on the West Coast and at that point you were able to talk to the people whose names are on the doors – still the Don Valentines of this world and the Tom Perkins. Things have changed a bit since then and they've grown a lot bigger. But we carried on with venture capital far too long and didn't see that the world was changing, except that after 2000 we got the boom in the tech bust. And I started looking at how we could move from an area where we couldn't raise any money to an area where we could. So after a few years we ended up with what I called renewable energy infrastructure, and I think I was one of the first, if not the first, in the UK to use that phrase and indeed to build an asset class. Why did I do that? Well, at the time people were talking about clean tech. I needed a bridge from tech to something that people wanted to invest in. Clean tech provided the bridge. In fact, it wasn't the latest fuel cell technology; it was a solar farm or equivalent. And indeed we were the first in the UK to start investing in solar in 2007-08. We got into that area not because of some kind of quasi-religious conviction, but because we could see that solar in particular would be the cheapest form of energy generation. The reason being: it's subject to Moore's law – the cost of a semiconductor goes down by 25% every 18 months compound in perpetuity. And indeed we've seen that. It's an amusing aside: I saw in the paper the other day that Chinese solar panels are now so cheap, largely because they're hugely subsidized, but they're so cheap that farmers in some countries are using them for fences. So that's where we've got. But we saw that, we foresaw that to coin a phrase back in 2005-06. And our vision then, or my vision then, was that solar would be the cheapest form of energy generation. So it's proving now. I think what we're looking quite hard at is hydrogen as the next step in the decarbonization of the world. I think when it came to venture capital, we really morphed into again something that people wanted to buy, which is private equity. Our strategy was basically to do what 3i used to do back in the day when it used to be called ICFC, and indeed when I used to work there, which was to be a regional private equity player. In every major town in the UK you had your bank if you wanted to borrow something, and you had ICFC or 3i if you wanted to raise equity. And now indeed we're one of the two largest regional private equity players in the UK. We did that by figuring out that firstly there was a need, a wide open goal as 3i had left the market. Secondly, the way to finance it was to go to local authority pension funds in the regions and say to them, 'Look, do you want to put some money into something that will invest in your region and create jobs in your region and generate wealth in your region?' And that was a winning strategy. Which means that we've raised money now from most, I probably shouldn't say all because I'm not sure it is, but most if not all of the local authority pension funds in the UK. Through which kind of vehicles? They're limited partnerships, so in the main they're LP/GP type structures. Indeed, although as you correctly mentioned earlier, we have raised money in investment trusts, the serious money in the years going forward this year and next certainly will be LP/GP funds. Because as we're in the infrastructure space in a kind of arms race type situation where the biggest will win, we've got to raise lots of money quite quickly. Last year was a bit of a dry spell in that respect; the checkbooks of the LPs remained resolutely shut. This year, however, is different, so I hope we'll begin to see some significant money flowing into the coffers. We've never been short of deals; we're always short of money. Much money we've got, that remains the case.

Well, that's an interesting point. The answer is on the service not much. Other than private equity was our original business. But in reality, increasingly in infrastructure we're seeing deals that need private equity skill sets, and private equity and infrastructure are converging to some extent. So you've seen quite a lot of big operations – I'm mindful of people like EQT and Partners Group that have both skill sets, both disciplines within their businesses. And I think we'll continue to do that and we'll continue to grow both.

I agree and to reiterate, we've always only invested in things for economic reasons. And hydrogen will win and do its bit in the energy transition only as a function of cost reductions going forward. You need to see significant cost reductions. I was going to mention that the governments normally get in the way, but with solar they were very material in making it happen because feed-in tariffs followed by ROCs in this country enabled the industry to scale. And it was all about scale. I mean, most of the renewable energy industry is about scale. If you want to get cost down, you've got to be big, which is why I was talking about us seeking to expand quite rapidly in that space.

They were, they were ahead of probably everywhere else in Europe. But now the solar cells manufactured in Germany have been wiped out by the Chinese. Hence my earlier comment about farmers using solar panels as fencing – it's so cheap you can't compete.

I think I try to set out what will be the main forms of energy generation, what the government framework of support will be for that energy generation, and set it in concrete for the next 10 years. Right, so certainty is really important. But I tell you the other thing that's really important: another thing that politicians seem, and I've seen it close up, they think that they say something and next week it happens. If you say you're going to have an energy transition, that's fine and we're having an energy transition, but it's a 30-year event, not a three-minute event or even a three-year event. Which means we need hydrocarbons as much now as we've always done and will do for years to come. And what will drive the transition isn't fine words from politicians, it's economics. So all of the pressure groups will get their wishes not because of pressure but because people want to buy stuff because it's cheaper or more efficient. And the good news is that will happen, has happened in solar, and will begin to happen in a whole lot of other stuff as well.

I think it's a transition technology, right? I think it's going down a blind alley which will peter out in maybe five or 10 years time.

I think so. That's why – well, there is no charging infrastructure of any note in this country. I mean there is one, but would you fancy driving long distance? I wouldn't. One question, second question: what do you do with the old batteries? Third question: how do you deal with the repair and insurance and life cycle cost generally, and secondhand values? Oh yeah, all of those things no one's thought through. And fourth question: do you really want your car industry to be wiped out and we import all our cars from China? If you can answer all those four questions, then I'll revisit my opinion. But um, I also saw a quite worrying policy paper by a consultancy the other day that basically said if we're going to electrify everything and everyone's going to be driving electric vehicles, we need to be introducing effectively load shedding South African style so that people can choose whether they can charge their car or have the fridge on. That didn't seem to me like a truly progressive option. The point about an over-fast transition faster than we can do it is that the people that will suffer are those with least. It's very, very regressive and that is not a policy that I'd want to pursue.

Firstly, I think there's enough for everybody. But our competitive advantage is that we're one of the biggest in terms of size. We've got 150 people addressing this, we've got offices now a couple of offices in Western Europe – in Madrid and in Rome – and we're now quite big in Australia as a result of an acquisition we made a year or so ago. In our 150 people, we've got engineers and we've got accountants, and we're offering a soup-to-nuts service. So we don't subcontract out the business running of a solar park as many other people do. We don't rely on third parties to work. We've got owners' engineers, if you will, that work for us when stuff's being built. When things go wrong, we've got our own people that can identify that. And in Australia, actually we've got people that operate stuff like hydrop plants. So it's a mix of people that are addressing the issues not only investment but also technical issues that arise from these investments that you make. So that's the very modern operational private equity approach rather than the merely kind of do the deal and then try and find an exit. I think those days are long gone.

Not very competitive. I mean, we're doing deals three, four, five, seven, maybe up to ten million. The world needs dogs in the... I want to do 50 to 100 million or 200 million deals and I might do one or two a year. I mean we're doing probably 30 to 50 a year. It's a very different approach.

Well, you got to have a physical presence in the areas where you're investing. And we've got offices all over the country. I mean, it's hard to figure out a major conurbation where we don't have an office. And we've got local people in those offices. So it really is kind of the old 3i model. It was meant to be the old, but then 3i didn't pull back from that model. It was a very stupid thing to do in my opinion, a major mistake. The one thing good that came out of that was 3i Infrastructure, which is a great business. But the idea that you had something that had been embedded in the UK since the war and you just throw it away because you wanted to become a major buyout shop – and now they aren't – was crazy. But there you go, everybody's got their own approach to these things.

Quite low risk. I mean, what goes wrong? It might be an electrical distributor in the Kettering area, for example, turning over say 5 million and making a few hundred thousand when we invest. What we're basically doing is, because of the network that we've got, we're investing locally, then expanding the business, but then selling internationally. Once or twice we do come across some real huge winners, sometimes in unexpected quarters. And contrary to some people's prejudices, we're doing good deals in Scotland as well. We raise money there both from local authority pension funds but also from the Scottish government, which has been quite helpful and forward-looking in their approach. We're literally all over the place. We just opened an office in Wales, for example – I think two or three deals have been done already. The fact is, if you've got a hinterland which the UK does of literally hundreds of thousands of small businesses, in due course people want to retire. In most cases, no one's bothered with sales and marketing, and you're just selling to your mates as you always have done. It's the story that we got taught at ICFC as it then was all those years ago, and it remains good even today. And at some point we'll export the formula to Continental Europe. We looked at an acquisition in France, for example, of an investment management company that's got this regional network with regional connections. From memory, they even had a 50 million wine fund down in Bordeaux. That's the ultimate wine garden, probably literally. I think it's a very good area. I can't ever see the demand not being there because people retire and opportunities come up.

A few years ago, we could see that we've got 40,000 retail investors – I haven't mentioned that, approximately one third retail, two thirds institutional. We've got 40,000 private investors. So a few years ago, you couldn't get any money on deposit on the one hand, but on the other hand we were investing in these fairly safe businesses, namely renewable energy businesses that were generating 5-6% yields. And the idea came to me to put the two together. So based on our quite deep knowledge of the renewable energy market, we said to ourselves, if we put together some open-ended investment company structures and invest in a portfolio of in the UK, in many cases competitors but listed companies – listed wind companies and solar businesses and a variety of others – then we'd pass through what they were paying as dividends, which generally started at 6%, so we could pass through 5% to our investors. That expanded to a second fund which covers the whole world. So we're investing in a portfolio of listed businesses but in a space we understand and have deep knowledge of, and passing through the yield to investors. It's an income opportunity. Inevitably over the last couple of years, the amount of money we're managing there has gone down because you're talking about long duration assets and in a rising interest rate environment, long duration assets tend to be out of favor. That's what's happened, but I expect that to come back big time when interest rates start coming down. It's not a huge operation – it's about eight people out of 400 – so it's a fairly small part, but a useful contributor. And I think that will turn around and become even more useful over the next year or so.

First of all, there are two elements that I was seeking to achieve. Firstly, much higher visibility. We didn't want to be a well-kept secret because if you go to a big institutional investor and they've never heard of you, you've lost the battle before you started the war. It's worked brilliantly in that respect. Also, by the way, being in The Shard has been very helpful because people have wanted to come and see us. That still remains the case. I mean, one might wish it weren't the case in some of the small VCTs – some of their AGMs, you could get a lot of people turning up, eating your biscuits. But there you go. The second reason has worked not at all, which was to have the stock as an acquisition currency. That has just not worked because the London market – everybody knows the liquidity in the London market is tiny and getting worse. And we're valued now at about seven times forward, which given that we're growing at 25% compound is a fairly silly number. So right now we're not making acquisitions using stock because it would be enormously earnings dilutive. If you look at the private markets in our space, they're probably selling at 15 times; public markets are selling at half that in the UK.

The strategy going forward basically is to continue down the route that we're going in terms of significantly expanding our infra business. Our infra business right now is about 10 billion; it needs to be 20 to 25 billion pretty quick, in two or three years. At that point, you find gross margins starting to go up as well, which obviously is important for investors. As I've said earlier, the opportunity is enormous. We could deploy money at a far faster rate than we're currently raising it, or even that I could perceive that we could raise it. So at some point we'll need to enter into some kind of alliance with someone that can help us. I've described it in the press as a 'big brother' that will give us access to money, either directly or through some kind of distribution deal. There are plenty of models around. I think the PE business can probably double from its current size, the regional PE business. But at some point we need to look at overseas markets. For example, we've got 60-odd people located in two offices in Australia, so that's something we could look at exporting to the Australian market. Although I have to say, the important thing is that we raise money locally first; we don't go into a region and spend UK money. It does seem a slightly risky prospect to an international expansion of a private equity business, but that gating option of raising local money is a risk mitigant. It's credentials when you go in. I recall back in the day, 3i had an excellent business in Italy, for example. People don't realize the amount of private money in Italy is vastly more than it is in the UK. I think I saw it's four times higher per private savings in Italy than in the UK. So there are other markets out there with interesting dynamics. We're not in the business of just going in, opening an office, and hoping for the best. We'll only do that if we can raise local money before we start. Then we totally mitigate the risk because we've got a formula which we know works well: we hire local people, we support them from London, and that's the formula which has worked for us.