It is investment, not technology nor political will, that has been the bottleneck of progress within the waste industry in recent years.
The banks have, for the most part, shut up shop for small and medium enterprises, and for any project without a 25-year PFI contract to underpin debt and interest repayments.
Considering what the banks have been through, it is not surprising that they have to take the most conservative view at the moment. A hiatus has ensued for at least four years.
With no senior lending and a paucity of private equity, many businesses and good projects have struggled to stay afloat or attract investment. The Government has been distracted by the bigger economic picture.
But slowly and steadily we have seen something significant happen on the back of an increasing groundswell of environmental concern; the creation of something that will potentially unlock the purse strings of private equity and in due course bank debt.
The Green Investment Bank (GIB), with £3 billion of Government money to invest in areas such as offshore wind, energy efficiency and energy from waste, is going to play a significant part in the development of our industry.
Here at Foresight we have seen this impact first hand – and it’s not the first time we’ve seen it.
In 2011, through a procurement process run by the European Investment Bank, on behalf of the London Green Fund, Foresight became the manager for a £60m private equity fund for waste and renewable energy projects in the capital.
The London Green Fund was created with money from the European Regional Development Fund and the London Waste And Recycling Board, and created a cornerstone investment in the Foresight Environmental Fund (FEF) of £35 million. This was then coupled with £25 million from private institutions and individuals.
The GIB procured two fund managers to manage its waste-to-energy portfolio, one of these being Foresight. We have been mandated to invest and manage an initial £50m fund.
The fund, which is known as the UK Waste Resources and Energy Investments Fund (UKWREI), looks to ‘crowd in’ private equity on pari-passu terms and invest into waste and renewable businesses and projects throughout the UK.
The investment mandates of both FEF and UKWREI funds are very similar and cleverly simple. They need to: provide new capacity; divert waste away from landfill; reduce the carbon footprint; create jobs; and provide a suitable return to investors.
We are able to consider a variety of investment structures through a special purpose vehicle with a broad church of technologies, all of which are proven – we do not take first generation plant risk. Probably most importantly, we can look at opportunities that include merchant risk.
We don’t want to lock and load all the risks away to such an extent that there can never be any upside. Clearly this is easy to say yet more difficult to achieve.
However, as we aim ourselves at projects that can for the most part be structured with an all-equity investment, and look to refinance post- construction, the banks’ influence is felt to a lesser degree.
We use the structured investment of project finance but couple it with the entrepreneurial appetite of private equity.
We are not constrained by any specific metrics per pound of investment, which also means we can consider opportunities that do more on one element than another as long as the overall impact is a positive one.
This flexibility is key in providing good projects, which by their very nature are not standard with the appropriate investment.
Regular review of all these elements is a key obligation placed on the recipients of the investment. An annual report covering actual performance versus original forecast is required. However, these days this is very much business as usual rather than additional paperwork.
Both the FEF and UKWREI funds will make equity investments, structured in such a manner as to facilitate the refinancing of a level of the investment by senior debt in due course.
This is an important aspect to creating momentum in the waste market while allowing the recycling of such investments.
Foresight has already made two investments through these funds – the most recent being in the construction of the TEG Anaerobic Digestion and In-Vessel Composting plant in Dagenham, East London – and we continue to pursue several near term projects.
We have developed a pipeline of projects far greater than the GIB’s £50m or indeed the FEF’s £60m.
So new things are afoot in the waste industry: private equity is becoming the investment not necessarily of choice but of necessity. We could sit back and wait for the banks to return but we would lose the momentum, the opportunity and the ability to grow our industry.
The FEF and the GIB funds are a start, a catalyst to continue and maintain the movement away from the technology of the past to the technology of tomorrow.
Nigel Aitchison, partner at Green Investment Bank fund manger Foresight Group
How the investment decisions are made
Companies seeking investment from either or both funds need to provide a business plan that provides a clear description of the project, including specific details on their strategy for feedstock, offtake, construction delivery and operational and maintenance arrangements.
A well functioning financial model is required with an explanation of the underlying working numbers, for example the evidence that supports the offtake pricing for the facilities outputs.
This business plan is reviewed internally by Foresight’s experienced environmental team before we provide feedback on areas of concern, with the aim of agreeing a set of investment terms.
Once these are agreed and we have entered into a period of exclusivity we commence, subject to Investment Committee and GIB approval, due diligence covering the market, technical, financial and legal areas of the proposal.
Following the successful completion of due diligence, a full investment paper is submitted to the Investment Committee and the GIB.
With this final approval process complete, the investment moves towards financial close. In summary, this is a normal investment process reflective of almost any private equity fund.