As investors finalise their bids for the UK Green Investment Bank: who’s in the frame?

Investors are expected to submit their binding bids for the UK’s Green Investment Bank in the coming days, as the government prepares to privatise the £2.7bn venture.
Still in its relative infancy, the bank was seeded with £3.8bn of taxpayers’ money in 2012, with a mission to stimulate investment into green technology in the country. Since then, it has become a cornerstone investor in a series of specialist funds and launched a dedicated offshore wind fund which currently stands at £818m – expected to hit £1bn by the end of the year – and has investment from sovereign wealth funds and pension companies, among others. The GIB has total assets under management of £2.7bn so far, invested across 81 projects such as biomass, offshore wind and energy efficiency.

The decision to part-privatise the bank last year met with a mixed reception. It will allow the bank to fundraise more aggressively, and therefore potentially ramp up its work both in the UK and abroad. But the news came just months after GIB announced its first ever profit – for the 2014/15 financial year. Some accused the move of being made too fast, with Nick Mabey, CEO of UK think tank E3G (which was a driving force in the GIB’s creation) describing the process as “rushed and potentially botched”. The national Environmental Audit Committee concluded that the decision was taken “without due transparency, publication of relevant evidence, consultation, or proper consideration of alternatives”.

In response, the GIB claims it improved the process, and last autumn UK law was changed to allow the bank to go ahead with the privatisation, which is estimated will raise some £4bn. The bank also introduced a ‘special share’ structure, giving control to selected trustees who will be responsible preserving the green function of the bank.

Earlier this year, three bidders were shortlisted by the government. The first of those is widely understood to be Australia’s Macquarie – the world’s largest infrastructure investor and a big player on the UK scene, which is in the process of selling off a 26% stake in national water supplier, Thames Water. There was some speculation that the firm had balked following the recent Brexit referendum. However, insiders told RI that all bidders would be “taking stock” of the new political situation, but that no one had pulled out of the negotiations.

The second bidder is reported as private equity giant KKR, which is making a big push into green investments at the moment. Earlier this year, it launched a Green Solutions Platform, which focuses on promoting eco-efficiency and climate impacts at portfolio companies. This summer it claimed it had invested $1.6bn into renewables since 2011, and $400m in water infrastructure. In December, the company co-invested in a wind farm with the GIB, via a lending programme managed by Temporis. It is reported that KKR would partner with Temporis on a bid for GIB.

Against these two Goliaths is a David: the third bid for the bank is expected to come from a consortium led by a London-based boutique fund manager, Sustainable Development Capital Ltd.The firm specialises in energy efficiency investments, and is one of the fund managers that already runs money for the GIB (others include Foresight, Equitix and Aviva). It was founded in 2007 by Jonathan Maxwell, former director of business development for HSBC’s real estate and infrastructure investment arm. Maxwell was one of those behind the 2006 float of HSBC’s HICL Infrastructure Company – a highly-regarded UK infra fund whose share price has risen more than 67% since launch and nearly 30% in the year-to-date. He also advised the UN Environmental Programme’s Finance Initiative, of which SDCL is now a member. Maxwell is the largest shareholder of SDCL, with others including First Eastern and Sustainable Technology.
SDCL runs a number of energy efficiency funds including a UK fund, in which the Green Investment Bank is a major investor. It has a S$200m energy efficiency programme focused on the manufacturing industry in Asia, which it runs as a joint venture with First Eastern. It also manages the UK-China Energy Efficiency Fund, as well as vehicles in Ireland and the US. The funds are largely government backed, sometimes via green investment banks, with co-investment from the private sector.
RI can reveal that in May, SDCL created a company called UK Green Investment LP. Its name mirrors other firms set up by SDCL to manage the GIB’s funds, but RI understands that no new vehicles are being capitalised by the GIB currently. Both parties declined to comment on the function of the new company, which the document states received seed contributions of £1 from Jonathan Maxwell.
But SDCL wouldn’t be going it alone in its move to take over the GIB. In order to give it the capital it needs to contend with KKR and Macquarie in the bidding process, it has teamed up with a series of other investors. These are reported to include energy heavyweight GE, with whom it has an existing partnership to finance combined heat and power projects with the UK’s National Health Service; and Mitsui, which invested in SDCL last year and became a “group level member” in the firm.
American insurance company John Hancock is another reported consortium member, alongside the Pension Protection Fund pension lifeboat scheme. The PPF last year announced it would bring more of its asset management in-house to cut costs.
Once the deal is complete, the GIB has said it could double in size by accelerating its fundraising. A key part of this will be its ability to issue debt for the first time – something it is prohibited from doing under public ownership because of restrictions to borrowing on the government’s balance sheet as part of current UK fiscal policy. Once it is privately owned, it is expected to start issuing bonds – likely labelled ‘green bonds’ – as well as commercial debt.
It is also preparing to invest in other countries for the first time, as part of a partnership with the government known as UKCI. A pipeline of projects are lined up, RI understands, and the GIB has a mandate to invest in India, South Africa, Kenya, Rwanda and Tanzania – across a broader range of green technologies than it is allowed to touch in the UK, such as solar.