Impax: the UK fund manager blazing a green trail

Annual AUM growth of 25% in the last five years as environmental specialism pays off.

These are tough times for fund managers. But in the green investment space, Impax, the London-based environmental specialist, is in good shape. In October, the group reported a £201m (€252.6m) increase in assets in a pre-close statement for the year to September 18, to pass the £1bn mark at £1.18bn in assets under management and advisory. In September, Impax won a £35m mandate from the £1.5bn UK Environment Agency Pension Fund, one of the leading schemes for sustainable investment. And in a sign that environmental investing is no longer considered niche in the City, the group hired Charlie Ridge, former chief financial officer of Deutsche Bank’s UK asset and wealth management business, as its chief operating officer. Ian Simm, Impax’s chief executive officer, believes 14 years of dedication to the environmental space – 10 managing money – are paying off. He says Impax is now a scaleable, specialist combination of listed and private equity funds. Broadly speaking, the private equity side is dedicated to infrastructure such as the building of solar and wind projects, while the quoted funds invest in environmental suppliers such as equipment and maintenance companies. The manager runs money for over 100 institutional investors, notably in the UK, butincreasingly overseas. That coverage was extended to 20 new countries in one go in December 2007 when French fund manager BNP Paribas Investment Partners increased a small existing stake in Impax to 29.4%. Simm says the deal came about after Impax approached BNP, for whom it was already running money on the French manager’s Parworld funds platform, regarding an overhang of stock for which it was seeking a long-term investor. “At the time, BNP had equity stakes in 17 fund managers and the potential for distribution was very appealing for us. BNP decided to buy the overhang shares and more to take their stake to 29.4%. We also signed a distribution agreement for them to sell our funds in continental Europe and Asia. BNP see this as a natural compliment to their other capabilities.” Since signing the deal, BNP has launched the Parvest Global Environment fund, for which Impax does the stock selection. The BNP tie-up is not exclusive. Impax has a similar distribution relationship with Japanese equity fund manager DIAM, which also holds 5% of Impax shares. “Besides BNP, we are still 70% owned by other shareholders,” says Simm. As well as carrying out the research for a suite of environmental indices via a joint venture with FTSE, Impax has also recently launched a

joint fund with PaxWorld, the US manager, kicking off a dialogue with US investors which Simm believes will grow significantly under President-elect Barack Obama, who made renewable energy a cornerstone of his future economic policy. Obama plans to increase the proportion of electricity produced from renewable sources on the grid from the current 8% to 25% by 2025. He has also said he will invest $150bn over 10 years in low-carbon energy sources. The US Treasury’s recent extension of tax credits for wind and solar industries in its $700bn bail-out plan will provide a boost to companies in those sectors.
Return prospects for the environmental sector overall remain positive, says Simm: “We have generated annual increase in funds under management of over 25% for the past five years. With a diversified portfolio you offer investors superior growth without significant additional risk compared to general global equities.” However, he says that one or two environmental themes are struggling, notably biofuels: “There is a legal obligation for petroleum products and transport fuels to use a certain percentage of biofuels by certain dates, so there is a public sector pull on the market. However, down at the operating level prices are very uncertain both for feedstock and fuel product, which makes it very difficult to manage.”
In Europe, cast-iron policies such as the EU Water Framework Directive, which stipulates that water meets defined standards by 2015, and the EU Landfill Directive, which sets strict targets for the reduction of biodegradeable waste sent to landfill, are stimulating sound investment potential for related companies. “Ifyou’ve got a broad enough investment canvass you can mitigate and avoid risks and find the right areas to invest,” says Simm. One result of this year’s spike in oil prices, says Simm, has been the growth in technology to reduce energy consumption in transportation as well as good prospects for companies in building insulation, electric meters and related themes. Waste management, he says, is also interesting because it allows investors to tap into relatively defensive companies that are cash-flow positive – and potentially very lucrative in the case of recycling – and growth generators in all economic conditions. Another interesting future prospect, he cites, is water, particularly in desalination, storm water management, irrigation and filtration for domestic insulations and industrial food and beverage. Potential pitfall themes, he says, include first generation biofuels, which have yet to prove themselves commercially and are unlikely to escape their dependence on the food chain. Carbon capture and storage is another “holy grail” in Simm’s eyes, but he notes that there currently are no commercial scale, cost effective solutions. Wave and tidal energy, he says, both have potential, but require careful investment On the more established clean energy/renewables side, Simm says the tariffs available for wind and solar power generation in Europe and North America alongside increasingly established and proven technology, mean costs have stabilised. This bodes well for the sector against traditional brown power production, although debt financing for large projects has come under pressure as a result of the credit crisis. In the solar sector, he says silicon refining is expected to lead to a supply glut towards the end of 2009, and costs
down the chain are expected to fall, which ought to lead to keener prices and allow policy makers to reduce subsidies. Impax’s investment in the infrastructure for these power and development companies is made via its private equity fund, which has now been running for more than three years. “There is plenty of opportunity in infrastructure and a shortage of capital. It’s a great time to be in the market, notably if you have equity because of the tighter bank lending conditions. We recently said we would expect to raise more money for investing in power projects and I would expect over the next 6-12 months we’ll come back to the market.”
The growth of the overall environmental market, which Simm estimates at about half a trillion dollars in pure playcompanies and 4-5 trillion dollars in less specialist companies, has drawn increasing numbers of fund managers towards it. Simm believes that specialists can still differentiate by seeking growth at reasonable prices in less visible sectors or in those perceived to be less attractive. More important, he says, is the increasing education of investors on renewable and sustainability issues: “The number of interested and empowered investors is growing rapidly. Trustees are starting to do serious analysis because the returns in the space speak for themselves. At a time of huge stock market uncertainty, fund managers with good, low correlated returns are attracting a lot of attention.”