Investing in sustainable infrastructure with Resonance Asset Management

Episode Transcript:

Rosie (00:00.078)
sustainable finance podcast which is rated one of the top ten most useful sustainable finance podcasts by green finance guide. It is one of the jurisdictions leading the way in green and sustainable finance and as part of this podcast series we will be speaking to and learning from some of the leading global figures in the field. My name is Rosie Allsop, I am communications director at Guernsey finance. We are the promotional agency for Guernsey's financial services industry and today I'm delighted to be joined by

by Orlando Hilton, who is investment director at Resonance Asset Management. Resonance Asset Management is an alternative asset management firm focused on originating, distributing and managing real asset investment funds for institutional investors. Its focus is on assets in growing and changing industries with compelling long term investment scenes with areas of focus, including alternative and conventional energy, water and waste treatment.

environmental and agricultural assets. Orlando is responsible for the origination, execution and management of Residences 2 Wind Funds acting as a director for each of the subsidiary, if I could say that properly, subsidiary companies. So Orlando, welcome. It's great to have you with us today.

Orlando Hilton (01:11.559)
Thank you.

Orlando Hilton (01:17.959)
Thank you very much for having me along.

Rosie (01:20.142)
Can you tell us a little bit about yourself and your career to date?

Orlando Hilton (01:23.943)
Yeah, certainly. So I was studying at LSE in early 2010s, just as the renewables industry started to take off in the UK. And that piqued my interest in the sector. So I spent my summers working with a company called Versus Solar, who were developing some of the UK's first large scale solar parks in the UK. And that really sort of got my head into renewables, which got me looking for jobs in the space. After graduating in 2013, I joined Resonance just after it.

completed its first investment. And now I've been there 11 years helping originate and execute deals across all three of the funds. I'm now responsible for managing our two onshore UK wind funds and I am working with the team to develop our latest strategy.

Rosie (02:11.726)
Thanks very much. Now, as I mentioned in the introduction, Resonance specialises in thematic investing with a mission to reduce pollution and waste by investing in sustainable infrastructure. Why is this important and how does it differ from a more traditional investment approach?

Orlando Hilton (02:29.575)
That's a very good question. I think it's important to mention first and foremost that our aim with our investments is to provide an attractive risk -adjusted return for our investors. So that's the sort of the primary driver. But on top of that, we do like to try and make a positive contribution to the economy through supporting local industry and businesses and to the environment by investing in clean energy and waste and wastewater treatment assets.

When we began investing in Onshore Wind in 2012, it was a relatively new concept for institutional investors. And that has changed a lot over the past 10 years as investors have grown more comfortable with the risk profile of these investments. And they can see the appeal of investing in assets whose returns are typically uncorrelated to the wider markets. And that's what makes these investments quite different to more traditional investment products, such as equities and bonds.

Another differentiating factor is that these investments can provide very predictable long -term cash flows that often have a degree of explicit inflation protection. That's something that not a lot of other investment products can offer. It's very appealing to long -term investors who have long -term liabilities, eventually. Really, what Resonance is trying to do is provide attractive returns in hard -to -find opportunities.

that are differentiated from more traditional investments.

Rosie (03:57.422)
fascinating. Can you tell us about some of the projects the wind funds are involved with?

Orlando Hilton (04:03.175)
Absolutely, sure. So maybe to give you a tiny bit of background on both of the funds and then I can just jump into a couple of projects. Great. So our first wind fund, which we launched, as I mentioned, back in 2012, the idea was to invest in assets that are credited under what's called the Renewable Obligations Certificate scheme. That basically means they're above a certain size, above five megawatts in installed capacity. Our first investment in that fund was a 6 .9 megawatt asset in Aberdeenshire. So that's

Rosie (04:08.974)
Yeah, that would be great. Thank you.

Orlando Hilton (04:31.399)
three 2 .3 megawatt turbines. So enough to power quite a few homes, thousands of homes. That asset uses anacond turbines and currently sells this power to a well -known energy supplier in the UK at a fixed price for the next 12 months. A very attractive fixed price, I might add. I think what's interesting about that asset is that we acquired the land that the turbines, the substation are located on, which means going forward when we come to repair that.

assets should make life a lot easier because we don't have to renegotiate the lease. So one thing that's happening across the industry is there's a lot of talk about repowerings and one of the most challenging things with the repowering is renegotiating the lease. So having assets in our portfolios where we own the land is a real plus. Another interesting project in that fund is what we refer to as our industrial wind portfolio. This is a portfolio of three assets which are all of them are co -located on the site of industrial facilities.

So two of them are located next to large chemicals businesses and one next to a cheese factory. Although they don't get any free cheese, annoying me. Yeah, very disappointing. But what we do do is sell all the power that the turbines produce to these facilities under long -term offtake agreements. And co -located wind is really quite unusual, particularly in the UK where the land is quite sparse. So it's quite interesting to have these sorts of assets in the portfolio.

Rosie (05:38.926)
Oh.

Orlando Hilton (06:01.031)
Our second wind farm took a slightly different approach. By the time we launched it in 2019, just about everyone and their dog was bidding for rock assets. So we thought we needed to look at something slightly different. So what we decided to do was look at smaller turbines. And so those are assets are credited under what's referred to as the feed and tariff regime. So that's less than five megawatts, typically around 500 kilowatts, about a tenth of the size.

And the idea there was just to go around the country buying up lots of these assets and putting it into one big portfolio. Our first project was acquiring a portfolio of 42 turbines in Northern Ireland that had been developed by a team out there who still manage and operate the portfolio for us. I think what's interesting about this project is that we, the turbines are what's referred to as refurbished. So that means that secondhand turbines have undergone a full

refurbishment programme. So that comes with a bit of risk in that you don't get a availability guarantee like you would get with the larger turbines. And so you don't get paid out if things go wrong, basically. Despite that, they've actually been really, really reliable. We've also taken a few of these assets through what's called a reparing, which is a great process to go through and adds value to the...

Rosie (07:20.302)
That is fascinating. How do you decide which infrastructure projects are invested in and where the projects are located Orlando?

Orlando Hilton (07:29.895)
Yeah, another great question. So each of our funds has quite a defined investment strategy. So this sort of sets out the parameters of any project that we can invest in. So that's the technology type, deal size, the geography, expected returns, etc. And so we're typically targeting quite a particular type of opportunity in each fund. If we take onshore wind, what we'll tend to do before making any investment decisions is carry out a whole

range of activities. The first thing we typically do is analyze the asset's potential returns and sensitivities around those returns and see if it can meet our return requirements, assuming standard assumptions around things like higher prices, inflation, et cetera. Once we get comfortable with what an asset might be worth and what returns it might produce, we then start looking at the asset's historic performance, so looking at both technical and commercial factors.

We'll then undergo a very thorough review of all the key agreements in place. So if there is a lease in place, the lease, things like the O &M agreement with the turbine supplier, off -take agreement, subsidy agreements, those sorts of things. And then eventually we'll negotiate the key investment agreements, which is the sale of purchased agreements, et cetera. And assuming all of those things can be done, we'll then make the investment. In terms of location, it's a bit more straightforward of our water assets because they have to be co -located with an...

shore party because water is very expensive to transport. So you have to have the water treatment site right next to where the water has been coming from. You can't go tankering it hundreds of miles. Obviously with wind it's very different because it plugs into the grid and you can send electrons to the other end of the country in a matter of seconds. So it's a whole different thing with wind. But choosing the right location is really important and it's quite challenging. So the three main things to consider are energy production,

So is it in a windy spot? Wind can vary huge amount from field to field. So choosing a spot where there's the most amount of wind is very important. Important to remember that the installation costs and construction costs are kind of fixed. So if you can get a site that's 10, 15, 20 % more productive, then that just goes straight through to your bottom line because the construction costs are the same, but your revenues are going to be that much higher. So choosing a nice windy location is really important.

Orlando Hilton (09:51.303)
The next thing is planning. Planning is really challenging with wind. So working with local planners and local communities to get their approval. It can take five, 10, 15 years to get a site approved. So putting it in a location where you think there's going to be least resistance is important. And that's why to date most wind farms have been built at quite remote locations or let's say next to a main road where there's already a lot of noise and disturbance.

And then the final thing which has become a real issue recently is grid. So grid capacity, finding a location where there is enough capacity in the grid to take the power that you're producing. And that can again, that can take years and years and years. And it can be very expensive because sometimes you have to pay to reinforce the local grid yourself. So the three main factors when you're looking at wind, is it windy? Can you get planning permission? Can you get grid? And those three things will determine where you can build.

Rosie (10:50.19)
That's an awful lot to think about. Tell me what the advantages and disadvantages of onshore wind versus offshore wind. Do you think you'll see more offshore wind going forward?

Orlando Hilton (10:51.847)
Yes.

Orlando Hilton (10:59.495)
Yep.

Orlando Hilton (11:03.943)
Yes, definitely more offshore. I think in order to meet the government renewable energy targets that have been set for 2030, 2050, there needs to be an enormous increase in onshore and offshore wind. Although I don't truthfully think those targets will and can be met, but we'll get, I suspect, somewhere towards them. The benefits of onshore wind is that it's...

It can be integrated in the local network so you can use the power closer to where it's being generated and that puts less stress on the grid and so that means there's less grid enforcement work done. And projects can be done at a smaller scale so that they can often be slightly easier to finance. Offshore benefits from having a lot less or fewer planning issues because obviously they're out at sea so they're much less visible or not visible at all.

And that means the turbines can be significantly larger. So it can be four or five times the size of what you find on shore. And that means they capture a lot more of the wind's energy. So how much wind you can capture through a turbine, a lot of it's determined by the height of the turbine. And offshore, you can go two or three times higher than you can on shore. And so that means they can capture a lot more of the wind power available in the UK, which means we can build much bigger wind farms.

which will help us decarbonize a lot quicker. One of the downsides of offshore wind is that it does require huge amounts of grid investment. So you're talking about adding gigawatts to the electricity grid and that means that huge transmission lines are having to be built across the country and these are very controversial from a planning perspective. So there's been a bit of news recently about some local groups forming to try and stop very large transmission lines being built.

right across Norfolk and Suffolk. And these are the sorts of issues that you get with offshore wind, where you have to build massive infrastructure around the wind farms to actually take that power and put it into the grid. And it's also very capital intensive, so someone's got to pay for all of that work. That being said, as I mentioned, there will be a lot more offshore wind built, whether it's as much as the 50 gigawatts that's targeted, I don't know, but there'll be a lot more. And I suspect onshore wind as well, there'll be a lot.

Rosie (13:28.014)
So as I understand it, it's not your direct responsibility, but you also work on the Resonance Industrial Water Infrastructure Fund. What projects does this invest in? And can you tell me a little bit about the aims of that fund?

Orlando Hilton (13:43.207)
Yeah, absolutely. So very different to what we do in wind, although still investing in small to medium scale infrastructure with sort of long term predictable cash flows. But the aim of this fund is to invest in water and wastewater treatment facilities that service what we refer to as industrial clients. So basically corporates. This is, we do this by financing the construction and operation of assets and the long term BOT contracts, which is a build, operate, transfer contract.

where basically the industrial client leases a piece of equipment off us over say five, 10, 15, 20 year period. And at the end of that period, the asset transfers to the client. We've invested in 20 of these projects, I think, across the UK, Europe, Southeast Asia, Australia and China. We've actually done quite a lot in China, which has been really interesting. We've got a team out in Hong Kong and they've done a great job of investing in China.

The idea essentially is to help industry meet its water and waste needs as it's becoming increasingly difficult for corporates to meet various regulatory requirements. And also they're often in areas of water scarcity, so helping industry reuse water so that it can continue to operate. In terms of example projects, an interesting one, we've built a large desalination plant on the island of Sardinia in Italy.

And that takes, yeah, that takes seawater and turns it into fresh water, which is then used by the largest refinery in the Mediterranean. So that's quite interesting. And then we've done a number of projects which takes sort of wastewater streams from the food and beverage industry and turns that into biogas. So we've done a project in Australia, which refers to project harvest, which is working with a local abattoir, which is...

Rosie (15:07.758)
Oh wow.

Orlando Hilton (15:36.327)
sheep and cows mainly, and takes all the waste product from that abattoir and puts it into an anaerobic digestion plant and turns that into biogas and then sows the gas that it produces back to the abattoir. And similarly we're working on a very large project in the Netherlands at the moment which takes manure from lots of surrounding farms and puts it into a big plant which then turns that into biogas and is sold into the local grid. And in the Netherlands there's a very attractive subsidy for doing that.

So the government are subsidising that activity.

Rosie (16:11.374)
That is just fascinating. The breadth and the scale is just, yeah, mind boggling. So both Resonance Wind Funds and the Industrial Water Infrastructure Fund are domiciled in Guernsey. Tell us why you chose Guernsey and how would you describe your relationship with the service providers here?

Orlando Hilton (16:12.199)
Thank you.

Yeah.

Orlando Hilton (16:33.607)
Good question. Gosh, we changed working in Gansu, probably just before I joined the business and back in sort of 2011. And I believe it was originally chosen for a number of reasons. It's obviously a well -respected, trusted offshore jurisdiction that is considered stable from both the legal and regulatory perspective. And I think when you're investing for the long term with institutional investors, that's really important. It obviously has a favorable tax regime as well, which makes domiciling funds there.

efficient in that respect. And it has a very mature and deep services industry. So lots of highly skilled workers, lawyers, tax advisors, consultants, auditors, administrators. So it's really set up to run, you know, funds like the ones that we manage. In terms of relationships, we have a number of long term relationships on the island. So we've been working with KPMG on all things audit related for 10 plus years. Similarly, we work, we've been working with OJAS on

legal matters on the island since we've since we started and we about two years ago we moved our administration over to Edmina which is a relatively new outfellow the island led by Christine and Mark yeah and they're doing a fantastic job so we've got some really great relationships.

Rosie (17:50.126)
lovely to hear. What are the typical investors for these funds and has that demand changed or evolved over time? And if so, do you think that that will change going forwards?

Orlando Hilton (18:03.879)
Yeah, it has changed a lot and I suspect it will continue to change. So the vast majority of our investors are institutional investors, so that's local authority pension schemes, government pension schemes, corporate pension schemes. We also have an endowment from the West Coast in the US and we have a couple of very large family offices and high net worth individuals. I think where it changed the most is that demand for these sorts of products has increased massively over the past 10 years. So...

When we launched this stuff 10 years ago, it was quite niche. Whereas now these sort of products are considered fairly mainstream. And more and more institutional investors are increasing their allocations to infrastructure, in particular, sustainable infrastructure. So really growing in popularity. One of the interesting things that has changed, I think, over the last few years is there's been an increase in the number of listed infrastructure vehicles.

So one of the issues with infrastructure funds is that your money tends to be tied up for quite a long time. And this illiquidity can prove an issue for investors. So what these listed funds do is they combine the benefits of infrastructure investment vehicle with the listed security vehicles. So you can get your liquidity whilst also benefiting from all the things infrastructure can do. And that's proven very popular in a new product called a long -term asset financing.

product has just been launched, which is essentially trying to do the same thing, which is giving pension funds access to the infrastructure, whilst also providing them with some liquidity. So these are quite interesting developments that are taking place at the moment. I think in the short term, we've had a bit of a sort of, there's been a bit of a hiccup with interest rates shifting and lots of investors saying they don't want to commit to illiquid strategies at the moment.

But that is changing. Certainly this year, things have gone off to a better start from a fundraising perspective. And it's very much our belief that there's still a very large demand for quality infrastructure products.

Rosie (20:15.086)
Absolutely. So excuse me, the latest fund RBWEI2 is also a Guernsey Green Fund, which you probably know is the world's first regulated green investment fund product. And it's something that we in Guernsey are extremely proud of. How important are these regimes and what benefit does it bring to both the fund itself and the investors?

Orlando Hilton (20:16.327)
Yeah.

Orlando Hilton (20:28.103)
is something that anybody can understand.

Orlando Hilton (20:41.447)
Yeah, yeah, great question. I think they're important because they provide credibility. So the Gerns' Agree Fund is something that provides credibility to that particular fund and basically making sure that investors can be confident that the ESG claims that we're making are legitimate. I think what's happened over the last few years is that a lot of funds have launched with claiming lots of ESG.

credentials, but actually it's been proven that they are really making a positive contribution in those areas. So that's what's referred to as greenwashing. And what something like the Goerntegreen Fund does is that it ensures investors that we're not greenwashing, that we are actually investing in an environmentally conscious way and that we are making a positive contribution to the environment. So it lends credibility and it affords trust to the fund, which is really important. Also, it differentiates the fund.

from other funds that do a similar thing but aren't accredited under this regime. So it's a good way to make ourselves stand out a bit.

Rosie (21:49.23)
Good to know. How do you verify the credentials of prospective projects and measure the ESG impact of your funds?

Orlando Hilton (21:50.15)
Yeah.

Orlando Hilton (21:55.367)
Good question. We have a member of the team that is an ESG specialist, which is a new thing. And this is some ESG credentials of projects and funds is something that has grown exponentially over the last, the importance of it has grown exponentially over the last couple of years with lots of investors asking, you know, lots of information on what we do. Top level, we employ quite a rigorous ESG due diligence and data monitoring process.

using a blend of internal and external resources. So all of our data is reviewed and processed by an independent external party called Terra Instinct. In terms of prospective investments, equally they undergo rigorous ESGDD process conducted by our team and by Terra Instinct to oversee everything. And we evaluate our investments against our primary environmental goals, which are reducing carbon emissions,

and reducing water pollution and scarcity.

Rosie
So you're obviously doing an awful lot but what's next for Resonance? Do you have any new projects?

Orlando Hilton (23:54.439)
Yeah, fair enough.

Orlando Hilton (24:05.479)
We do, yeah, very timely. We are in the process of developing our latest strategy, which in very broad terms, will be looking at opportunities across the energy transition space. So, you know, the energy transition represents a massive investment opportunity. And we think at Resonance, we're very well placed to take advantage and capitalise on that opportunity due to our experience and our expertise.

I can't go into too much detail on this, but I can sort of talk in broad terms. So we'll be looking to invest in three categories. Renewable energy generation, so assets like wind, solar, bioenergy. What we're referring to is transmission and storage assets. So things like grid infrastructure, battery storage, hydrogen. And then finally, across what we refer to as resource efficiency and recovery assets. So that's looking at things like waste treatment and renewable heating and cooling for industry.

So quite broad range, but we think there's so many interesting opportunities out there. We want to try and capture as much of it as possible. The plan is to invest across the UK, Europe, Southeast Asia and Australia building on the success that we've had in those areas. We won't be looking at China again, not because China hasn't been really good for us, but just because investors are very sort of risk on when it comes to China. They're very nervous about what's happened.

happening there from some political angle. So we won't be doing anymore in China. Yeah, I think that's probably everything I can say at this point.

Rosie (25:38.542)
Well, that's that's absolutely plenty. And it's certainly enough to keep you busy, isn't it? Thank you so much, Orlando. It's been wonderful talking to you today to get your time. Thank you for your time and thanks for your insights. It's really been a pleasure. I really look forward to seeing what Resonance does next. I'd also like to thank our listeners for tuning in. We have quite a back catalogue of interviews and panel discussions on the Sustainable Finance Guernsey podcast channel. You can check them out.

Orlando Hilton (25:43.367)
Yeah.

Orlando Hilton (25:54.503)
Thank you.

Rosie (26:08.398)
by searching Sustainable Finance Guernsey wherever you get your podcasts. And if you enjoyed today's episode, please leave us a review or a comment because we love to get your feedback. And we'll be back soon with another episode of the Sustainable Finance Guernsey podcast.

Orlando Hilton (26:20.199)
Perfect, thank you very much.