Large institutional investors have had the opportunity to invest in illiquid assets for many years, unlike private investors who have not been able to take advantage of many attractive opportunities until now.
Among these is direct participation in infrastructures related to the energy transition, which, in addition to contributing to energy security, offer higher revenue potential, allow for portfolio diversification, and provide undeniable benefits for the environment and society.
Today, private investors are able to access such investments thanks to the new structures they use quickly. Indeed, we see increasing demand for assets that meet the energy transition objective and offer a different risk profile in investment portfolios.
In this article, we explain how private investors can access investment opportunities in the energy transition and describe why a “semi-liquid” structure is ideally suited to this investment objective.
Why invest in energy transition infrastructure?
By 2030, more than $2 trillion is expected to be invested annually in infrastructure supporting the energy transition. Much of this capital will go into traditional renewable energy assets such as wind farms, solar plants and hydroelectric plants, but also into areas such as green hydrogen production, battery storage and large-scale heating networks.
We have already discussed the reasons why this asset class attracts investors: because it answers the challenge of sustainability and for financial reasons.
The first reason is undeniable, but the potential financial benefits explain why wealthy investors are increasingly including private investments in their portfolios. Exposure to the energy transition allows them to diversify risks and generate strong returns through high, stable and predictable cash flows.
What is a semi-liquid fund?
Semi-liquid funds are created to facilitate investors’ access and exposure to illiquid assets. Private investors have historically faced barriers to entry into traditional illiquid fund structures held by high minimum subscription amounts, complex capital call structures and long capital lock-up periods.
In semi-liquid structures, investors can buy and sell at the prevailing net asset value, with entry and exit points defined (as per regulations) to control liquidity. Payouts are generally capped (often at 5% of net asset value) but are available at any time. A well-constructed portfolio diversified across geographies, sectors and asset classes (potentially with a low allocation to liquid assets such as listed shares and cash) can result in a level of ‘natural liquidity’. Semi-liquid funds use management tools to control liquidity, such as setting redemption limits and making liquid investments.
Why are semi-liquid funds relevant to the energy transition theme?
For many investors, investing in illiquid assets is a new experience. The semi-liquid structure is designed to answer questions that investors targeting the energy transition theme may have.
How to invest in the energy transition simply but surely?
The main advantage of semi-liquid structures is that they provide access to different types of high-quality, easy-to-operate assets. In the case of energy transition infrastructure, it has a risk and return profile that can help drive better portfolio performance and currently provides an attractive entry point.
I believe in power transition, but what if my situation changes and I need a refund?
The energy transition is a long-term topic, and investors in this area generally have a long-term view. However, we understand that investors’ needs may change over time. Investments in renewable energy infrastructure are generally considered illiquid investments; By creating regular liquidity, semi-liquid funds provide a happy environment. With the flexibility of these funds, which can be subscribed and redeemed periodically at net asset value, investors can manage their risk as they wish.
It is important to note that although periodic payments are possible, they do not occur as often as with mutual funds that offer daily liquidity. Buybacks depend on a combination of factors: the cash flow generated by energy transition assets must be sufficiently high, and the level of liquid assets must be sufficiently low. If necessary, the fund manager should also be able to sell shares in energy transition assets in a growing buyer’s and seller’s market.
The energy transition is constantly evolving. And how can you be sure you’ll be exposed to a wide variety of assets that will evolve?
The open and permanent structure of semi-liquid funds (“evergreen”, without a closing date) allows you to make continuous investments in the fund. Thus, the invested capital starts working immediately. New subscriptions (entry point) are added to the existing asset pool, allowing more assets to be purchased to expand the overall pool. This method allows existing investors to benefit from the growth and income potential of new assets integrated into their portfolio, and new investors to gain access to a diversified portfolio from the first day of investment.
How do I know if the entry fees are acceptable?
Fee structures vary among semi-liquid funds, but due to increased regulatory scrutiny and an emphasis on transparency, fee information should be very clear.
In a semi-liquid structure, investors typically have a full overview of all fees and commissions paid to the manager, and items such as transaction fees (where the manager receives additional commissions for buying or selling securities) are disclosed. Likewise, some managers receive performance fees in addition to their fees. In semi-liquid structures, these should be disclosed. Our approach is to make fees and commissions not only competitive but also as transparent as possible.
Overall, investors considering investing in the energy transition should understand that it is critical to consider these investments over the long term to maximize benefits. Therefore, allocations should be made taking into account the investor’s objectives, liquidity needs and risk tolerance. These factors are relevant to the nature of renewable energy infrastructure assets.
Therefore, semi-liquid funds have many advantages, but there are other points to consider. Investors should understand that holding liquid assets (cash and listed securities) involves risks not exclusively dedicated to the energy transition. Furthermore, energy transition assets are ultimately illiquid assets. Although the semi-liquid structure of funds improves the liquidity available to investors, it has its limitations. Fee controls present capping risk because in weak market conditions, it may be necessary to limit fees to protect existing investors. Investors should consider these aspects before deciding whether to allocate to semi-liquid structures in their portfolio.