The recent investment by Vortex in a 644MW wind portfolio operated by EDP Renováveis (EDPR) shows the ambitions the EFG Hermes-managed platform has for the European renewables market. The Middle East-based asset manager intends to more than double its exposure to European assets in the next two years and become the continent’s largest manager of renewables.
Though each of Vortex’s two deals to date have featured only Middle Eastern equity investors, the platform is now attracting attention from Europeans, including large pension funds, according to EFG Hermes managing director Karim Moussa. He believes that the unique structure of the platform is providing a new opportunity for institutions to be active, rather than passive, investors in renewables.
Moussa says: “We have more of an investor friendly approach, unlike classic blind pool GP/LP structures; the platform allows investors to get direct exposure and decide at their own discretion on a deal by deal basis.”
EFG-Hermes was established in Egypt in 1984 and has an extensive presence across the Middle East and North Africa, specialising in investment banking, asset management, securities brokerage and private equity. Its private equity arm has previous experience investing in infrastructure as one of the founding sponsors of the InfraMed fund.
It set up Vortex as a vehicle in which sovereign wealth funds from the Middle East could invest in operational and yielding infrastructure assets outside of the region. EFG Hermes sees European renewables as a good fit for the platform given the growing number of equity opportunities in the market.
The first acquisition by the platform was in 2014 for a 49% stake in EDPR’s French wind portfolio of 334MW, spread across 33 wind farms. The following year it then bid on but failed to win a portfolio of wind assets sold by Enel in Portugal. In April 2016 Vortex agreed the acquisition of a 49% stake in 664MW of wind farms in Spain, Portugal, Belgium and France, again from EDPR.
The majority of this latest €550 million ($622 million) acquisition was funded through debt, with a group of five European banks covering 60% of the transaction costs through a 13-year facility. The remaining costs were met through equity, of which 95% was provided by GCC sovereign wealth funds and 5% was invested by EFG Hermes as seed capital.
Moussa says that its ability to leverage the acquisition with 13-year debt, despite that debt only being secured against a minority stake in the assets, was one of the major reasons it was able to beat out other bidders.
Vortex is not structured in the same way as a typical fund. Investors do not make firm capital commitments to an unspecified number of transactions, instead they sit in a pool and have the option to participate in any deal undertaken by the platform. Vortex identifies potential acquisitions, expresses an interest and then approaches its pool of investors to see which ones are interested in the assets.
There are a number of advantages for investors through this structure. Most significantly, costs are reduced. Investors pay no fee to be a part of the pool, and instead just pay a management fee on transactions they participate in. Vortex also allows investors more flexibility over their exposure and gives them an opportunity to carry out their own due diligence. Vortex acts as a mediator between a vendor and the investors, allowing the latter to ask specific questions and scrutinise documentation ahead of a transaction closing.
Moussa says that this quasi-direct investment structure was created to meet growing appetite from institutional investors to be more directly involved in infrastructure transactions. The platform targets large minority stakes, which gives it an active role in the management of the assets but does not give it a controlling shareholding. Both of the portfolios that Vortex has invested in to date continue to be operated by EDPR.
Moussa says its next deal is likely to be in solar or offshore wind and completed in the next 12 months. “Spain is an interesting market for us,” he says. “A lot of other investors are not there because they have had their fingers burned but we see an opportunity. We like Portugal a lot. France is a core market but more fragmented and more competitive”.
The platform has appetite for offshore wind, but the total value of these assets can be prohibitive. In order to acquire more than just passive stakes, a large amount of capital would need to be invested, making many of these assets out of reach for Vortex. Moussa says however that they are tracking a couple of opportunities in the sector.
“Our sweet spot for investments is €100 million to €200 million in equity but we can go higher or lower”, Moussa says.
Attracting additional investors into the Vortex pool may help to increase its appetite for larger deals. “We usually fund our deals using our own balance sheet and sovereign capital from the GCC but we are also increasingly targeting European institutional co-investors”, Moussa says. Some European pension funds have apparently expressed an interest.
A larger pool of investors could create added complications however.
Deals to date have typically involved between one and three investors, with little competition between them. Moussa says that Vortex is working on a system whereby investors are automatically allocated an option to participate in deals which fit with their particular investment criteria. The investors would still be able to opt out of the transaction, and all those that opt in would split the exposure between them. These plans are at an early stage however.
In the medium-term, the platform plans to invest between €200 million and €300 million in equity each year in Europe and increase its net owned capacity from 489MW to 1GW in the next couple of years.