OPTrust Acquires Two Spanish Solar Plants

Bruc, OPTrust and Green Investment Group recently closed the acquisition of two solar plants from Solarpack in Alvarado, Spain:
Bruc Iberia Energy Investment Partners has acquired from Solarpack two solar photovoltaic power plants under construction in Spain with a combined capacity of 100 MW. The plants represent a total investment of 65 million euros and have a project finance in place from Banco Sabadell.

The two 50 MW plants are located in Alvarado-La Risca, a town in the municipality of Badajoz (Extremadura region). Both plants are currently under construction and anticipated to become fully operational in the third quarter of 2020. Together, they will avoid an estimated 53,000 tons of CO2e annually, and provide enough electricity to power the equivalent of almost 40,000 homes. The plants have been developed by Solarpack who will continue to manage the projects throughout construction and operations. The sale of the energy is secured by a Power Purchase Agreement (PPA).

This is the first investment in Spain made by Bruc Iberia Energy Partners, with shareholders including Juan Béjar, OPTrust and Green Investment Group. Bruc Management, also led by Juan Béjar, advised and managed Bruc Iberia Energy Partners. Macquarie Capital is acting as financial advisor.
On Friday, I had a chance to discuss this deal with Morgan McCormick, Managing Director, OPTrust's Private Markets Group based in London:
Morgan is a Managing Director within OPTrust’s Private Markets Group and the head of OPTrust’s London office. Morgan has responsibility for European private equity and infrastructure investment. Morgan has worked across North America, Europe and Asia as a principal investor. The OPTrust Private Markets Group has a global mandate to invest $6 billion of OPTrust’s assets in private equity and infrastructure. Prior to joining OPTrust in 2007, Morgan worked in investment banking for CIBC World Markets. 
Before I cover our discussion, I'd like to thank Morgan for taking the time to talk to me as well as Claire Prashaw and Jason White of OPTrust's Communications team for setting this call up and sending me pertinent links to items we discussed.

Also, there is a background on OPTrust and its Private Markets Group which I found from Apollo here to learn more about Morgan McCormick's responsibilities (note: Jason White helped me update the information):
With net assets of almost $20 billion, OPTrust invests and manages one of Canada's largest pension funds and administers the OPSEU Pension Plan, a defined benefit plan with almost 95,000 members and retirees. OPTrust was established to give plan members and the Government of Ontario an equal voice in the administration of the Plan and the investment of its assets, through joint trusteeship. OPTrust is governed by a 10-member Board of Trustees, five of whom are appointed by OPSEU and five by the Government of Ontario.

OPTrust's private markets program was launched in 2005 to build diversified private equity and infrastructure portfolios. The team was recruited internationally and seeks to construct well diversified portfolios across investment strategies, geographies, investment vehicles, partner base and sectors.

In 2018, private equity accounted for 11.5% of OPTrust’s total plan assets, committing to 10 new investments, totaling $434 million, as well as funding ongoing growth and expansion initiatives in various portfolio companies. OPTrust’s private equity portfolio generated a net return of 15.7% for the year.

Infrastructure accounted for 12.4%. of OPTrust’s total plan assets in 2018. As asset valuations have remained elevated in a record year for fundraising within the asset class, OPTrust found better value in smaller scale opportunities and establishing platforms to pursue them. In 2018, OPTrust completed six new transactions in this space, totaling $569 million, and generating a net return of 9.9%.
Again, this information was updated using the latest figures which are available here and I posted it here as it provides a decent background on OPTrust's Private Markets Group which is run by Sandra Bosela and Gavin Ingram (the two co-heads) who are both based in Toronto.

Anyway, Morgan is extremely nice and very knowledgeable. I truly enjoy talking to managing directors who are much closer to the investment deals because they work on them directly and can explain them in more detail.

Morgan told me he joined OPTrust in 2006 and in early 2010, was relocated to the UK when OPTrust opened its London office. In 2013, he moved to Australia to open up OPTrust's Sydney office to focus on infrastructure and private equity investments. In 2015, he moved back to London where he has been ever since.

Morgan told me OPTrust's Private Markets Group invests in private equity and infrastructure. In infrastructure, it's mostly direct deals and in private equity, they invest in funds, co-invest alongside them and do some purely direct deals.

We then discussed renewables. I mentioned to him that during my last discussion with OPTrust's new CEO, Peter Lindley, he had mentioned that renewable investments now account for 8% of OPTrust's total portfolio, exceeding the 3% exposure in traditional energy investments.

Morgan told me that 8% figure includes green real estate and green bonds, but there's no doubt that climate change is a key element of all investments right now and that the renewables portfolio is growing. "We view the world through a sustainability lens as our mission is to pay pensions over the long run."

As far as the solar deal above, he told me they have great partners in Solarpack and Bruc Management, an investment manager specializing in renewable energy which OPTrust partially owns:
Bruc Management is a investment fund manager specializing in the renewable energy infrastructure sector. We currently invests in solar photovoltaic assets in Spain and Japan. Bruc’s main objective is to originate investment opportunities that imply attractive returns by generating value through a disciplined approach and selective investment criteria.

The main shareholders of Bruc are its own management, led by Juan Béjar, Macquarie Capital and OPTrust.


Bruc considers that an energy transition towards a decarbonized economy is urgently required. Part of this transition rests on the development of clean energy, with growing contribution from this sector to the energy mix. The mission of Bruc is to generate attractive investment opportunities in the renewable energy industry with the aim of contributing to the sustainability of energy supply systems and to significantly reduce their environmental impact.
Morgan told me Spain offers a "fantastic climate" for solar energy and I read something very interesting on Bruc's site on why the wind flows for the sun in Spain:
Spain will have to exert itself if it wants to meet the expectations included in the Global Market Outlook For Solar Power 2019/2023 by Solar Power Europe, an organization that represents more than 200 members from different parts of the industry value chain of solar energy. This study points out that, in an average scenario, Spain will have an installed solar energy power of 19,452 MW in 2023, compared to the 5,915 registered at the end of 2018. This figure represents a compound annual increase of 34%.

It is true that winds drive growth. The European Union was one of the first promoters of clean energy by setting ambitious energy and climate goals: 20% reduction in greenhouse gas emissions, 20% renewable energy and 20% increase in efficiency energy by 2020. The countries of the Union thus illuminated a path that boosted investment in infrastructure, research and innovation. It was a call to action that has now been imitated by other countries around the world.

With the Paris Agreement, the EU has pledged to continue moving forward and achieve a reduction in greenhouse gas emissions of at least 40% by 2030. To respond to this challenge and continue to lead the global energy transition, the EU has adopted a set of new ambitious standards, defining the legislative parameters for the coming years. This new framework is called the “Clean Energy for all Europeans” Package.

This is the world’s most advanced legislative package to transform the energy sector and decarbonize the economy: a new renewable energy target of at least 32% binding in the EU and a new main EU energy efficiency target of at least 32.5%. Both objectives include the possibility of a new upward revision in 2023. When fully implemented, they could lead to a reduction in greenhouse gas emissions in the EU of around 45% in 2030. Solar energy plays an important role in achieving these ends.

Spanish legislation is aligned with the EU’s commitment, although it has to refine some processes to achieve the proposed objectives. Thus, in the field of solar energy, the National Energy and Climate Plan (PNIEC) for the period 2021-2030 proposes the installation of an average of 3 GW of new photovoltaic power per year, beginning 2021, to reach a total of 28,000 MW of new installed photovoltaic power. This objective involves an investment of 28,000 million euros.

One deciding factor will be technology maturity. Proof of this is that photovoltaic energy has reduced its costs up to 95% in the last decade, a cut that allows it to be competitive in market conditions and that, together with terrestrial wind energy, is the main tool to decarbonize the production of electricity in Spain.
No doubt, solar and wind are the future and Morgan told me Spain "is at the forefront" and has 120 GWs target by 2030 which is mostly made of wind energy right now with solar growing fast.

According to Morgan, the attraction of this deal is fourfold:
  1. They are long-term, stable assets which provide a steady source of income going out over 30 years (better duration match with OPTrust's long dated liabilities).
  2. Spain benefits because of its climate
  3. Solar is a low level cost of energy
  4. Created certainty of cash flows through Power Purchase agreement (PPA)
I asked him what type of returns can investors expect on these and without being specific, he told me that typically on mature brownfield assets, "it's in the high single digits" but since OPTrust is taking construction risk on these solar plants, "we expect to be compensated for it."

By the way, it sounds risky taking construction risk but that's why you need the right partners and here Morgan was unequivocal praising Solarpack and Bruc Management.

In fact, he told me "OPTrust has taken construction risk before where the risk was embedded in the terms" and mentioned renewable energy investments in Japan (through Bruc Management) and Australia.

I asked him what other sectors OPTrust's Private Markets' Group invests in and he told me they don't have airport investments right now but are invested in an Australian bus operator (Skybus) which links to Melbourne airport.

Interestingly, he told me emerging markets like China and India are not the priority and they are more focused on developed Asia: Australia, New Zealand and Japan.

Lastly, Morgan briefly discussed Globalvia and how it was recently received the top ranking in Global Real Estate Sustainability Benchmark’s (GRESB) 2019 Global Sustainable Index.

Headquartered in Madrid, Globalvia is a concession management business that oversees a portfolio of highway and railway projects across Europe and the Americas. OPTrust has been an investor in Globalvia alongside two other pension funds since 2012.

I must say, I love Spain from my days of investing in Vega Asset Management (2003) and think very highly of the country. It doesn't surprise me one bit that GPs are bullish as Spain's private equity comes of age.

Hopefully, now that Greece has a competent Prime Minister and government, the country can learn a lot from Spain and Portugal.

Anyway, once again, I thank Morgan McCormick for taking the time to chat with me and thank Claire Prashaw and Jason White for their help. If there's anything that needs to be edited, I will edit it.

Below, a CNBC clip on the rise of solar in the US. There are real problems that the industry needs to tackle if solar is going to reach its potential. However, if the recent past is any indication, solar power is going to help lead the transition to a carbon-free future, and it might do it faster than we all expected. Watch the video to learn more.

I also embedded an excellent VPRO documentary on how green energy will change our future. Take the time to watch this and you will understand why the US is playing catch up to China and other countries that see renewable energy as the future. 

Lastly, the Spanish government encouraged the public to embrace solar power as a sound investment. But the financial crisis forced it to cut subsidies. Domestic investors, in particular, seem to be losing out. This last clip shows you the dark side of solar but as noted, big funds are not treated the same way as small investors.