UK-based fund manager Octopus Group has quietly built a presence in Australia over the past 12 months and is raising an initial $150 million in capital for one of the firm’s arms, a renewable energy business. To start, it will focus on solar power in Australia.
Initially, at least, the solar sites, for which there is a healthy construction pipeline, will be in the eastern states and South Australia. The first vehicle is an unregistered unit trust called the ‘Octopus Australia Sustainable Investments Fund’ (OASIS).
Australia’s reliance on cheap coal has meant that the country has been a late bloomer in the renewables space.
Running the Australian business of nine people – eight in Melbourne and one in Sydney – is Sam Reynolds, an Australian who has spent several years with Octopus Group and headed up its renewable energy investment team in London. Octopus launched into renewable energy in 2010 and has subsequently built production capacity on 250 sites, of which 160 are solar, with the total portfolio now worth close $5 billion. The rest are onshore wind, anaerobic, reserve power, landfill gas and biomass. Most of their solar sites are in the UK but it has also built some in France and Italy. “We have built and now operate the largest solar portfolio in Europe,” Reynolds says. By 2025, the UK will be coal free – a long way ahead of Australia despite the very different weather patterns.
Chris Hulatt, one of the founders, was on a visit to Australia last week and this week, together with Alistair Seabright, a managing director and head of alternative investments, working on the capital raise and to also attend the Fiduciary Investors Symposium near Melbourne later this week, at which Reynolds is speaking. Octopus is also looking to raise money from institutional investors for segregated accounts, although the OASIS fund is likely to attract investors who want to go into a pooled investment vehicle.
Hulatt said: “On a sunny windy day in the UK, the coal plants will not be used as part of the energy mix.” For Australia, solar is even more appropriate than Europe given that the highest period of electricity use is in the hot summer months for air conditioning. In cold countries it tends to be in winter for heating. He said: “People are increasingly wanting to see their capital having a purpose.”
Hulatt and his co-founders worked together at the old Mercury Asset Management, which merged with Merrill Lynch Investment Management globally and was subsequently acquired by BlackRock, which also bought Barclays Global Investors. They were all in their 20s – Hulatt was the youngest at 23 – when they started the firm in 2000.
“We have looked for sectors which have a good long-term future and have a positive impact on society,” he said. “In the UK as well, there is a shortage of care homes and retirement villages.” Another of the Octopus Group’s arms is healthcare real estate.
Given their experience – albeit relatively short – at Mercery, Hulatt and his colleagues started in listed markets among small caps and venture, investing on the AIM, venture-orientated second market in the UK. Of the A$15 billion under management, $9.6 billion is invested in alternatives – mainly energy and real estate – and $5.2 billion in the listed markets. About $4.1 billion of the money has been raised from institutional investors.
Sam Reynolds says the three main requirements for a solar site are: a grid connection, land for lease or purchase, and planning approvals. The pipeline generally comes about because of the world of specialist developers, some of whom have opened up in Australia after years in Europe. Octopus doesn’t take the development risk, but it does take the construction risk.
Reynolds says that the firm sees the “rightful home” for these long-term assets, generally with a lifespan of at least 35 years, with the superannuation community.
Another unusual aspect of its renewables business in the UK is that Octopus has become very hands on and has built an integrated energy operation. “We now supply renewable energy to more than 400,000 households in the UK,” Hulatt said. “We are challenging the big six electricity suppliers there.” “We are looking to own, operate and manage them,” Hulatt said. The firm has bought a material stake in a UK company called Reactive Technologies which has developed technology systems for grid management (inertia, smart grid) and demand side response. This technology will have an application down here as Australia manages the impact of more renewables on the grid.