Episode Transcript
Akhil: Welcome to the Be Inspired Series as part of the London Stock Exchange. I'm Akhil Suresh, a member of the Investment Funds Team at the Exchange. Today I'm delighted to be joined by Steven Lilley, part of Greencoat Capital, which manages Greencoat UK Wind; the largest listed green infrastructure fund on our markets.
Stephen, thank you so much for joining me today. Can you take us back 10 years or so when you launched? What were the motivations for the, listed strategy?
Stephen: So Lawrence and I, have a background in, energy infrastructure. So, we were in the sector we were in, I guess, so we looked at listing in 2011, and, got pretty close to succeeding but didn't actually. And, hopefully the wise person learns from mistakes and we came back a second time around with a much clearer product, if you like, for investors. And so in 2013, March the 27th, we successfully listed the first, fund sector and created a sector as a consequence. But really our focus, I guess second time round thinking about it, really what, what was the need, was for the, the sort of three major, components I guess in investors come back to that, utilities and societies in, in general.
In terms of investors; we were very clear, I guess, the context, I guess is only a couple of years after the credit crunch or a few years after the credit crunch. And so therefore income was a problem, I guess, and so did, the investment committee have access to, to income, also inflation. So, you know, dividend that we could grow with RPI kind of important, especially where governments were not necessarily attacking inflation with interest rates, as we all know, in the, in the decade after, the credit crunch. And then also capital preservation.
So important thing of people not wanting to lose money, which is obviously kind of important, but especially in the context of, the background of the, of the credit crunch. So I think those two things, we listed a company with a 6p dividend that we always wanted to increase with, RPI which we have done 10 times.
So 6p now becomes 8, 8.76 p 10, 10 years later. And that's just compounding RPI, including a 13% lift. From 22 to 23 as a target. And then we've preserved capital on a real basis as well. So we've, beat that, if you like, by 23% above compounded RPI, which has been about 45%. So those sort of components of product to investors have, a high dividend in increasing with RPI, preserving capital on a real basis, really, really important.
Then in terms of, utilities, I think there's a real need as, the sector gets built out for utilities to have, a way of recycling capital so they can go and build new capacity, which we saw 10 years ago, and even more so now, as the sector really starts to grow significantly, especially offshore and the ability to have capital recycled really, really important.
So creating that for, that type, you know, for that component if you like, was massively important. And, that's why RW and SS C came into our listing. On the basis of creating a market that was helpful for them, and the rest is sort of history.
And then for society in general, the energy transition is hugely important. And so a company like ours, we provide power for about 1.8 million homes. We produce about 1.6% of UK electricity, but crucially we avoid 2 million tons of, CO2 as well. So I think that's a really important thing.
And then if you take all of the capital that's like ours, either the listed funds that came on after us, about the 20 of, those, but also all the pension fund money that's decided that it understands how to do this as well.
Tens of billions of pounds that will translate into, a lot more, green production and a lot more, you know, avoidance of, co2.
Akhil: And you, mentioned it's a sizeable business, and I guess part of that is, you know, coming back to market and, raising further capital and you've done that almost every year since you've, listed, how has that really enabled you to execute your strategy?
Stephen: Yeah, the nice thing about listing is that you have a balance sheet. And once you have a balance sheet, you can , borrow against it. And therefore, an IPOs as stressful as, I'm sure you'll know, cuz they're a bit like boom and bust. In fact, they're not bit like, they are that. You know, if you don't succeed, you're not listed. But the important thing of, I, guess of having been listed is you can then go and you can delink buying assets with raising money.
And so we've used short term revolving credit facilities, to go and buy new assets and do that when it's good to, you know, opportunistically good to buy assets and then come back and raise money at a different time, when it's good to raise money, et cetera.
So the delinking or decoupling those is I think is hugely important. And as you, rightly sort of say, as we grow bigger, we can have bigger revolving credit facilities, and we can do bigger raises until the last raise was 450 million pounds at the back end of 21, so, you know, 18 months ago. So it's a long period of time we haven't been back to market.
Revolving credit facility is now 600 million and that's versus an IPO of 260 million. So, you know, the size of the size of the business is, sort of significant.
The benefit I guess, of, doing that also it means that, you know, being independent, we can look across the whole market. So we've bought 6 wind farms at IPO came into the IPO, we've bought 40 since. So we've got 46 wind farms now across the whole breadth of the UK on and offshore. We've bought something like 1-in-9 projects that we've looked at and we've bought from 20 different, sellers, be it utilities, developers, funds, et cetera.
The ability to be able to transact, nimbly, if you like, and decoupled from equity raising is hugely important.
Akhil: You touched upon this earlier in terms of the investor base and how, how has that evolved because you've, you know, had the strategic backing of the Green Investment Bank, at IPO, and as you've kind of grown, grown further, you know, what type of investors have you been able to attract?
Stephen: We, thought that the Green Investment Banks was very sort of nascent, if you like. It was actually something called, UK GI I think it was before it became a Green Investment Bank. So we were right back in the beginning of that, if you like. We thought that it was, a task that they that the GIB should be doing in the sense that, what it was trying to do was crowd capital into, a market.
And so we went to GIB and actually in the end, it went through for various reasons, it went through Vince Cable's department. So Vince Cable, I think saw, he as, as he was Energy Secretary at the time, saw the benefit of getting private capital into new sector, if you like. So he sponsored the, IPO with 50 million pounds worth of government money out of 260 million pounds total, which they sold at a profit two years later and had created a sector, which has now had over 20 other companies following on from us. So good use of 50 million pounds, and they got, they got it back, but also there was a catalyst created that. So you know that it was hugely important.
Akhil: And kind of, since you've also listed the focus on ESG and the environmental, social, and, and governance factors have heightened for, publicly listed companies. How do you deal with that, and approach that for, Greencoat UK Wind?
Stephen: We'll be slightly less complacent than we probably were at the beginning. We're a wind farm business. What's not to like about that? Joking aside, we've got a good story, I guess, and we have, you know, it's one of the things like, as well as, you know, the simple mathematics, which has gone very well is, is how do we, talk about where we might be and how we might help the, you know, the country and, you know, and, be a, you know, a go-to green stock, if you like, for people's portfolios.
I think that's as an important thing. So, getting away, from the, we're a wind business and, you know, we do, ESG and everything that we, in invest in, even from, you know, from modern slavery or from a health, you know, big, big issue on health and safety, for instance, making sure that, people get home, in the same state they started work.
Obviously hugely important, because we do run operating assets, so it's not just a fund in that sense it is a real asset business where we, do run operating assets. The other things that we've just had to do is a whole lot more reporting. So, TCFD is obviously one that's, required for a list of companies now and then the other EU directives, so the SFDR and the, and the, article, nine and, the various schedules. One, three, and five, which everyone will be very familiar with, sadly in some ways. The scope one and one to three of, TCFD, albeit scope three seems slightly bizarre to us.
But, you know, all of that, a nd then the, URPI or the SDGs, and actually SDR coming through in this country as well. How do we do that? So I think we, we've got a lot of focus on that, but mostly it's about reporting stuff that's really good. So it is not a risk in that sense, but , you know, reporting is, an important thing. Hopefully people will look at us and think, actually that's okay. And in fact that's good.
Akhil: In terms of looking at the energy sector, at the moment and the broader environment, there's been, inflation looming, over swings there, as well as interest rate hikes, as well. How does that impact Greencoat UK Wind?
Stephen: So inflation is pretty straightforward, if you like, because a lot of our revenues are linked into to RPI and also a lot of our costs are, so they're pretty much of a wash. So actually for us, inflation is something that we can help investors with if you like, because we're a bit of a hedge, if you like.
So I think if you saw the chart of TSR growth in 2016 after the Brexit vote, where inflation came in as a consequence of devaluation of Sterling, you saw our TSR go up. And so I think that was investors, spotting that UK Wind and actually the solar funds as well.
Similarly where, costs and revenue quite distinctly sort of linked into inflation, either explicit or, implicitly. And therefore, I think for that we're good. Interest rates are more interesting, and I think we've seen over the last year the sector more generally, go to discount because we don't think, the sector generally believes in the capital asset pricing model like we do. We have a discount rate that is higher than it was at IPO, that we're the only one that has got that. I think that we, in a part of my job, I guess over, the last few months and more than increasingly, be so is, to start to try and differentiate and point out, that, that where we, do believe in the capital asset pricing model and it, and you can't just rely on, well, there's no, slackening of pricing in the market effectively. What, well people can buy other things. So, you know, you can't just discount cap 'em in that sense. We, look at that and think, the message that we've gotta get across is, that our product is not about a 5.5% dividend yield.
It's about a 9% return. And so, you know, where we talked about, originally of 800 million pounds of dividend and 650 million pounds of reinvestment. We have a general dividend cover by design of 1.7 times. Now that's not for any other reason of, we also want to preserve the nav on a real basis, and that means the total return is the important thing.
So I think part of the task that I've got is to talk to investors and try and explain how we've used the, the strong year, especially last year, to get into a place we fixed the roof while the sun was shining, if you like, last year. So that the total return we've got is, good relative to where interest rates are.
Akhil: You're 10 years in now, looking ahead, to the future. What are your growth aspirations and, you know, how do you hope to realize them, through the public markets?
Stephen: So we have never, Lawrence and I have been very clear about this. I guess we've never wanted to answer a question. I'm gonna answer it, but don't, don't worry. About what is your growth target? I think because we are a business where we want to make good investments, and I think for us, if you have a target. That leads to growth for growth's sake, which isn't necessarily good. So yes, we bought 1-in-9 assets, but, we've had some years where we bought more than that as a percentage, but in others we bought nothing.
So I think growth for growth's sake is, a bad thing in one sense. But if you look at our market going back 10 years, it was 20 billion pounds of operating wind farms in the UK. It's now a hundred, it's five times as big. And then if you go back, I guess to the next 10 years, you've got the same amount built out offshore.
So you know, it's a doubling if you like. So if we stayed at the 6% market share that we have, and we're 5, 10 places off the FTSE 100 at the moment, that probably puts us up at about 60 in a FTSE. If, I mean there's massive if in that sentence. But so I think that there's plenty of opportunity and we're now of a size that we can be significant. We're, the fifth largest owner and all the rest of utilities in that list recognize utilities of which we are to some extent. But we can continue, you know, sitting alongside, co-investing, alongside, being a, a great partner for all of our utility friends and partners. And own assets by ourselves.
But because of scale, actually now we can, be really helpful in terms of recycling large amounts of capital. So scale is helpful and it also, I think it means that there's a whole range of different projects. Then I think we get into a place where hopefully we can buy assets even more creatively, because the competition is sort of slightly less.
But, you know, it's exciting actually, we've, created a business that. Has done really, well. And actually as well is just doing, a great thing with the country. So it's been fun.
Akhil: Thank you, Stephen. It's been really interesting to hear about the journey of Greencoat UK Wind and delve a little bit deeper into your listed strategy.
And thank you for watching this latest episode of the Be Inspired Series as part of the London Stock Exchange. You can watch more episodes like this at www.LSEGissuerservices.com/spark
