The anaerobic digestion (AD) industry holds a strategically important position in both the UK waste management and agricultural sectors. The market is constantly evolving to meet the needs and challenges of today. Nigel Aitchison, Partner at Foresight Group, a leading infrastructure and private equity investment manager, discusses what it takes to finance AD plants successfully in the current marketplace, and how Foresight plans to continue investing in greenfield and operational assets worldwide.
“At Foresight, we have been an early-mover in acknowledging the compelling investment proposition presented by the combination of biomass/waste processing capacity with subsidy-backed RPI-linked revenues. Having made investments into 20 AD projects, from a total of more than 40 waste and bioenergy projects generating 137MW of renewable energy, we recognise the contribution AD can and does make towards the UK’s climate change targets.”
Managing both institutional and retail capital, Foresight has established a leading position within the UK AD market, with AD plant sizes ranging from 0.2MW up to 3.5MW. To date, Foresight’s AD investments have primarily been in greenfield projects, where the construction and accreditation risks have been appropriately contracted for and managed. However, in a maturing market with lower UK subsidy levels available for new plants, Foresight is increasingly applying its AD expertise towards secondary acquisitions of operational assets.
Foresight’s recent acquisitions, in partnership with Material Change and its parent company Heathpatch, illustrate the market’s evolution towards secondary growth and aggregation. The transaction saw Foresight acquire two large-scale plants and seven composting sites located across East Anglia and the East Midlands.
“These additional investments are part of Foresight’s wider AD aggregation strategy and mean that we now boast a waste and biomass processing capacity of more than two million tonnes per annum,” says Aitchison.
As part of the deal, Material Change entered into long-term maintenance service contracts, digestate offtake contracts and feedstock supply contracts. The opportunity to lock in the cost-base of AD plants, with an element of performance protection over the long term with experienced, credit-worthy counterparties in this way is a rarity in the market which has been very challenging for technology and O&M providers over recent years. Accurate analysis of the balance between merchant and contracted cash flows in projects is critical.
“At Foresight, we apply our deep understanding of this dynamic to match projects to the risk-reward appetite of our various retail and institutional funds. This risk management approach means that we are able to successfully compete in the secondary market for AD plants with a broad range of risk-reward profiles”.
A key factor within this sector is employing specialists with expertise in different areas, in addition to finance professionals. Members of Foresight’s investment and portfolio teams have previously worked as project developers, lawyers, technical consultants or operators. This enables Foresight to carry out commercial, technical, valuation, deal structuring and corporate finance work. But working with the right advisers is also crucial to success and adviser input undoubtedly played a pivotal role in the Material Change acquisitions.
“In the future, we plan to grow our UK portfolio and export our extensive experience to acquire operational and develop/fund greenfield AD assets globally. The AD market offers attractive opportunities to an investor base seeking long-term stable cash flows with a return premium over core infrastructure.
“Our expertise lies in matching capital to the risk profile of individual assets, building portfolios and managing them actively to ensure optimal performance. At times this can mean ‘getting your hands dirty’ either literally or metaphorically, and we’re happy to do either!”