Q&A - Ancala: Delivering growth through downside protection

Ancala is an independent infrastructure manager. It has more than €4 billion (£3.41bn $4.28bn) of assets under management, with 18 assets operating in essential infrastructure sectors, including renewable energy and energy transition, transport, utilities and the circular economy.

The firm recently completed the final close of its third flagship co-mingled fund, its largest ever individual fundraise. The fund closed with a total of €1.4 billion in commitments, surpassing its €1.2 billion target.

inspiratia speaks to Ancala's team of partners, consisting of managing partner, Spence Clunie, and partners Karen Dolenec, Lee Mellor, Tim Power and Ankur Ajmera to learn about its plans for 2024. The partners stress the importance of downside protection as a key characteristic shaping their investment strategy.

What are the key characteristics you look for when investing?

Clunie said: The key things we look for are strong infrastructure characteristics, that is downside protection, asset backing, inflation-linkage, and a cash yield. We have delivered that through all of our funds to date.

We are delivering a double-digit return and a high single-digit cash yield to our investors by sticking to that philosophy. How we differentiate ourselves from other managers is that we look for investments that other managers are not looking at. We conduct our research in-house, and we have industry expertise through our asset management team and industry partners – former CEOs and chairs of leading infrastructure businesses - that help us do that.

We pride ourselves on sourcing primarily bilateral transaction opportunities. We actively look for companies to invest in which have the characteristics I spoke about. We then approach them directly to see if we can help by providing capital and offering our industrial expertise. We can enable these companies to realise value-creation plans and reduce leverage. We are flexible in our approach to securing investments and provide bespoke solutions to vendors, this could mean we take 100% ownership or create a structure where the vendor retains a stake in the business or exposure to upside. Once we have made an investment, we proactively work with the business to create value.

And what are your views on the energy transition specifically?

Clunie said: Energy transition is a broad term. In Europe, there is a big focus on net zero by 2050. But over the last few years, energy security has also moved up in priority. This has created a lot of opportunities as countries and companies look for alternative energy sources. Most of our recent investments have had an energy transition angle, and in our portfolio, we have assets operating in wind, solar, hydropower, biomass, biogas, and geothermal.

There have been a lot of challenges in fundraising in the past year. How have you addressed these challenges?

Dolenec said: There are a couple of factors, there are market related dynamics, and then Ancala specific ones. We are fortunate to be in the infrastructure space, which has been less impacted than some other asset classes. This is because infrastructure is a much younger asset class, so factors like the denominator effect have less of an impact. Whereas in private equity, you have a lot of investors who are at their allocation, so when the denominator goes down, they have an issue immediately.

As the infrastructure market grows and matures, an increasing number of investors are interested in our segment of the market and appreciate the additional value that can be generated. We are in the mid-market because we believe we can get a better risk-return profile. As investors become more active in infrastructure, they realise the benefit of that. We are focused on the characteristics that people are looking for in this market environment – downside protection, inflation-linkage, cash yield, and value creation. We have a demonstrated track record of delivering that consistently through COVID and varying market conditions. We were also fortunate that, over the years, we have built up a great investor base of high-quality institutions globally who continue to support us. The investors speak to each other, so word spreads.

How do you approach risk when making new investments?

Mellor said: If you sit in on one of our investment committees, we typically spend 95% of our time discussing what can go wrong with potential investments. There is a relentless focus on downside protection and trying to bring variables within our control. If we take a renewables business, for instance, what is within our control is uptime to the grid and, to a degree, generation. What is not within our control are merchant power prices. We look to minimise factors that are outside of our control, which allows us to work through challenges. Where areas are outside of our control, we will stress test what happens when they go wrong, making sure that capital is protected. We look at ways to mitigate their impact, such as reducing costs in the business or through insurance.

We spend a lot of time managing these assets and looking to improve them, and that is the key pillar of how we generate value. We do not rely on leverage to generate value. If you look at the portfolio, the average gearing across the portfolio is significantly less than you would expect for infrastructure; it currently sits at 33%. Our disciplined approach is proven, and the track record has been good.

Given this focus on downside protection, are there any emerging technologies that you are interested in expanding into?

Power said: Ultimately, Ancala's primary investing mandate is to focus on assets with traditional infrastructure characteristics, as Spence mentioned earlier. Whilst we see the material benefits of new technologies within the portfolio that we own as well as opportunities that we are yet to invest in, the primary approach at all times is that downside protection focus.

At the same time, for every asset that we pursue, we will look at adjacent opportunities attaching to the primary business where new technologies are in play. So when we are buying that asset, we will know that it has an opportunity to develop, let us say, an e-methanol plant, ammonia bunkering facility, or floating offshore wind capability. We will not bid on the asset for that reason, but it gives us a great chance to observe, analyse, and then implement new technologies, creating low risk upside.

Our recent investment in Fjord Base, Norway's largest supply base, is a great example. Offshore floating wind is a major development area for Norway's energy transition, with substantial government targets backed by subsidies to spur on this nascent industry. On account of its history of providing critical infrastructure services to the traditional offshore energy industry, Fjord Base is also ideally suited to providing storage, marshalling, assembly, and O&M services to the burgeoning offshore floating wind sector. The asset does not need the industry to develop to scale to deliver on our base case returns and this outcome would see upside for us, but it also represents a key learning experience for us as an investor, and ultimately, it helps us to stay ahead of the curve. For example, Fjord Base is in advanced discussions to lease space for zero-carbon fuel solutions. We want to make sure that when technologies go from being new and nascent to being fully accepted, we are in the right place at the right time. That is how we typically approach new technologies.

What was the investment rationale behind Biogen?

Ajmera said: We first invested in Biogen, a leading owner and operator of anaerobic digestion (AD) plants, in 2017 as a platform for consolidation in what we identified as an attractive yet highly fragmented sector. The majority of cash flows from an AD plant are underpinned by long-term, inflation-linked government subsidies which are well suited to infrastructure investors. These subsidies understandably incentivised many developers to build AD plants. This created an opportunity for consolidation once the plants were operating, and they sought to recycle their capital. However, to access this market in a credible manner, an experienced team in all operational areas is critical, from sourcing feedstock to improving uptime of the plants. Biogen had a leading reputation and strong operating record, which allows us to do that.

The AD sector addresses a number of major policy objectives. It provides baseload renewable energy generation, unlike most other renewable technologies which are intermittent in nature and have their own challenges. From a circular economy perspective, our sites also recycle organic waste, mainly food waste, which if not recycled through an AD plant is instead being disposed of in landfill or an incinerator, at much higher costs. It is a real win-win outcome for the environment and in supporting energy security, whilst also saving costs. Strong policy support, along with technological advancements in the sector, are positive and should enable both existing and new plants to operate and provide these benefits over the long-term.

What opportunities lie ahead for Ancala in 2024, and how do you plan to capitalise on them?

Clunie said: We are in a fortunate position right now. In the last year, we have completed fundraising for our third flagship fund and our Growth Fund. We are now looking to actively deploy capital in assets which meet our criteria. We actually prefer a market like this. This is because post-financial crisis through to, probably the end of the third quarter in 2023, it was a very bullish infrastructure market, where most assets bought went up in value, without necessarily having to do very much. In the current environment, our strategy, with dynamics around downside protection, value creation and everything else we mentioned, has helped us pass through inflation, manage costs and lower leverage.

The increase in base rates has, therefore, not had a material effect on us. We are in a good position, but we will be patient on investing capital to make sure that we get all those characteristics in each new investment. We see opportunities coming up because people are no longer able to borrow at low interest rates. There is also inflation in CapEx. People are going to need money to deliver for customers and grow, and that is going to create opportunities for us in the energy transition and energy security space. We will continue to focus on hitting our key criteria and continue to actively manage assets to create value to deliver returns. We are optimistic about the opportunity the current market provides and are confident our proven and differentiated strategy will continue to deliver.