Q&A - Edmond de Rothschild Asset Management: ‘Equity-like’ offering in debt instruments

Edmond de Rothschild (EdR) is a family-run investment house founded in 1953, which specialises in private banking and asset management. In 2014, the group launched its BRIDGE platform, which uses infrastructure debt to invest in the sustainable development and ESG space.

Since its launch, the BRIDGE platform has had six vintage funds, with the fifth vintage reaching a final close at €2.5 billion (£2.17bn $2.66bn). The asset manager is expecting to reach the first close on its sixth vintage by the end of this year, as inspiratia previously reported.

In conversation with inspiratia, Jean-Francis Dusch, the global head of infrastructure & structured finance and chief investment officer of infrastructure debt at Edmond de Rothschild Asset Management (EdRAM), speaks about the evolution of the BRIDGE platform and its recently launched unique investing strategy.

What sectors is EdR's infrastructure debt offering interested in?

So ESG is very much at the heart of our values. There is a true conviction to focus on products which can not only generate yield for investors, but also have a strong impact, and infrastructure is a way for that. When launching infrastructure debt in 2014, we were conviced we had to go beyond transport and social PPPs- which were the most common at the time- but also at renewable energy, telecoms (now more broadly digital infrastructure), utilities and district heating. Our first investment was part of the UK energy transition back in 2015.

In the past four years, we have been really focused on what we call "Gen 2 energy transition", which includes biomass, waste to energy, battery storage, hydropower, hydrogen, and floating offshore among others. We are interested in green mobility and were a first mover, in 2019 we financed Allego, which was a considered bit of a gamble at the time. But it wasn't for us as we mitigated the risks and really believed that there was a case for green mobility backed by a string reputable sponsor.

We like green mobility and EV charging, where we were a first mover. Having said that, we are very selective, because now there's almost the risk of a bubble of EVs. We made an investment in hydropower recently, mixed with more conventional solar and wind on the site, biogas as well as battery storage (to deal with the key topic of regulating the renewable energy intermittent production into the grid).

So for us infrastructure debt and energy transition are very broad. It's across all sectors. You don't have to work within core, core-plus value added which is more of an equity concept here. For us it's a question of: Is it an infrastructure that you build? Does it serve a public service? Is ESG embedded in it? Then you structure the debt accordingly, so it's a very broad universe.

The BRIDGE platform is currently fundraising for its sixth vintage. How has its strategies evolved from one to six?

BRIDGE is one of the core products of the Edmond de Rothschild group as part of our commitment to ESG, impact finance, private markets. We were the first infra debt asset manager, back in 2018, to obtain an energy transition label for of our senior funds.

We try to always be innovative, the platform itself is evolutive. Bridge V was centred around the senior offering for two-thirds of what we raised, the rest for yield plus (junior). For Bridge VI, we are broadening the investment reach further, some investors want us to invest in OECD countries beyond Europe. The US is a target because they're embracing their energy transition and digitalisation so there are great opportunities. We want to be more systematic in globalisation from a geographic standpoint. Then the other element of globalisation is the products we offer, and that's why we're adding a growth strategy. Yield Plus Growth to support further companies active in energy transition and digital infrastructure and which need to accelerate their development/ Such debt will comprise some kind of equity premium.

That sounds like an interesting structure. What kind of benefits will it offer?

Let's put it this way- the bulk of the financing is senior in infrastructure. If I have €3 billion to use tomorrow, €2 billion will be senior debt, two third- of the remaining will be junior debt (Yield Plus), and the remaining will be the new strategy (Yield Plus Growth).

As mentioned above, there are a lot of medium-sized companies that are very active in energy transition or digital infrastructure, and they need to accelerate their growth. Then we will look at whether they have got the right team, the right human resources, enough finance, and enough track record in technical projects.

Our product is probably at the border between the fully secured debt and the traditional equity.

But because it's a debt instrument, there's still a recurrent income, there's no J-curve, they are not waiting for an exit. So, it's in some cases an attractive alternative to equity, but it's not a competitor. You have double-digit returns for some projects, but you still have the features of debt, with a security package and an element of fixed income.

How important is battery storage for your portfolio?

Renewable energy is taking a very prominent space in the generation of electricity. But it's a bit more volatile in terms of the production. Battery storage bring to the equation the ability to regulate the flow in the grid.

But it's not just about battery storage, there's also the recycling of batteries. The technology and transmission grid components might have been a bit underestimated as assets, so that is why we focused very early on it.

It is interesting that you mentioned hydropower, which is an asset not often talked about.

We are selective with hydropower. We have looked at projects over the past four to five years, and we have recently in projects mixing this technology and more conventional renewable energy. The hybridization of renewable plants (combined with battery storage) is a very interesting sector.

Being a first mover is important. Projects having a track record is good but bringing it at an earlier stage enables you to create a bit of first-to-market premium. That doesn't mean that you take more risk as on the contrary, by arranging the debt instrument we invest in, we manage to also implement avery well structured, secured debt solution. The premium comes from your ability to bring that liquidity at an earlier stage. This is where I think sophisticated asset managers can be a string credible alternative to the more traditional lenders like banks because we can be at times more agile.

Do you see hydrogen being in a bubble right now?

Hydrogen is not in a bubble yet, but there's the risk of a bubble. We haven't seen many projects where we think it totally meets the definition of infrastructure that we want to bring to our investors. But a lot of the technology is linked also to transport and for the time being, I think all the heavy investment in EV mobility means that we still have to see about the role of hydrogen. But we have a few projects we're working on, which we're very confident about.

So, what are these 'criteria of infrastructure' that you are referring to?

We look at factors like whether they are building infrastructure. Does it provide a true service to society? Can you structure the debt with a security package? Can you assume that there's a predictability of cash flow? Is the construction risk mitigated? Do you have also the right skill set from the players in the space? There needs to be real assets. What is the underpinning regulation and how proven is it.

That is why I've got a few engineers in my team, or some team members like me, who started their career within the industry. The covenants we put have to be driven by an understanding of the underlying technical, operational, technological aspects, whether it's construction or operation, or either renewal or upgrading.

Regulation is also important. On paper, you can have the perfect security package with perfect governance, but the element of regulation needs to be sound. The fact we advised the public sector also brings a decisive skill set which investors appreciate.