Q&A – Mirova: Long-term optimism for the European EV market

Europe's electric vehicle (EV) market has been swerving off course over the past few months. Stagnating demand, strong competition from Chinese manufacturers, and growing pressure on EU lawmakers to overturn the 2035 ban on the sale of new internal combustion engine (ICE) cars have led to car manufacturers revising their forecasts for EV demand.  

Most recently, Northvolt Ett Expansion, the special purpose vehicle in charge of managing Northvolt's planned expansion of its gigafactory in northern Sweden, filed for bankruptcy last month [October 2024] with over €5 billion (£4.19bn $5.49bn) owed to investors and commercial lenders. 

Despite these pressures on the EV market, Paris-headquartered Mirova sees long-term opportunities in the transport sector. Mirova is an affiliate of Natixis Investment Managers dedicated to sustainable finance. Mirova and its affiliates had €31.1 billion in assets under management as of 30 June 2024. 

inspiratia sat down with Witold Marais, investment director for energy transition infrastructure funds, to discuss the electrification of transport and the broader role that Mirova sees itself playing in the energy transition.

Looking at a broad overview of Mirova's investment strategy, what sectors and geographies are keeping you busy right now? 

We are currently investing through Mirova Energy Transition 6 (MET6), and the strategy is fairly similar to the previous fund, which is investing mainly in clean energy generation and storage for about two-thirds of the fund. Then we have a 30% diversification bucket for what we call emerging energy transition themes, and this encompasses low carbon mobility, green hydrogen and energy efficiency. We invest primarily in onshore wind, solar PV, and hydro. We have done biomass and biogas deals in the past, but that is no longer part of the strategy. 

In terms of geographies, we invest mostly in Europe for 80-90% of the fund, and we have a diversification bucket for OECD countries outside of Europe, primarily in Asia. We have an office in Singapore, and we have made our first investment in Australia. In Europe, we invest pretty much everywhere, both in euro and non-euro-denominated countries. 

Why is biomass no longer part of your investment strategy? 

It is a very specific asset type with its own risk profile. There are so many deals to be done in mature renewables that biomass was not at the core of the strategy. 

It takes a lot of time and resources to go deep into the sector. Obviously, as our fund size increases, our business has to scale as well, so when we invest in a technology or a country, we want to expand and reach a critical size and not just do one or two deals. 

It is really the industrial nature of the biomass projects that makes them extremely complex, and the risk-return was not optimal for us. 

Fundraising has been challenging for nearly two years now. How has Mirova navigated this complex environment? 

It is true that we have seen fundraising periods getting extended as well as some managers struggling to reach target size or closing below target.

We are still raising capital, and so we have to remain very humble. We are still navigating the fundraising environment; it is not behind us. Yet, there are a couple of positive factors playing in our favour. 

First, we have been in the energy transition space for 20 years. We were one of the pioneers in Europe, so we keep doing what we have been good at. We have fully invested five fund vintages and fully divested three vintages across market cycles with good realised and demonstrated performance, which is reassuring for investors. 

In terms of strategy, we have tried to stick to a disciplined and strategic expansion across vintages. Incremental evolution rather than revolution, which is another reassuring factor. We have a very stable team and very low turnover; I think only three or four people have left over the last 15 years. 

For the current vintage, we have a quality pipeline, mostly with repeat and exclusive transactions, which gives visibility and confidence in the portfolio construction for the first LPs who are coming in. 

We quickly secured "early bird" commitments from a couple of repeat LPs just a few weeks after we started fundraising for MET6. That enabled us to start investing, and it created a very positive dynamic during the fundraising period.  

Do you predict an improvement in the market in the coming months? 

Again, we remain prudent and humble, but we see the market is picking up steam, so that is very encouraging. 

The infrastructure asset class is resilient and has proven its strength and its value proposition in portfolios for our investors. There is undoubtedly a strong appetite for the energy transition theme in Europe, and our positioning, as a mid-market, specialist manager, is a good fit for the market.  

So, hopefully, we will keep having that good traction for the fundraising. We also see appetite from investors based in Asia for transition-oriented strategies such as ours, which is very encouraging. 

Mirova has made the shortlist in inspiratia's Best Energy Storage Investor category this year. What is driving your interest in the technology? 

Storage has been a hot topic recently, it is true. I must say, we dipped our toes quite early in the market back in 2014 when we financed the first co-located PV plus storage project in France. Since then, we have invested in a large BESS project in Belgium and, more recently, announced a Baltic storage joint venture that is building the largest continental Europe BESS facility. 

Firstly, the technology is much needed in an energy mix where you have an increasing share of renewables. The ultimate objective for renewables is to be as close to baseload as possible. That can be done through hybridisation (i.e. combining multiple technologies on a single grid connection point) or with the addition of storage.  

Then, you have the cost of storage, which has been decreasing sharply over the years. Over the last five years, it has halved. Over the next five years, it could decline by another 50-60%. Rarely an industry has experienced such a drastic fall in cost, so it is extremely encouraging. The sector's growth prospects are huge.

Mirova has made several investments in EV mobility through companies like Zunder and NEoT Green Mobility. How will this sector be influenced by the broader EV market – given declining EV demand and Northvolt's project going bust? 

Firstly, I think we should mention that there are very different revenue models, going from traffic-based models to leasing business with contracted revenue models. The underlying businesses are indeed exposed to the long-term trend of electrification of transport. But in that space, you can play differently. For instance, the two investments you mentioned, Zunder and NEoT Green Mobility, have very different revenue profiles. 

We have observed some negativity around EVs, especially before the EU elections. However, EV mobility benefits from positive trends and market dynamics.  

First, you have the EU regulation, both the 2035 ban, but also, most importantly, the CAFE regulation. The incoming EU College of Commissioners seems to be confirming the commitments of Europe to the Green Deal and to those measures that are ultimately much needed to support the transition. 

Then, more importantly, you have the falling cost of batteries, which is really giving comfort that EVs will be at Total Cost of Ownership (TCO) parity with ICEs soon, if not already achieved, depending on the countries and type of vehicles and usage. 

You also have car original equipment manufacturers (OEMs) that have made huge investments in the magnitude of dozens of billions of euros to electrify their production. Of course, they are trying to loosen the regulation a bit, as they are facing the 2025 CO2 reduction targets and potential penalties.  

But in the end, almost all car OEMs back the transition to EVs. What has been dragging the market so far has been the focus of car OEMs on expensive premium cars to preserve their margins. 

However, the 2025 CO2 reduction targets will kick in very soon. Most OEMs are expected to ramp up the offering of more affordable cars to increase the volumes and reach the objectives, which is positive for the market.  

It is true that EV adoption takes time. You need patient capital, and infrastructure funds are well-placed to fund the sector's growth.  

Do you anticipate continued growth in the EV mobility space then? 

I do not have a crystal ball, and I may be proven wrong. But I think the long-term trend is preserved. The regulation is here, industrial commitments are here, and TCO parity is almost here. The challenge is rather to navigate short-term market dynamics.  

We should not lose sight of the long-term trend and electrification is the winning technology in the decarbonisation of transportation in most cases.  

Then, there is the challenge of preserving our car manufacturing industry in Europe. Car OEMs are facing competition from Chinese manufacturers, and so far, Europe has taken a protectionist stance. 

Other countries like Australia, which do not have a domestic industry to protect, are more open, and this can accelerate adoption as well. 

I would love to explore the revenue profiles you mentioned for Zunder and NeoT Green Mobility. How are they different? 

Zunder is a public charging point operator. It focuses on owning and operating its network and selling a charging service to the end user. So, it is exposed to traffic risk in that sense, but it is also developing more contracted revenue lines, working with fleet operators to secure some volume. Here, the revenue is ultimately driven by EV adoption, the ability to roll out a quality network, user acquisition and retention through superior user experience, charging patterns, etc.  

NEoT Green Mobility, which is an infra-as-a-service platform, acquires various kinds of mobility assets and leases them over mid to long-term contracts to operators willing to remain asset-light. These can be vehicles (buses, coaches, trucks, light commercial vehicles, etc), vessels for offshore operations or water buses, EV chargers, etc. Here you are not taking revenue risk, but counterparty risk and, to a certain extent, residual value risk. So, the risk profile is different and probably on the lower side of the spectrum.