Euro Pensions Turn to Wind Power; Will US Funds Follow Suit?
Gerelyn is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The captivating thing about asset allocation is that even when one investment category falls out of favor there generally seems to be another waiting in the wings to take its place. The mystery becomes identifying which asset class will take that crown of some faltering piece of the pie. In the case of some Denmark pensions tussling to remain funded or attain funded status, there may be a changing of the guards unfolding from beleagured European bonds to wind power.
European pension schemes the US pension market is not - but returns are returns. Allianz Capital's David Jones, who oversees Allianz Specialized Investment, noted wind energy's non-correlation to the financial markets and pegged returns from wind and solar power at 7%. This type of growth has Danish pension capital quite literally blowing in the wind. And others may follow suit.
About a year ago the OECD predicted that pension capital, which currently has miniscule exposure to infrastructure projects including wind power, will play a greater role in funding this asset class.
Denmark pensions are already beginning to gain exposure to wind farms by purchasing direct equity stakes, acccording to Reuters. Notably, they are swapping out once-low risk Euro debt for assets that even banks and insurance firms are shunning amid the high-risk nature of this alternative niche - wind farms.
US institutions such as pensions in addition to IRAs - both of which are designed to benefit from long-term assets - could well be attracted to the multi-decade exposure and returns that wind farms provide.
In the US, of course, wind power was once dubbed a quotient the equation to solve the domestic energy crisis. I recall hearing oil and gas tycoon Boone Pickens in the past decade touting his plan for US energy independence, one that relied heaviliy upon wind for power but that also extended to natural gas as a transportation fuel. It wasn't too long ago that Boone formed and later dismantled an alternative energy army alongside his plans to finance a multi-billion wind farm in Texas. And more recently he is distancing himself further from natural gas, suggesting that prices will hover at around $4 by year's end, he told CNBC on Wednesday, which will not inspire a flood of drilling activity.
Now, BP Capital, Pickens' investment capital firm, is liquidating a $12 million position in Chesapeake Energy (NYSE: CHK), a stock that has shed more than 15% of its value year-to-date amid weak natugral gas prices and - more recently - alleged unscrupulous behavior by CEO Aubrey McClendon surrounding the company's drilling practices. BP Capital is also liquidating its position in BP Plc (NYSE: BP), an allocation worth some $20 milllion, amid continued fallout from the oil giant's spill disaster. Incidentally, BP may be closer to generating some much-needed cash by unloading nearly $8 billion of its assets in the Gulf of Mexico. Aussie oil and gas giant Woodside Petroleum, which has some presence in the US Gulf, is reportedly shopping those fields.
Pickens expects the US will continue to have 'cheap energy' for the foreseeable future in comparison with the rest of the world. So where does that leave US wind? The domestic wind power industry may never mirror that of its neighbors across the pond, but that doesn't mean that there may not be opportunity for pensions domiciled stateside.
Asset managers at top private equity firms have said in the past that wind power was just too unreliable to consider as a primary source of domestic energy. 'The wind blows the most at the least practical part of the day - when everyone is asleep,' I've been told by PE veterans. That doesn't mean, however, that these firms did not recognize opportunity of the longer-term nature or that they were not buying wind assets, either.
Take ArcLight Capital Partners, which boasts of more than $10 billion in AUM. It recently closed $650 million in financing for wind farm assets in California - a region that is the closest US equivalent to Europe's alternative energy profile. ArcLight backed a pair of Alta Wind projects that upon completion will bring a combined 1320mw of power online. Both plants are products of the Alta Wind Energy Center in Tehachapi, California,which incidentially has been dubbed the largest wind farm in the country.
What's good for European pensions not to mention a US-based, top private equity manager may eventually find surer footing in US pension asset allocation. And who would shun 7% returns in light of equity volatility or a meager 3% being handed down by US 30-year government bonds?
GerelynT has no positions in the stocks mentioned above. The Motley Fool has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.