APG Asset Management, Europe’s largest pension investor, is set to double its global infrastructure allocation in the next five years and is stepping up its push into infrastructure assets in the Asia Pacific with a focus on Australia, India and Southeast Asia and opportunistic investments in Japan and Korea.
The $690 billion investor will inject $652 million into Octopus Australia’s renewable energy platform OASIS, joining several domestic pension investors down under including Rest Super and Hostplus.
Around a third of APG’s $37 billion infrastructure allocation is in the energy sector and it has been looking to expand its footprint in the Australian renewable market for some time, says Hans-Martin Aerts, head of infrastructure and private natural capital for Asia Pacific.
“Together with them [Octopus Australia], we will mainly seek to develop and build new projects and only look at acquiring projects where we can exercise control and typically have 100 per cent ownership, so that we can put together a portfolio of assets that allows us to optimise the revenue profile as much as possible,” he tells Top1000funds.com in an interview from the fund’s Hong Kong office.
To achieve that optimisation, it is important to match the demand and supply of energy, but due to renewables’ intermittent output the task is more complicated. It requires deeper consideration and matching of different sources of energy – for example solar farms, which generate the most energy at midday when the demand tends to be the lowest, can be paired with the complementary generation profile of wind farms, or battery storage that can store and distribute energy for future use.
Aerts says reduction in technology costs makes renewable assets more attractive as alternatives to fossil fuels.
Australia is also an appealing destination for APG due to the stable regulatory framework supporting the energy transition. Although a large part of the Australian economy is still hinged upon fossil fuels, being the second largest exporter of thermal coal and liquefied natural gas, the current Labor government wants the nation to become a “green superpower” in the next decades. It has established more stringent corporate rules for climate disclosures and last year issued the first batch of sovereign green bonds that will be used to finance green projects.
The Australian government also tweaked the mandate of the $307 billion Future Fund in 2024 – a move that sparked enormous controversy – to consider national priorities such as the energy transition in its investment decisions.
“For us, it’s all about all about partnerships. There’s always merit in working together with like-minded investors that have a local presence, and share similar beliefs and objectives as we do,” Aerts says, adding that the fund prefers to create value from projects over the long-term rather than spinning off an asset as soon as feasible.
“We would certainly be seeking closer collaboration with not just the Australian super funds, but other international parties as well that share the same values and interests as us.”
The private natural capital portfolio accounts for $3.5 billion and the fund is also looking to expand that to $5-6 billion, but Aerts says that is dependent on the opportunities available. Asia Pacific investments in that part of the portfolio include 170,000 hectares of forests in Tasmania, Australia (Forico) and a New Zealand timber producer which manages a 30,000-hectare plantation estate (Wenita).
In addition to Australian infrastructure, APG is homing in on India and Southeast Asia (predominantly Indonesia and the Philippines) due to attractive macro factors like the rising middle-class population, urbanisation and fast-growing GDP.
“Coming back to decarbonisation, Asia Pacific offers the biggest opportunity… because more than half of global emissions are created in this part of the world,” Aerts says.
“The other megatrend is digitisation. We see a lot of opportunities across the region, but especially in developing Asia where digital penetration rates are still very low compared to more developed markets.
“In India and the Southeast Asian markets, you really see a strong need for new infrastructure, not only to support the economic growth in the short term, but also to sustain long-term growth. That’s more of the top-down approach. But a top-down perspective alone is not enough. We are combining that with a bottom-up approach where are leveraging on our local market expertise, on the ground capabilities, and trusted partnerships established throughout our long-term presence in the region. Bottom up, it’s really about what are the investable opportunity sets that we’re seeing.”
Aerts says the fund is always conscious of regulatory and political risks when investing in emerging markets but against the global geopolitical background, the risk is higher everywhere.
“People may have thought it’s something only relevant for emerging markets, and they may not have paid as much attention to some of these risks in developed markets.
“For us, we always take these risks into account in our underwriting… If certain risks are too material, for example, when it comes to reputation, then it’s something that we would just avoid.”
