ASO Case study
Context and Client Objectives
Adiant Capital and a EUR 60bn revenue aerospace and defence global conglomerate (the “Client”) engaged discussions late 2011 to identify alternative opportunities to invest into, out of its c. EUR 12bn liquidity pool. The first objective of the Client was to generate superior absolute performance over equity and bond markets. In addition, the Client was also interested in an investment strategy that would generate environmental benefits, as it anticipated environmental regulatory changes affecting the air travel industry.
Adiant Capital and the Client defined the optimal product features, which were:
- A 5-year maturity, as the Client wanted its invested cash to be available in case new development budgets were needed;
- An annual liquidity to be able to exit the product;
- A payment profile consisting in annual fixed interest payment, an optional annual equity upside and a final principal repayment at maturity;
- A pure upside incentive for the manager (i.e. no commitment fees, no management fees);
- The Client had generally a strong risk aversion and wanted the manager to minimize investment risks as much as possible.
Based on the Client requirements, Adiant Capital developed an investment strategy consisting in investing in the construction phase of utility-scale photovoltaic projects globally, i.e. acquire special purpose vehicle from a developer at construction-ready stage, build the asset and sell it to a long-term investor in its early operational phase.
In terms of structure, Adiant Capital opted for a simple Luxembourg SA as investment vehicle. This vehicle would issue Preferred Equity Certificates (“PECs”) to the Client. Proceeds of the PECs would be used as permanent capital over the lifetime of the product and would be recycled in a series of transactions.
The proposed client solution meets the Client requirements:
- By investing in new renewable energy infrastructure, investments are aligned with the Paris Agreement to limit warming potential to below 2°C by 2100 and generate carbon savings regardless their jurisdiction;
- By investing in the construction phase of solar assets, short investment-divestment cycles are achieved, enabling annual liquidity of the product (as an exit option);
- Financial performance derives from the value crated through a “yield compression” between construction-ready stage and operational asset and permits payment of an annual interest and equity upside to the Client;
- Exit is de-risked by entering into a conditional sale agreement with a long-term buyer shortly after acquiring the project and before starting construction;
- Once an asset has completed construction and is operational, it has a market value and generates sufficient revenues to cover annual interest payment – further de-risking the exit scenario.
Implementation and Portfolio construction
Mid-2012, Adiant Solar Opportunities I SA (“ASO”), a Luxembourg-based investment vehicle and 100%-owned subsidiary of Adiant Capital, was created and issued PECs which were acquired by the Client. ASO was granted CSSF accreditation and Vistra was appointed as independent administrator. The Client was given an observer role at the investment committee of ASO and a veto right. Adiant Capital retained the role of advisor to ASO and was in charge of originating and executing transactions according to the proposed client solution strategy. FPS Audit was appointed auditor of ASO and Adiant Capital retained law firms Jones Day and Elvinger Hoss as legal counsels.
Over its lifetime, ASO has acquired, built and sold a portfolio of seven assets in Germany and the UK ranging from 1 MWdc rooftops to 37 MWdc utility-scale ground based projects. In 2014, ASO completed the construction of the Parley solar park near Bournemouth, UK, one of the largest solar parks ever built in the country and the transaction represented the largest single solar asset project financing in 2014 in the UK.
Financial and environmental impacts
ASO was the first fund investment of the Client and the first investment vehicle dedicated to the construction phase of solar assets globally. The business model of ASO has proven very successful and the vehicle achieved a gross pro-forma IRR of 32% and a MOIC of 1.50x. ASO’s strategy has been replicated by an energy utility and institutional investors.
The assets realised by ASO have been monitored during a 2-year period following their sale to third party owners and, over such period, ASO’s assets consistently over performed their planned output. Over its lifetime, the ASO portfolio will avoid the emission of about 2 million tons of CO2.
ASO was awarded Best Renewable Energy Fund in 2015 by Wealth & Finance, a financial publication with more than 130,000 monthly readers. ASO has been closed down in 2019, after seeing its maturity extended by 2 years upon Client request.