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Client interviews

Power transactions and trends

Competition sees capital shift

Investors take stakes in Australia’s traditional and new energy assets

A shortage of global P&Us investment opportunities has shifted investor focus to Australia. The country’s energy market stands to beneÕt, with keen interest in both traditionally attractive regulated assets and relatively new energy technologies. Matthew Rennie spoke to Tom Butcher from BofAML for his view.

Safe, stable and sizeable assets

As a managing director who co-heads BofAML’s Transport, Infrastructure, and P&U team in Australia, Tom Butcher has played a role in many of the deals in Australia’s power and utilities sector over the past two years. He says that, as one of the few stable Organization for Economic Cooperation and Development (OECD) economies with multiple, large assets on offer, Australia is a very attractive investment destination.

“Strategic and financial investors with billions in equity to invest are challenged to find suitably large and executable opportunities in North America, and are pursuing only selective opportunities in South America,” Butcher explains. “Europe has regular deal flow, but these transactions can be complex and, often, you need a local partner, which can limit the opportunity. Asia is still an emerging focus. This leaves the UK and Australia as the two key markets that offer up the kind of big, multibillion-dollar transactions these investors seek.”

Long gone are the days when Australia was considered too remote and inconsequential to attract investors seeking power and utilities assets. This has changed, says Butcher, with many international utilities and investment funds having an active local presence to better pursue the high-quality and large opportunities on offer. Investors are further encouraged by a falling Australian dollar, continuing regional growth and a stable regulatory environment.

Investment appetite broadens in a competitive market

Butcher says that many investors continue to favor the market’s largest, multibillion-dollar deals that are sold through government or private sector sale processes. Competitive market dynamics and the search for value means players are also pursuing alternative opportunities, such as unregulated assets, smaller-sized investments or those with complex execution aspects, which limit the number of bidders.

“Investors are still seeking large, straightforward deals, but demand far exceeds supply,” he says. “We are seeing an increase in transactions that are more complex to execute. They might need a different approach that breaks up businesses or involves partnerships.

“There are some deals that seem too hard and haven’t been able to close for various reasons. Our view is that there is greater interest in these harder deals, and they may well get done in the next 12 to 24 months.”

Butcher also senses a broadening of interest. “Safe bet” regulated assets remain favored – Butcher expects significant interest in the lease of New South Wales energy distributor Endeavor in 2017.

But he says there is also ample interest in investment in new energy technologies. “Relatively new technologies such as energy storage, solar farms and other renewable power generation assets are no longer too challenging for many investors,” says Butcher.

“The most experienced overseas investors, in particular, see these as a huge opportunity, not a risk. They feel very confident in the investment thesis over the long term and are confident of superior risk-adjusted returns being generated. These assets have a place in investment portfolios and sit comfortably alongside lower-risk assets, such as regulated networks.”

These shifting priorities have created interesting investment conditions, says Butcher. “There’s a lot of moving parts and, with the right knowledge, you can make sound investment decisions and do extremely well. For an industry known historically as being a bit boring, all of a sudden, it’s quite dynamic and exciting, and is set to continue to evolve for many years to come.”

EY - Tom Butcher

Tom Butcher is a managing director in BofAML Investment Banking Division and is Co-Head of Transport, Infrastructure and P&U for Australia. Tom has 15 years of experience and has advised on more than AU$100b of transactions in the transport, infrastructure and power and utilities sectors. His experience includes strategic advice, trade sales, privatizations, public and private market M&A, principal investment, financing, and debt and equity capital market issuances.

This client perspective was originally published in the Power transactions and trends (PTT) 2016 review and outlook