The UK’s part-answer to Germany’s KfW and Bpifrance is the UK Infrastructure Bank (UKIB). Built on Brexit rubble in the wake of the UK leaving the EU – and, with it, the European Investment Bank – UKIB was established in early 2021. Its five-year mandate is to invest £12 billion ($15.2 billion; €14.1 billion) to finance loans and equity, and a further £10 billion in guarantees. This to help the UK deliver on its National Infrastructure Strategy, and to fund projects tackling climate change and support regional economic growth.
UKIB is tackling its mission with gusto, and with a clear view to the future.
“The number of inquiries coming is increasing, not necessarily because of greater requirement, but because we’ve become better known,” says UKIB’s head of banking and investments, Ian Brown.
The haul of suggested projects then needs to be carefully assessed.
“Some projects are nothing more than good ideas and not financeable by anybody. Other projects are turned down because we think the market will finance them. And most of the time, we are right,” he says.
Which leaves the suitable projects. “Left in the middle are sensible transactions. A lot of them are the first of a kind or quite nascent in their sector, where generally the risk profile is too great for the market to do, either at a sufficient scale or at all. Our intention is to help them grow to a point where the market will then finance either debt or equity,” says Brown.
“We can provide confidence or remove risk by structuring the deal or by the fact that we are there. For example, if we were to do a mezzanine tranche in a deal, that’s effectively adding more cushion, more equity underneath the senior debt which ought to take some risk out for senior lenders.”
UKIB is required to deliver a positive financial return, which on paper should be a poor incentive for choosing the more difficult investments, but Brown insists this is not an issue. “We’re incredibly disciplined about not doing things that the market will do as we don’t want a reputation for crowding out. Also, we are spending taxpayer money, so it should be used only where needed.”
Where that money is needed is in nascent technologies. UKIB announced a £25 million direct equity investment into listed Invinity Energy Systems a couple of weeks ago as part of a £56 million fundraise. Invinity manufactures longer-duration (between four-12 hours) vanadium flow batteries and the deal should support the commercial development of production facilities in Scotland, as well as aid the energy transition and encourage other lenders to join.
Furthermore, the deal is perfectly aligned with the government’s focus on long-duration storage – a cap-and-floor model was announced only in February to make investments in the asset class economically viable. Yet, UKIB was needed for that crucial first step.
“We were involved in Invinity because the risk perceived by the market was that it was too great to take. We’re the catalyst to get other investors to come in and do things. And that’s fundamentally what we’re here for: finding financing problems and fixing them,” says Brown.
It appears to be working. The feedback from this deal has been that “the very fact that we are there putting money into the business has given enormous confidence to other investors”, Brown adds. He hints that Invinity will not be the only deal involving long-duration storage.
A lack of private partners
In the private storage space, UKIB announced a partnership with Equitix in March last year “to pursue a highly differentiated investment strategy and pipeline of UK electricity storage projects”. In due course, the partnership will “also look to deploy longer-duration technologies and/or electricity storage technologies with superior discharge rates and degradation levels”, according to the statement released at the time.
UKIB has also invested in niche energy transition funds led by NextEnergy, Gresham House, and Octopus among others. But while UKIB will invest in funds, generally, there are not a whole lot of infrastructure managers looking at what UKIB might like them to consider.
GeoPura – a company that produces hydrogen-powered mobile generators and makes hydrogen, too – closed a £56 million funding round in February. Other than UKIB’s £30 million commitment, there were follow-on investments from Barclays Sustainable Impact Capital and support from existing investors, GM Ventures, Siemens Energy Ventures – and, as the lone infrastructure manager, SWEN Capital Partners, through their second vintage Impact Fund for Transition.
It is a list that underlines just how far UKIB’s investments are from the haven that is core infrastructure. It also shows that where UKIB goes, even dedicated energy transition funds fear to tread.
“Most GP funds are not at the point on the risk spectrum that we are. A lot of these GPs talk about their transition funds and how they’re helping to deliver net zero. But then when you say, ‘Okay, well, will you do a long-duration energy storage deal?’ The answer is ‘No, we won’t. That’s too much risk for us’,” says Brown. “That’s generally a financial risk issue, sometimes it’s policy uncertainty. And, to be fair, sometimes it’s size – if you’ve got a $15 billion fund, you don’t look at £25 million deals.”
Furthermore, there is the question of mandate – and how old that mandate is. At this particular point in time, several years may have passed between a fund’s mandate being agreed and its dry powder being deployed. And then there is the question of who the customer is.
“Ultimately, it’s not so much the GPs. It’s the LPs who must decide what risk-return profile they want,” Brown says. “You can’t make net zero happen with a whole series of first-of-a-kind technologies and still have an investment-grade credit profile and a 12 percent return.”
A change of government but not of heart
Even with the current system in place, there are institutional glimmers of hope. “With some of the smaller funds or niche funds within big managers, we are now seeing more interest,” says Brown, adding: “Frankly, the more GPs we have in the [infrastructure] sector, the better.”
The UK will likely have a general election in 2024 with polls suggesting that this will lead to a change of government. But Brown does not worry. “Whether you’re red, blue, or, indeed, green or yellow, I think it’s pretty universally agreed that we need to get to net zero. Now, the speed at which we get there is clearly up for debate at the moment, but it’s pretty universally agreed that we need to be doing this, so I’m not expecting us to be particularly impacted.”
If this holds true – and there is no obvious reason why it shouldn’t – then UKIB will be one of the few things to come out of Brexit untainted by the controversy and animosity surrounding that decision. And while it can’t compete with the EIB for size or ambition, the UKIB does have a lot of money to invest in the UK’s nascent infrastructure needs. Preferably alongside private investments.