Appetite for construction?

On 9 July, Chancellor of the Exchequer Rachel Reeves formally announced the National Wealth Fund (NWF), as “a concierge service for investors and businesses that want to invest in Britain, so they know where to go”. She was less than a week into her new job, but the NWF was crafted while Labour was still in opposition; the £7.3bn fund has the aim of attracting £3 in private investment for every £1 of taxpayer cash and will target specific areas of infrastructure.

On October 14, at the UK government’s International Investment Summit in the City of London, Reeves made further announcements. The remit of the UK Infrastructure Bank has been expanded to support the government’s industrial strategy. The British Business Bank will also be setting up the British Growth Partnership, which aims to attract more UK pension fund investment into UK growth companies.

It’s small beer compared with the funds of Saudi Arabia ($900bn) or Norway ($1.7tn) that the words “sovereign wealth fund” invoke. “We’re not in that situation,” says Handelsbanken’s UK chief economist, James Sproule. “We’re running a bunch of deficit. We’ve got a lot of debt. This fund is going to be pointed at things where a bit more financing would help investors get comfortable and where the government could play a useful part in advancing deals.”

Needs must?

The size of the fund is a downgrade from Labour’s £28bn Green Investment Pledge strategy that this partly replaces. That pledge was ditched shortly before the general election at the start of July; there have been explanations for the change. 

Rhian-Mari Thomas, chief executive of the Green Finance Institute, which developed the National Wealth Fund Taskforce, believes the government should not have even considered using so much taxpayer cash in the pledge. Instead, she suggests, it should engage with the private investors who are already keen to pour their money into potentially lucrative green projects. In other words, the money was there, but government agencies could be used as a catalyst, tapping the City “to actually identify what exactly the obstacles [to investment] are and where government money can be most impactful”.

The Taskforce, which included CEOs of major banks, insurers and pension companies as well as specialist climate investors, produced a report that seems to have been largely taken on by the new government. It called for the NWF “to deploy the right combination of policy, regulation, tax, and subsidy, as well as catalytic capital to crowd in sufficient private capital”.

James Pincus, PwC partner and head of its UK energy transition and infrastructure lead advisory team, is pretty clear: “I think it’s right that the government should look at ways to reduce that change in the discount rate and address both the risk and return side of the equation. What strategies and policies can the UK government adopt to make the UK appear more like the stable, strong-rule-of-law and shareholder-protective country it once was, as well as encourage innovation and growth? How the NWF fits in to this I’m not sure yet, as we await further details.”

Energy boost

Sproule thinks the fund will aim to “identify areas that are government priorities, energy infrastructure being one of the big ones that we would want to look at because we need a lot of it. It’s the sort of area where the government will want to seem to be active. It can then figure out places where markets are uncomfortable with some of the risks that might be entailed in making a particular investment, and it can step in and mitigate some of that risk. Maybe the government takes the riskiest portion of a capital structure.

“For many years I financed wind farms,” he adds, “and these things have a very thin amount of equity, with bank debt or bond debt or both. Maybe the government provides the bond debt and the bank debt is senior and therefore less risky, and therefore you get private sector involvement. There’s a real art and a skill to structuring investments, and that will be one of the key criteria of whether the NWF is successful or not.” Undoubtedly this will provide significant roles for corporate financiers.

Following the announcement of the National Wealth Fund, UCL economist Mariana Mazzucato wrote that the fund’s aim – to channel patient capital to projects that are aligned with the government’s missions – would only work if it is “deliberately designed for that purpose”. She thinks the strategy should be to pick missions rather than pick winners: “Those missions will galvanise investment and innovation across sectors. This turns big societal challenges like climate change, threats to public health, or housing crises, into market opportunities.”

Sproule also advises against a “pick winners” industrial strategy: “If I were advising the government on this, I would advise them go for a lot; don’t bet the bank on one or two great deals, [but] look at a wide range of deals up and down the country.”

The main areas in need of long-term investment, according to the NWF Taskforce report, are green steel, green hydrogen, industrial decarbonisation, gigafactories, and ports. All these align with energy efficiency or net zero concerns.

Equity gaps

Addressing historic equity gaps for growing UK businesses is also an issue that doesn’t seem to have been specifically addressed by the mission of the fund. Sproule identifies scale-ups as a potential area for investment: “Start-up capital in the UK is not generally a problem,” he says. “Scale-up is a problem. Maybe the government can do something useful there to ameliorate some of the risk and therefore attract more capital.”

But isn’t that the current job of the British Business Bank (BBB) or UK Infrastructure Bank (UKIB)? In its July announcement, the Treasury said UKIB would deploy the capital allocated by the NWF, although the exact arrangement is still awaited.

UKIB CEO John Flint will speak at the joint UKIB/ICAEW Corporate Finance Faculty seminar in Leeds on 5 November, at which he is expected to set out thoughts on what the Bank has learned in its first three years and how this can be applied to the future public finance institution landscape (see page 5 for more details). To date, UKIB has invested nearly £4bn and attracted £11bn in private capital for infra projects across the UK. “We have a strong track record of deploying capital where it’s needed to unlock private investment in critical infrastructure along the path to net zero,” Flint says.

Louis Taylor, BBB CEO, says: “Key institutions, including the British Business Bank and the UK Infrastructure Bank, will become aligned under the new National Wealth Fund to invest in the new industries of the future, supporting the government’s new industrial strategy. We expect the NWF to create a compelling proposition for investors that will help mobilise billions more in private investment.”

Daniel Grosvenor, financial advisory partner at Deloitte who leads the firm’s power, utilities and renewables business, and works across the public and private sectors in the UK, sees the fundamental difference of the new UKIB/BBB/NWF arrangement as being “scale and intent”.

“The key thing for the NWF,” he says, “is to do something the private sector can’t do or won’t do.” Grosvenor admits to not being a big fan of crowding in – a concept the NWF Taskforce is very keen on. “I’m not sure it’s going to accelerate investment in some of the new, riskier technologies that we need to deliver quickly if we’re going to hit net-zero targets,” he says. “I think they need to look at some of the more challenging risks in these projects and help mitigate those risks through their investment, whether it’s through credit enhancement or specific financial instruments that deal with those risks, or early stage equity,” he adds. “They need to be operating on the cusp of on- and off-market to make a real difference. They can’t just be doing things that everyone else is keen to do as well. If you’re operating on market terms, how big a difference are you going to make? I’m not sure this is necessarily a liquidity problem – it’s matching capital to projects.”

Old world issues

It’s the age-old search for a good deal. “There’s a lot of money out there; the shortage is of good deals,” says Sproule. But does the insurance of government co-investment make more deals fall into the ‘good’ category? Not necessarily, according to Louise Shaw, EY renewables leader in the UK: “The fact that government is looking to facilitate investment is helpful,” she says. “Capital is more of a constraint than it has been for a number of years.

“The fund is looking to address industrial areas and the decarbonisation agenda. It will be interesting to see how that works out in practice,” she says of the NWF’s intention to bring in private capital on a three-to-one ratio. The UKIB and Green Investment Bank have always, she says, “been in this difficult position where they’re trying to take the same risks as private sector capital, yet demonstrating additionality. And it creates a bit of a conflict because you’re either doing one or the other: investing commercially or taking a differential risk. There will be quite a level of complexity in terms of the type of investments they end up making, depending on the different sectors and where the gap in capital sits.”

Whatever the strategy turns out to be, there’s a lot riding on the NWF being a success. “The purpose is to drive UK economic growth and jobs through investment within our borders,” summarises Grosvenor. So how do they set a strategy? “Any investment fund will have its own investment strategy. It will have a policy around what it wants to do, but it’s important it then joins up to the policy environment. It’s not just about capital. We need clear, consistent, long-term policies that investors can trust and depend upon, as well as then bring the money in. I think government needs to make some decisions. You can’t completely stand back and let the market decide. You’ve got to be a bit more strategic in what you do and how you stimulate the market.”

PwC’s Pincus adds: “I think the focus needs to be on crowding-in capital, bringing resources and funds, skills, knowledge and connections, and not in areas that will crowd out investment. The NWF needs to help guide and allocate money to areas private capital currently isn’t getting to.”

Valuing expertise

The Taskforce report does suggest a professionalism and willingness to listen to experts that Sproule suggests should extend to the fund’s management: “Taking a lesson from other national wealth funds, they don’t invest directly themselves,” he says. “They often use other fund managers to invest and I would suggest the same thing here. Civil servants are very good, but they’re not fund managers. You want to have them employing or working alongside people whose primary skills and approach and the whole the way they are remunerated is all about running successful funds.”

Grosvenor adds that it is also an opportunity for corporate finance advisory “to work with both the government and the private sector, to design these bodies, set them up, help them invest, help them understand what’s needed to unlock that private capital and how you drive it forward.”

A little more bluntly, says Shaw, “We only get paid when projects happen, when transactions happen. The fact that government is standing behind some of those technologies will perhaps make buyers a bit more open to some of the less commercialised technologies, like hydrogen.”

In terms of structuring finance, Shaw thinks, “They’re fairly open to whether they’re taking debt, equity or mezzanine plays.” Depending on the sector or the project, “I think some level of flexibility is going to be helpful. But interestingly, the more you can standardise the products, the easier it is to unlock capital flows. There is a certain amount of efficiency that you lose by saying you’re going to do equity for one deal, equity bridge for another, mezzanine for another and a senior debt for the next. That creates a bit of friction against what they’re trying to achieve,” she says.

Somewhat forgotten in this is whether in mobilising private capital, a Labour government is going to, as Mazzucato recommends, “ensure that public investments are structured to share not only the risks, but also the rewards. Workers, not just owners, should stand to benefit and sustainability must always be a key condition.” 

But if the profits attract more capital to invest in sustainable UK businesses, then the NWF will have done its job. “Funding the transition to a low-carbon economy is not a short-term mission,” says the Taskforce report. “The NWF must be an enduring institution with a sustained focus on being catalytic and additional in the market. Public investment alone,” it warns, “will be insufficient to realise the transition to a low-carbon economy.”