Victory Hill:Anew generation ofenergy transition investment firms

Victory Hill Capital Partners LLP is a firm that has been hitting above its weight since it launched officially in May of 2020. The firm, which now has 20 employees based in London, was founded by a team of financiers that operated together within Mizuho Financial Group, the large global Japanese ‘megabank’ and one of the world’s prominent energy financing institutions. Victory Hill’s activities are truly global and, in just three years since launch, the firm now manages a large portfolio of 29 sustainable energy assets operated throughfivejointventuresinAustralia,Brazil,theUnitedStates and the United Kingdom. The firm’s success and influence in energy markets stems from the highly experienced team that founded Victory Hill and have an average of 22 years of energy investment and financing experience. Throughout their careers, the firm’s executives have participated in some of the world’s most recognisable energy infrastructure projects in no less than 39 jurisdictions around the globe.

All of Victory Hill’s activities are focussed towards enabling the energy transition, by supporting independent mediumsized energy groups in their growth plans and channelling capital into champion companies that will help create a more sustainable global energy system.

The team has been well received with investors, by helping themnavigatethecomplexnatureofenergymarketsaround the world and understand where investment opportunities really lie in the energy transition. This success was no more evident then when the team launched their debut fund, VH Global Sustainable Energy Opportunities plc (ticker: GSEO), by way of an IPO on the main market of the London Stock Exchange in February 2021. At launch, it was awarded the LSE’s Green Mark, acknowledging that most of its revenues derive from sustainable activities. The fund initially raised over £242mn of investor capital and, after a co-ordinated and disciplined initial deployment of the IPO funds, it raised an additional £190mn over two subsequent shares issues.

Todaythefirmmanagescirca£450mnandplanstocontinue its growth through the launch of Victory Hill Global Energy Growth Fund SCSp (GEG), a more typical private fund incorporated in Luxembourg. The firm is targeting US$500mn for GEG and has already identified a portfolio of 10 energy companies to constitute the portfolio. The GEG fund will be focused on medium-sized, renewable energy companies in North America and Europe that offer unique growth features andmaybestrongbuyoutcandidatesforthelargeindustrial energy groups.

A Unique Investment Philosophy

To understand Victory Hill’s investment philosophy, one must first recognise the importance of the energy sector within the global economy. The energy sector is the second largest in the world economy after agriculture, and it is a sector for which the effects of climate change have led to devastating consequences financially and socio-economically.

As a result, the firm recognises the breadth and universal nature of challenges posed by climate change but equally acknowledges climate change impacts can vary across different geographies and communities. Therefore, understandingacommunity’ssocio-economicdevelopment path, as well as its cultural and historical evolutions, helps inform how local communities shape and interact with their local energy markets. It is also important to understand the structural gaps that need resolving within local energy markets as they begin to shift towards a more electrified and sustainable system.

Understanding The Drivers Of The Energy Transition

Market fundamentals drive energy markets through supply and demand factors. An increasing world population has increased demand for power and electricity as one of the most preferred sources of energy, and the energy industry has been adapting business models and strategies in order to meet it. This fundamental demand shift has driven the growth of renewables and the growth of natural gas markets for use in power generation and transportation.

Large, often multinational, industrial energy companies have been changing their business models to adapt to this new and fast-growing demand for electrification. Industrial, commercial and personal consumption patterns have changed with the advent of new technologies and a more globalised process of modernisation, which has supported a global proliferation of this ‘electrification of demand’ trend.

Evidence suggests medium-sized companies constitute an overwhelming majority of the independent power producers and development groups of newer energy infrastructure. The so-called ‘middle market’ in the energy sector has become a strong driver of innovation and change as the industry adapts to the energy transition process. While large utility scale renewable projects exist, more often renewable projects tend to be smaller in scale and do not attract the attention and investment of large energy multinationals. They are usually developed by the middle market. The speed of growth and proliferation of distributed generation aroundtheglobeisevidenceofthepredominanceofactivity of smaller scale renewable projects around the world. In its purest form, distributed generation is rooftop solar at commercial and industrial sites, as well as in residential properties. The co-location of renewable power sources that support independence from the grid system allows the energy transition to develop anywhere on the globe. This growth has, paradoxically, attracted the attention of large industrial energy groups which, according to Bloomberg data have been driving over 70% of the buyout activity in the energy sector for the last 20 years.

The process of energy market consolidation presents a huge opportunity for investors to capture a market that is still dominated by trade players and where return margins remain high due to the intrinsic barriers to entry that prevent generalist financial sponsors from participating in the sector. Specialised firms like Victory Hill help investors navigate the sector and can enable differentiated return sources for investors that are underpinned by a structural supply and demand dislocation.

Capturing And Disclosing Sustainability Data

The International Energy Agency has identified three of the 17 United Nations Sustainable Development Goals (SDGs) as relevanttotheenergysector,theyareSDG3–GoodHealth& Well-Being,SDG7–Affordable&CleanEnergy,SDG13Climate Action.ThesethreeSDGsunderpinthesustainabilityplansand outcomesthatVictoryHillimplementsthroughitsinvestment activities. This SDG alignment will often be complimented by other SDGs relating to infrastructure participation or SDGs that address the way energy companies govern and manage their resources.

All investments that are made by the firm’s funds involve an impact plan that drives towards clear sustainability goal targets. These targets are facilitated by the alignment of investments with energy transition themes that drive the selectionofinvestments.Fromanenergymarketperspective, themes such as climate change, energy access, energy efficiencyandmarketliberalisationhaveunderpinnedVictory Hill’sthinkingwhenparticipatinginprojectsaroundtheglobe. At the same time, from a market participant perspective the themes of decarbonisation, decentralisation, electrification, digitalisation and commoditisation are in focus.

Victory Hill is meeting SFDR Article 9 disclosure requirements for the GSEO fund and it is intended to do so for GEG and all other future funds within the Victory Hill bench. The firm’s investordisclosuresoftengobeyondEUtaxonomyalignment and Article 9 requirements. The firm measures the ‘Climate Value at Risk’ (ClimeVaR) of each investment made. It engagesincarbonpaybackperiodcalculations,investigates thecarbonlifecycleofsupplychainsandassessesthoroughly theselectionofsuppliersandsupplychainparticipants.Lastly, assessment of greenhouse gas emissions through Scope 1, 2 and 3 emissions are captured and reported. Environmental andcommunityreportsareundertakenforinvestedprojects.

Victory Hill’s sustainability capabilities are complemented by activeengagementatpolicy-levelthroughtheGlobalImpact Investor Network, the Net-Zero Asset Manager Initiative, adherence to the United Nations Principles for Responsible Investments and support for initiatives such as TCFD and the UN Global Compact.