Case study: How to use reinsurance hedging solutions to guarantee a more successful fund launch
Karl Andersen, Managing Partner and CEO at AV Group, discusses the challenges of launching a new fund during a pandemic and how reinsurance solutions can reassure lenders.
Sara Benwell POSTED ON 3/1/2021 3:41:21 PM
Sara Benwell: What made you decide to launch the new fund now?
Karl Andersen: The origin story is Norway was the oil economy in transition, pushing into renewable energy and wanting to be a leader in that area. The Norwegian government both invested and supported a lot of investment capital into the venture markets in this area but now need growth equity in order to scale the opportunities globally.
Now, all these alternative energy type solutions such as charging stations, IV batteries and smart society technologies have really started flourishing and need foreign direct investors to help export the technology to other markets.
In 2015, I was a part of something called the Norwegian American Chamber of Commerce and the Norwegian government was looking for financial network partners to help grow the Norwegian technology market and asked: ‘how can you help these Norwegian companies come to America etc?’
“Alternative energy type solutions such as charging stations, IV batteries and smart society technologies have really started flourishing and need foreign direct investors”
So, from 2015 on, I was raising capital for companies, acting as a board member, advising them on marketing/PR and trying to find strategic distribution channels for their products and services.
At the time I was running a reinsurance company and our focus was on hedging public pension liabilities and longevity risk. So, I worked very closely with the state of Rhode Island, hedging public pension liabilities, using captive solutions, that sort of thing.
We put together this fund that we’re launching, focused on climate insurance and climate securities which combines our knowledge of investing in renewable energy and renewable energy infrastructure projects with our knowledge of hedging the risks with reinsurers.
Sara: What’s different about your new fund?
Karl: It’s the first growth equity fund dedicated to climate solutions for both companies and infrastructure coming out of the Nordics.
There are other funds that invest in certain aspects of the Nordic economy but to have our Fund dedicated to this is unique.
In addition, we bring reinsurance solutions to the table to hedge the various risks related to Intellectual property, property, reps and warranties and EPC risks. So we are able to obtain undervalued assets that are in high demand and hedge them with our reinsurance solutions.
What is enabling this is a shift in thinking from the reinsurance market itself. The new Climate Index demonstrates that reinsurance companies see that climate is directly affecting their bottom line in terms of catastrophic events such as Hurricanes, Forest Fires and hailstorms.
“With reinsurance in place helping to hedge the technology risks, lenders can get comfortable on better terms”
Thus, they have increased their capacity into underwriting renewable energy as an offset to this risk. Thus, they are shifting risked based capital into this market, which is a seismic difference in analysis than just carbon credit trading or cap and trade.
With reinsurance in place helping to hedge the technology risks, lenders, who do not like the tech risk, can get comfortable on better terms. This means that when our Fund invests equity into a deal, we can lower the cost of capital by hedging the tech risk and borrowing at lower rates.
Regarding the market generally, the current market of investments in climate solutions is around $100 billion or so. If you're going to keep the Earth from increasing by two degrees, you don't need just one hundred billion dollars – you need trillions of dollars to get there.
“It brings the insurance companies who have been traditionally insuring oil and gas companies into the climate debate”
So, with the insurance markets, the other the other thing that this does is now it brings the insurance companies who have been traditionally insuring oil and gas companies into the climate debate.
And what you have generally in this market is a lot technological solutions, but the lack of the insurance market to keep up with those innovations and figure out what risks can be insured and what can't be insured and how quickly they can do that.
So, the adoption cycle of technology is slow for reinsurers. And we're trying to be the connective tissue between those two languages, financially speaking.
At the same time, technology is enabling the price points to come down and the components to everything are cheaper than the price of oil to produce. So, it's pretty obvious from a market perspective that this is the continued direction where we're headed.
Sara: What were some of the core challenges getting to launch – and how did you overcome these?
Karl: To be honest, the biggest challenge was the same for all people, COVID-19 hit. In this environment, we were unsure if renewable energy and cleaning green investments would still be part of people’s portfolios and agendas. To our happy surprise, the market doubled down on these initiatives.
The second challenge was that we were nervous about fund raising in this new environment. We were unsure if zoom meetings and virtual capital raising was going to succeed.
“The market was willing to adapt to the new technologies and make investments with the trust of virtual meetings”
Again, to our pleasant surprise, the market was willing to adapt to the new technologies and make investments with the trust of virtual meetings.
So having overcome these two very big core challenges, I think we're set to have a very robust market environment to grow our fund. But let me be clear, this could have gone the other way, and people could have stopped spending money in this area. So, we feel blessed that the market is working with us through this.
Sara: What are your operational priorities to make the fund a success over the next few years?
Karl: Our core focus is investing in good management teams, quality IP, and remaining flexible to a market that is extremely dynamic.
There are a lot of new market participants and changing dynamics which provide great opportunity for Alpha, but making sure we invest in strong teams and keep adapting is our main focus.
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