NZ Super is positioning its direct investment portfolio for future growth, as it expects to hit NZ$ 100 billion by the end of the decade. And wind farms are a key part of it, Will Goodwin says.
As time passes, New Zealanders will increasingly appreciate the benefits flowing from how their sovereign wealth fund, New Zealand Superannuation Fund, is deploying the nation’s savings.
They will see that these savings have been channeled into providing as much as 10 per cent – or maybe even 20 per cent – of New Zealand’s energy needs.
Some will live in new homes within master-planned communities that embody every aspect of sustainability.
And, as they enjoy the enlivened streetscapes of previously underused and neglected precincts within central Auckland, they will truly understand that it was the wise use of the country’s savings that has made the transformation possible.
Of all the fund’s projects, none is more ambitious than NZ Super’s joint venture with the world-renowned Danish renewable energy company, Copenhagen Infrastructure Partners (CIP).
NZ Super and CIP in March jointly set up a 50-50 joint venture to explore the potential of large-scale offshore wind farms. The JV company will initially manage a development in South Taranaki Bight, a large bay on New Zealand’s west coast.
The initiative is a natural progression for NZ Super, which, in October 2021, committed to invest NZ$208 million in the manager’s global flagship fund, Copenhagen Infrastructure Fund V (CI V).
The proposed New Zealand wind farm has now been earmarked for fund CI V.
Will Goodwin, Head of Direct Investment at NZ Super, tells [i3] Insights: “We have invested in their global funds, and, off the back of those investments, we are developing a good relationship.
“We see CIP as a good manager with global capability. Overlaying that is New Zealand’s need to double its energy base over the next 20 years. Offshore wind needs to play a big role.”
New Zealand [has a] need to double its energy base over the next 20 years. Offshore wind needs to play a big role
Goodwin adds: “Initially, we will build a 1GW wind turbine, scalable to 2GW. New Zealand’s total energy usage is 10GW a year.
“We could later expand the capacity to 2GW to help meet strong projected growth in electricity demand.”
But patience is required. Goodwin says the initial stage of the project will take six to eight years from start to production of energy.
“This is the type of project that we, as a sovereign fund, can undertake,” Goodwin says.
“We can bring world-class foreign capital to New Zealand to develop a big-scale opportunity that will create strong portfolio-type returns to the fund.”
Goodwin believes the first stage of the project will cost around NZ$5 billion to construct.
The Bigger Picture
But NZ Super is thinking big. “As we continue to receive contributions from the government, along with our retained earnings, our funds under management by the end of the decade are forecast to sit at close to NZ$100 billion,” Goodwin says.
“Up until the 2030s, when we start to pay out, and taking into account our forecast returns, the fund will basically double every eight to ten years.
“So we have to be quite deliberate in how we invest as we grow.
“We need to find and start developing projects now, so that by the time they are ready to come on-stream, they will earn a place in our portfolio.
“Our share of the construction cost for the offshore wind projects will be around NZ$2.5 billion, and, at that size, will be about right for us in the 2030s.”
As we continue to receive contributions from the government, along with our retained earnings, our funds under management by the end of the decade are forecast to sit at close to NZ$100 billion
The wind farms will be the fund’s first substantial infrastructure investment in its home market – although it did have a false start five years ago when, together with Canada’s CPDQ Infrastructure, it offered to build a light rail network in Auckland.
“It was an example of us trying to innovate and build a greenfield development,” explains Goodwin. “In the event, politics and vacillation in government decision-making consigned the project to the too-hard basket.
“Obviously, that initiative wasn’t successful, and we accepted that we would have to try a few things before one of them got through.”
Lessons were learned from the light railway experience, Goodwin says, and the subsequent research that was put into looking at urban renewal projects led this year to a significant partnership with Eke Panuku Development Auckland.
The joint venture anticipates redeveloping parts of central Auckland progressively, possibly over the next five decades.
Offshore, NZ Super relies on trusted managers, and has successfully invested in renewable energy platforms in both the United States and Europe.
One of its key managers is Morrison & Co, a homegrown business that has spread its wings across the globe.
“Morrison & Co has provided fantastic platforms overseas,” Goodwin says, pointing to Longroad Energy in the US as a ‘great example’.
“Longroad is the type of investment that complements the approach we have taken and how we invest,” he told [i3] Insights.
The US energy company’s near-term development pipeline includes 4.5GW of development projects to begin construction over the next three years. It is planning to reach financial close on 1,000MW of projects before year-end.
“Longroad has given us the opportunity – and the ability – to seek out and to build assets we can hold,” Goodwin says.
“Alternatively, we can sell the projects to others that have a lower cost of capital than us, and want projects which yield an income stream.”
NZ Super is also invested with Morrison’s European renewable energy platform, Galileo Green Energy.
Goodwin describes Galileo as an ‘early stage’ investment.
A co-investor in Galileo is Australia’s public service super fund, the Commonwealth Superannuation Corporation.
In Australia, NZ Super is invested in Infratil, a dual-listed infrastructure company also managed by Morrison & Co.
Infratil’s diverse portfolio includes digital infrastructure, renewables, and social infrastructure. (NZ Super is also a co-investor with Infratil in RetireAustralia, which ranks as Australia’s fifth-largest retirement village operator.)
RetireAustralia is currently on the market, with a price tag said to be A$1 billion.
Goodwin on Residential Investments
But NZ Super is not walking away from the so-called living sector – a space very much in vogue with institutional investors.
The fund plans to become more involved with residential investment, including build-to-rent (BTR) both at home and abroad.
NZ Super owns around three dozen long-term rental homes at one of its projects in New Zealand, which it sees as just a taster – more are to come in future.
Last year, it invested in a value fund managed by CBRE Global Investors, which is developing BTR projects in Japan.
Goodwin says the fund has also been investing in New Zealand tourism infrastructure through a joint venture, NZ Hotel Holdings, in partnership with Russell Property Group and Lockwood Property Group.
“Our platform of seven hotels is now worth between NZ$500 million and NZ$600 million,” Goodwin says. “Pre-COVID (in 2019), we paid NZ$300 million for a portfolio of just three assets. In hindsight, our timing was not great.”
For us it is about long-term value, and if that means shutting the hotel now for a total upgrade, that is the choice we’ve made
But NZ Super was not deterred. It continued to buy hotels during the downturn as assets offering good value came to market.
“Now that we are at the other side of COVID, we are seeing the benefits of these assets,” Goodwin says. “Occupancies have increased as the borders come down.
“We have had the option to invest when others can’t, and we have the ability to control the rate of investment, which is important. Our ownership and control of these platforms have worked really well.”
Last November, NZ Hotel Holdings bought the 280-room Rydges Wellington for NZ$100 million. “We shut it down to upgrade the rooms. We don’t need to have it open (to generate income).
“For us it is about long-term value, and if that means shutting the hotel now for a total upgrade, that is the choice we’ve made.”
Asked how often, if at all, the fund sells assets, Goodwin says: “It is a critical part of our investment framework to always be considering what is best for our investment portfolio.”
The fund’s reference portfolio is 80 per cent equities and 20 per cent debt.
“We sell equities and bonds to buy assets when we can buy something else which offers better returns,” Goodwin says.
“So we will part with an asset when someone has placed a higher value on that asset than we do – and put the money back into the reference portfolio.”
While direct investment, and especially investment in platforms, gives Goodwin the optionality he prefers, he says that, in the immediate future, the fund is considering investing in listed property and infrastructure to take advantage of market dislocations in unsettled economic times.
[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.