Insight into Australia’s energy transition and opportunities as well as the benefits to private equity in a recessionary environment.

Coming next, we have the partner of Federation Asset Management, Mr. Neil Brown, joined the call.

Federation Alternative Investments 2, F2, provides individuals' assets to a diversified portfolio of private market investments otherwise reserved for Federation's institutional clients.

F2 invests into businesses and assets that may

both economic and social needs, leveraging the team's strength across financials, healthcare, real estate, technology, and renewable infrastructure.

Neil is a partner of Federation and leads the investments in George Health, Sendl, and Plenty.

Previously, Neil worked at the balance sheet investment arm of Macquarie Bank.

He has more than a decade's experience in investment management and corporate advisory across a wide range of sectors, including energy, infrastructure, transport, financials, and real estate.

Neil is going to provide us insight into Australia's energy transition and opportunities, as well as the benefits to private equity in a recessionary environment.

Welcome, Neil.

Thank you for having me.

Thanks for the introduction.

My name is Neil Brown and I'm a co-founding partner of Federation Asset Management.

As we've heard, I'm going to talk about the opportunity offered by the energy transition in this country to investors over the next decade.

But first, to reiterate the overview of Federation, we're an Australian private equity investment business based out of Sydney.

The team has achieved a track record of a 22.7% IRR.

on a set of $4 billion worth of investments exited over a period since 2011.

We manage a little over $1.5 billion of client commitments for institutional and wealth management clients across our activities.

And as mentioned, we have an existing portfolio of performing assets.

Our F2 fund allows wealth management customers to access

those investments as well as our future pipeline alongside our institutional investors.

We invest in businesses that meet social and economic needs.

In addition to private businesses, more broadly across Federation, we have colleagues that manage investments in social real estate in both childcare and disability accommodation, and also in energy transition infrastructure.

Our private equity focus is in defensive sectors.

We've worked in those sectors for a very long period of time now, including in particular,

health care services, businesses servicing the energy transition and financials with a particular focus at the moment on the ageing population thematic.

We're a through the cycle investor focused on protecting capital in the downside and delivering strong upside potential as well.

And finally, we're a responsible investor.

We believe that investing in an ESG savvy way is

beneficial broadly from a societal perspective, but in the end drives strong long term returns for our investors.

So turning now to the Australian energy transition and the opportunities in this sector over the next decade, perhaps I'll start by really the driver of the energy transition.

And it is one that

It is not a policy or political or philosophical driver of an energy transition.

It is an engineering and an economic imperative for this transition to happen.

The reason for that is that the majority of generating fleet in Australia is provided by coal-fired power stations and those coal-fired power stations

Many of them are 40 and 50 years old and just reaching the end of their engineering and economic life.

So they are becoming more unreliable.

They're becoming prohibitively expensive to continue to maintain.

And so the assets themselves require replacement as opposed to necessarily this being a philosophical view on wanting to transition away from coal.

Having said that, renewables now are already the lowest cost of generation when taken over a lifetime view.

And so, again, it's an economic driver to replace the generation that we require with a combination of renewables and storage to provide for the electricity requirement that we have

And then finally, there is a strong policy setting to assist all of that economic and engineering imperative.

It has now been legislated in terms of carbon reduction targets under the carbon reduction bill of 2022.

And that provides specific requirements to reduce our carbon footprint by 43% below 2005 levels by 2030.

and also to achieve net zero emissions by 2050.

So I guess what I'd leave you with is that it's an engineering requirement for us to replace this generation fleet.

The cheapest alternative now is renewables and they will continue to become cheaper as scale and technological advancement continues.

And all of this sits with now a very strongly supportive policy setting to drive that change as well.

To give you a feel of the scale, that is a massive capital requirement that Australia will need to attract over that period of time to achieve this transition.

The Australian Energy Market Operator estimates that in excess of US $150 billion is required just for replacement of the coal fleet alone.

Other bodies, Clean Energy Investor Group,

estimates that more than 400 billion is required to actually meet our Paris Agreement commitments.

And so that's part of the carbon reduction requirement to meet those requirements.

And finally, people will have heard about Australia's hydrogen ambitions as well.

And if those are to come to fruition, then that will be even more electricity generation required to do that.

So in summary, just a really massive capital requirement and a big task to achieve, not without its challenges, but certainly a huge opportunity set for investors to make good investments within that broad universe.

perhaps turning to how Federation is approaching the energy transition.

As I mentioned, we've spent a long time in this sector, but our strategy has evolved by taking private a wind farm development company called WindLab back in 2020.

Windlab was probably underperforming in a listed setting from a share price perspective and we took the view that we were able to take private that business at a valuation that really just reflected its operating assets and the market wasn't valuing the huge book of development options that they have.

So we feel like we were able to effectively create that company at evaluation that was effectively a free option over a very large pipeline of wind farm development opportunity.

The business did have operations in Africa and it had operations in the US.

Our strategy was to really refocus the business back on Australia.

We exited the operations in those other countries and actually were able to recover more capital from the exit of those businesses than we needed to deploy to take private the whole business in the first place.

We've reinvested that capital into the business, built the team,

It's now a world-class team of more than 80 team members across development and wind science, grid engineering, commercial teams and the like.

So Wind Lab is now poised

to deploy projects in the order of $10 billion worth of capital required over the next five years.

And so we're really excited of how that business is now set up to really attack the energy transition opportunity that we have in front of us.

As well as that, we have a dig that we're looking to deploy into as well.

So finally, then, to round up on how wealth management investors may get access to this thematic, and there are relatively limited options in this respect, but we have designed our F2 fund for that purpose.

to allow wealth management clients to get access to opportunities like these alongside institutional investors.

The F2 fund is now open, it provides monthly liquidity, it's widely available on numerous platforms and is researched as well.

So thanks very much for that so far and I'll pause there.

Thanks Neil.

So I've got a couple of questions for you.

First one is, for those businesses that Federation typically invest in, how big are they?

And how competitive is it for deals in the Australian mid-market private equity sector?

Yes, understood.

We could be thought about as typically investing in companies of 100 to 200 million dollars of enterprise value.

And really our bread and butter is identifying companies doing call it five to 10 million dollars worth of EBITDA and growing those businesses over our investment hold into the 30 to 50 million dollars of EBITDA type of companies.

And at that scale, there's then

a very broad universe of both global private equity players, strategic players, IPO is a sensible option.

So a large universe of exit opportunities for businesses of that scale.

In terms of competition, I would say there are good mid-market private equity firms who are attacking that sector of the market.

What I would say is that more than 60% of the deals by volume in Australia are in that mid-market segment.

And so there is a really deep pool of opportunity for us to play in.

And we focus in particular on those sectors I mentioned that we've been working in for more than a decade now.

And so I feel like we are able to find bespoke and attractive opportunities in that very large opportunity set that we're playing in.

Indeed.

And you have mentioned that federations focus on the downside protection as well as strong equity returns.

How is this achieved practically?

In private markets deals, there's a greater ability to negotiate bilaterally and create a bespoke investment.

I use the example maybe of our investment in George Health, which was actually an investment made by way of convertible loan.

So it was a loan.

a loan investment that had security over the underlying assets in the business but it allowed us to convert into equity at a time of our choosing and really what that means was we were sitting in a very protected position in the capital structure as a piece of credit earning an interest rate over time

but then allowing us to convert into equity when we were certain that our expectations of improvement in value had been realised.

And by being able to do that bespoke structuring of that type of investment, it meant we were extremely well protected in the downside, but able to still deliver an excellent return for our investors, you know, very strong equity returns on that investment as well.

Thanks for the example and thank you Neil for the presentation today.

Good to see you and take care.

And you as well.

Thank you.