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Published on: 6/25/2007
Last Visited: 9/10/2007
When Laurent Segalen launched the European Carbon Fund in 2005, he wasn't really sure what to expect."We just wanted to see if big banks would be willing to risk a bit of their money on this innovative concept," he recalls.
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Segalen not only had to market the concept, but also had to come up with a projected rate of return worthy of the perceived risk.
"We announced a return of 15% per year," he recalls, "but that was more of a mantra than a strategy."
The figure, he says, is "magic" to private equity investors.
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But Segalen isn't among those pursuing that strategy."We are not taking equity in projects," he says, "but we are more and more providing debt to project developers and making collateralized agreements, or otherwise sharing the risk of a project."He says ECF also absorbs a lot of up-front expenses, such as certification costs, which could evaporate if the project fails to deliver credits.
"The main reason we don't take equity in projects is time to market," he says.
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"Carbon is now much more sophisticated and mainstream than it used to be, and investors now ask now about track record, pipeline, exit strategy, hedging, value at risk, leverage, etc.," says Segalen.
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"You have trading houses like Mitsubishi and Noble launching carbon funds," says Segalen.
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Segalen, for example, says that collateralized carbon obligations (CCOs) are being used to collateralize future deals so that buyers can leverage their purchases and sellers can get funding up front.He also uses futures on the European Climate Exchange (ECX) extensively to hedge simple price risk, and he uses the exchange's spot and futures products as a benchmark for purchases.
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Segalen agrees."Applying hedge fund techniques to carbon is exciting, but it is recipe for disaster if you don't manage the underlying portfolio," he says, adding that the bigger risks exist far away from the trading room and out in the field where he spends the bulk of his time."You have to stay close to the projects at the factory level."
And, he adds, you have to keep focused on the big picture.
"If you forget that the goal of all this emission trading is to foster clean energy and promote energy efficiency projects around the world, then you end up trading hot air, and this whole business becomes a farce," he says.
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