Investing in infrastructure
Electricity, heating, water and communications are basic functions of society, which require financial resources for capital investments and structure development. Finnish capital is the key to making investments in these possible.
Investors have long shown interest in basic utilities such as electricity, heating, water and communications. They offer an attractive combination of low interest rates and steady cash flow that is immune to economic cycles and hedged against inflation.
Despite this, investors have rarely been given the opportunity to invest in public utilities. This is due to fears of repeating the concentration of ownership of Finnish electricity distributors, which involved international energy companies and investment funds.
Erkko Ryynänen, Chief Investment Officer at OP Asset Management, is familiar with the situation and the industry’s challenges from an investor’s point of view. He wants to assuage the feelings of mistrust.
“The utilities sector needs capital for investments and structural development. There is no shortage of money – the issue is that the investor must be seen as trustworthy and preferably Finnish.”
According to Ryynänen, the reason for this is that the sale of power distribution networks to international investors resulted in a large void of trust among public-sector decision-makers. He sees this as the key when attempting to open new doors for investments in basic infrastructure.
“Infrastructure is a local issue, and the origin and trustworthiness of the money used for its development are emphasised to a great degree. We have heard from many sources that trustworthy, Finnish capital that is intended for domestic and local projects is the best guarantee.”
Getting involved in individual projects
The environment, climate and sustainability are strong areas of focus for local authorities and public companies owned by municipalities. Basic infrastructure industries in Finland are developing and becoming centralised, with structure development also moving forward. Capable companies are expanding their operations across all of Finland.
“We want to be a part of this trend and support the industry’s structural change.”
Ryynänen does not believe large-scale privatisation to be likely, now or in the near future. The reconciliation of special interests and utilitarian aspects in issues related to tariffs, urban development and zoning often poses too much of a challenge in a political process.
“In contrast, there is great potential in individual projects, such as green investments in carbon neutrality. They allow investors and public companies to work together on a specific project instead of the company as a whole.”
Ryynänen notes that introducing private capital to support public funds would free up the municipal authorities’ budget for other uses. This way, a company owned by the municipality can invest in important projects without incurring debt for its owner. Cooperating naturally is an effective way to build trust.
“It is better to be a part of the solution than a part of the problem. Investors can channel funds that are suitable for the situation and need, thereby supporting the often limited balance sheets of public entities.”
The power of listening and long-term investing
The Vapo Lämpövoima fund was a useful dress rehearsal for OP Asset Management and an example of how investors can get involved to support a capable operator by strengthening its balance sheet and resources. The collaboration started out promisingly but ended when the company was bought out by French investors in January 2021.
Ryynänen and his team have expended great efforts to find a balanced approach that would resolve the mismatch between the need and demand for capital in basic infrastructure.
“We have looked for a solution by carefully listening to the sector and trying to find the best way for Finnish capital to be channelled for Finnish operators to use in Finnish projects."
The result of this brainstorming is a fund that stands out from other investors. As of right now, preparations for launching the fund are on the final stretch. Ryynänen sums up the main elements of the new infrastructure fund:
“The fund is long-term and has no maturity date, meaning that it does not force investors to sell. Its cornerstones are Finnish entities and investors. The fund is also backed by OP’s sustainability promise and trustworthiness built over the span of 120 years.