Castlepines Corporation’s investment focus is on secure, long-term equity investments in major assets. Of importance to Castlepines is a stable basic yield, small annual inflationary increases and all income being net of outgoings/costs.
The key to any Castlepines investment is ensuring that the return or coupon on the equity that partner pension funds have contributed is secure, date-certain and sum-certain for the full investment term, and that the payer is ‘investment grade’.
The key elements of Castlepines’ investment strategy are:
- Investing in assets with a purchase price typically greater than US$100 million or equivalents in local currency
- Assets leased by a strong entity for the investment term, normally 20 years or longer. Shorter terms are possible but require a higher yield. Assets are leased under a triple net lease structure or a bareboat charter basis for shipping. Alternatively, the assets can be operated under operations and maintenance, and off-take contracts for the investment term; and
- An agreed annual inflationary increase on coupon payments (commonly 3%).
Managing investment risk
Castlepines adopts a suite of risk management strategies to ensure the security of an investment. This includes ensuring:
- Strong entities as counter-parties (e.g. lessee, charterer or off-taker, as appropriate);
- Where assets are to be constructed, substantial builders with performance guarantees and/or a completion bond, who are engaged under a fixed-priced turn-key engineering, procurement and construction (EPC) contracts;
- Substantial operators and managers that are prepared to provide operations and maintenance agreements for the investment term and/or a maintenance contract for the same term with an annual non-use fee, where appropriate. Alternatively, any off-taker would need to accept contractual step-in rights in the event there is a serious break in production; and
- Any feedstock risk is managed through agreed feedstock quantum and base price contracts with a strong supplier for the same term as the off-take, with a floor and/or collar price to the feedstock to ensure its affordability throughout the term; and
- Synchronicity of the key contractual arrangements for a project. For example, off-take, operations and maintenance, and feedstock contracts must match the investment term.
Castlepines defines a “strong entity” as being rated as investment grade by Standard & Poor’s (minimum BBB rating) or Moody’s (minimum Baa rating). Each key counter-party to a project or asset must be investment grade, or a world class company with a substantial balance sheet and wrapped by a minimum AA- rated insurer.
Where a potential counter-party is not investment grade or not rated at all, Castlepines may deal with that company provided it sells its product or service to an investment grade off-take party. Agreements to buy or supply the product/resource/service over the investment term are then required to secure revenues.
In the case of depreciating assets (e.g. plant, equipment, wiring), a conservative yield is required, marginally above property yields. Castlepines may be prepared to make available in advance all the capital required to permit the vendor/lessee to upgrade its equipment once or twice throughout the lease, so that the life and effectiveness of the equipment is maintained until investment/lease end.
Castlepines is seeking only conservatively-leased assets and is not sensitive to pricing of those assets. Market valuation is therefore normally not required prior to purchase.
Castlepines has no expertise in asset management. It therefore has no interest in this activity during the term of its investment. All maintenance issues and daily operations are managed and paid for by an asset’s tenant, lessee or charterer.