BaltCap backs local governments in green transition and expects to increase its activity on the Polish market. Interview with Simonas Gustainis, managing partner of the BaltCap fund
Over the next three to four years, BaltCap plans to invest EUR 50–100 million in raising the energy efficiency of public infrastructure and development of communal services in Poland. The investor seeks to cooperate with local governments, mainly under the ESCO financing model.
The green transition is a hot topic for economies, enterprises, local governments, and citizens. What challenges does it pose?
The green transition is a highly complex and multifaceted process, which should be looked at holistically. Of course, one of the principal and most newsworthy aspects is the energy industry itself and the reduction of emissions. BloombergNEF estimates that if the European Union wants to achieve the net zero target by 2050, it must invest about USD 3.8 trillion in new energy projects, led by solar and wind farms. On top of that, an additional USD 1.5 trillion should be allocated to installations for production of clean hydrogen. This scale in itself makes the energy transition a challenge comparable even to the industrial revolution of the 19th century. Of course, this process has been underway for some time, but it is now entering an increasingly advanced phase that will take another 30 years or so.
But the green transition isn’t just huge, front-page investments.
Definitely not. Perceiving the green transition solely through the lens of the energy industry and the financial aspect would be an oversimplification.
The green transition project is not only about abandoning fossil-fuel energy sources and replacing them with renewables, hydrogen or nuclear energy. Along the way, it is also necessary to ensure steady supplies of transitional energy commodities, guaranteeing the stability and resilience of the system. It is also a challenge in terms of changing the way energy is consumed. The key is to use energy more wisely, more efficiently. All forecasts show that as a society and an economy, we will have an increasing demand for energy, and therefore the use of environment-friendly energy sources is one thing but constantly striving to improve energy efficiency is another.
Additional aspect of the green transition is the social dimension – one of its aims is to support building a more just and inclusive society. Finally, investments in the green transition must ensure the resilience and elasticity of the system, and thus it is necessary to see that there is an appropriate mix of energy sources and infrastructure solutions to guarantee stability, including transmission solutions.
What experience does BaltCap have in green investments?
We have extensive experience in green financing. We have completed and are currently carrying out numerous projects, increasing the energy efficiency of social and recreational infrastructure. For example, in Poland we are responsible for energy upgrading of public facilities in the Mielno municipality, construction of modern street lighting systems in the municipalities of Kobylnica and Miedźno, and energy upgrade of sports facilities in Lubań.
Power and energy infrastructure investments are also in our portfolio. From the ground up, we built and operate photovoltaic and wind farms, energy storage facilities and biogas plants in the Baltic States. We are very much engaged in the energy transition of the residential heating system in Vilnius. We also ran a similar project in Riga. These are obviously only selected examples, but what they have in common is the resilience and flexibility of the solutions used.
How do you assess the attractiveness and challenges of the Polish market?
The Polish market is very attractive for us. Compared to the Baltic States, it is much larger, and has significant demand, which naturally gives us greater opportunities for operations and growth. Currently, in Poland we are successfully implementing several projects involving upgrading the efficiency of local government infrastructure, but we are seeking further opportunities to invest in this market. I am confident that in the not-too-distant future our portfolio in Poland will increase significantly. Before the end of 2023 we plan to launch our second infrastructure fund, which will to a great extent focus on developing cooperation with Polish partners. It is our ambition to invest EUR 50–100 million in Poland within the next three to four years, which best demonstrates how important this market is to us.
In developing our activity in Poland we would like to focus mainly on cooperation with local government bodies in the area of energy, increasing the energy efficiency of infrastructure, and expansion of communal services. Ventures using the ESCO [energy service company] financing model appear particularly interesting to us.
What benefits does cooperation in the ESCO model generate for local governments?
ESCO is an operating model in which specialized firms, like BaltCap, offer comprehensive implementation of ventures for improvement of energy efficiency. First and foremost, cooperation in this model does not engage the personnel or financial resources of our client at the start of the project. We also identify the solutions that will cut energy consumption, and our compensation is closely tied to the actual savings achieved.
Interest in ESCO is evident not only among local governments, but also among companies from many industries. They perceive the benefits flowing from this model, particularly with the current economic slowdown and limited funds. Thanks to our knowledge and experience, we can meet even our clients’ most demanding requirements.
Could the current geopolitical situation in the region threaten the flow of investments to Poland and the Baltic States?
Based on our observations, it does not seem to. While there was a certain shock during the first year of the war, particularly visible on the energy market, the current situation looks different. It appears that the countries of the European Union, including countries from its eastern flank, effectively and quickly addressed the need to replace Russian energy commodities with supplies from other sources. Besides, as they say, in the economic system people vote with money, and the quick return of investors to normal activity clearly shows that the current war in Ukraine is not being treated as a factor having a negative impact on the economies of frontline countries. If anything, the investments into increasing the long-term energy and social resilience have gained another layer of urgency and importance.
BaltCap fund is the largest private equity investor in the Baltic States, with presence in Poland and the Nordics. Since 1995, the fund has made over 120 investments across a wide range of industry sectors and raised aggregate capital of over EUR 800 million. BaltCap´s shareholders include prominent international institutional investors, such as EIB, EBRD, and flagship Scandinavian pension funds. In Poland, BaltCap has been present for nearly five years and is pursuing infrastructure projects for local governments.
Simonas Gustainis joined BaltCap in 2005 and is today serving as a co-Managing Partner, responsible for business operations and investments in Lithuania and Poland. He is also the founding board member of the Lithuanian PE & VC Association and serves as member of board of Baltic Institute of Corporate Governance.
Last Updated on December 14, 2023 by Anastazja Lach