Securitisation can help pension funds and charitable organisations support sustainability while earning a healthy return. Sven Ulbrich, managing director of Fund2sec, explains why this is important.
Many institutional investors want to invest more in sustainable projects, but are limited by internal policies or government regulations from putting too much cash into certain asset classes. Securitisation, which breaks up investments into more digestible chunks, is one tempting solution. A new outfit wants to make the process simpler for initiators and investors.
Fund2sec is a Luxembourg-based securitisation platform focused on sustainable assets for institutional investors. It started operations in March and plans to announce its first issuance, which will be listed on the Luxembourg Stock Exchange, “soon”. Fund2sec is a joint venture between Fair-Finance, a socially-oriented pension fund provider based in Vienna, and Fund2seed, a socially-oriented consultancy in Germany run by Sven Ulbrich. (Fair-Finance and Ulbrich have another joint venture in Luxembourg - a fund platform for sustainable real estate investments.)
At the moment, Fund2sec has 1.5 full time employees: Ulbrich splits his time between Germany and Luxembourg, and Nadja Knoth is 100% based in the grand duchy. Ulbrich said in an interview that “we are hiring, especially in accounting and information technology, within the next couple months” with more management and operational roles to follow.
Aaron Grunwald: What is Fund2Sec and what are you trying to do? Sven Ulbrich: It’s a securitisation vehicle and company formulated in Luxembourg, which addresses sustainable investors looking for sustainable assets to invest in. Fund2sec will be the bridging partner between the asset and the investor, just for sustainable topics.
What types of projects will be listed on the platform? Sustainability is always a very subjective topic. One investor, for example, looks more for social, responsible investments, and another one for ecological topics. We want to be open to this point, because we are ourselves not the real sustainable experts. But typically, the investor has something in mind, let’s say solar platforms, or green energy, or affordable housing, or whatsoever. We bring both sides together with an expert for the sustainable part, in order to really make sure that the investor addresses their money into their sustainable topic.
So this could be an investment with an impact objective or it could be an investment that fulfils certain ESG criteria? Yes, and potentially even one step further. I mean, one of our targeted investor groups is foundations. And these foundations, in order to reach their charitable goals, need to earn money. Sometimes charitable trusts decide to invest into stocks or normal kind of investments. However, we are providing a platform to reach their sustainable goals. Also, there’s a main discussion with one of our main partners right now, because he says, ‘it does not make sense to invest into green investments, because they are already ecological, they are already rated. We need to invest into non-ecological companies, in order to be a stakeholder and to get them to really change for the better, instead of just investing into the best.’ Therefore, for us, it must be either the asset is sustainable, or the investor [has a sustainability framework], but it does not have to comply with both at the same time.
How do you screen the initiators? Our joint venture partner is Fair-Finance group in Austria. Fair-Finance group was one of the first pension plans dedicated to sustainable investments. [They only offer pensions focused on] sustainable investments, so they are real experts. All of the projects we onboard are a board decision and they are part of the advisory board in order to say, ‘this is the initiator, this is the project, this is the investor, does this fit with our platform?’ They say no or yes to the initiator.
If initiators know they will be reviewed by Fair-Finance, it might automatically screen out the people who shouldn’t be there? Yes... one of the major issues in sustainable investment is transparency. It’s really hard to really be a sustainable investor. A decade ago, I had a project trying to initiate an ethical fund for groups within the Catholic Church... they discussed investing in weapons and if this really is an ethical investment. They said ‘yes’ while at the same time they denied investments in any healthcare company because there was a fear of anything [related] with embryonic stem cell research. This was weird to me, because [for me] medicine is good, weapons are bad. But it was the other way around [for those investors]. And so I decided at that point in time, I’m not the guy who says it’s sustainable or ethical. Let the initiator or the investor decide whether this fits to their ideas. Of course, there are some no-gos. But it’s really more about transparency and reporting.
So you’re not providing any advice or any recommendations, you’re just ensuring that clear information is provided to investors? No, it’s not really the main point to be an advisor, because, as I said, in my opinion, it’s really hard to see what Aaron thinks is sustainable or not. Potentially, your sustainable idea is totally different to mine. To be an advisor, you need some standards, and these market standards are not yet given. So right now, it’s very subjective.
Where are these securities going to be listed? This definitely depends on the request of the investors. The main target is to have the products listed on a regulated exchange. Most of the investors--whether it’s a charitable foundation, whether it’s a pension fund, or whatsoever--are highly regulated, either by the regulator, or just because they need to make sure that their money is safe. And therefore, it should be the maximum regulated environment. Our first product, for example, should be listed in Luxembourg on the regulated exchange, within the green bond segment.
You mean the Luxembourg Green Exchange? Correct.
But you won’t exclusively be listing securities on the Luxembourg Green Exchange? It could be an exchange in Germany or Norway? Yes. Normally, investors bring some ideas where they want to have the products listed. A pension fund, for example, is not investing directly into stocks or equities or bonds or whatsoever, they use mutual funds or special funds to invest into a final instrument. And the fund manager sometimes has some lists, they want to have the product listed in Frankfurt, or in Austria, or in Malta, or wherever. Listing is a very technical and operative thing. However, I really liked the Luxembourg exchange, because in my opinion, they really do a good job. Especially if trading is not the main topic. It’s not a trading exchange, it’s a listing exchange. If you want to have trading and if you want to have high liquidity and high volume, then potentially you have to look for Frankfurt, London or any main exchange, which are more recognised internationally.
Is there any geographic limit? I mean, is it only for EU projects or could it work for a project in Asia or Canada? There’s no global limitation or regional limitation. [Except at the present time] Russia would be excluded [due to sanctions].
You are currently preparing your first issuance. How many products are you planning to launch with? In our opinion, to build a sustainable platform means not having a big bang, at the very first moment to say ‘I’ve got 100 products and I’m the biggest one’ and so on. But to really build a company--and that’s different to other securitisation platforms in Luxembourg, we really want to have people here, structures within the company--and that means that the target should be within a year’s timeframe to have four to five projects listed. And then to increase these numbers to 10 or 12 in the second year, really just to have a smooth growing process. Otherwise, sustainability at some point in time is gone. And then it’s big business, but I don’t want to be at an investment bank anymore.
Is there anything else really important to know about the platform or what you’re doing? When I’ve introduced the platform, [I’ve realised that some] people don’t have an understanding that nonprofit organisations need to earn money. They think a nonprofit organisation is not allowed to earn money. That’s true for their stakeholders; stakeholders should not receive any dividends. But a nonprofit organisation must earn money in order to fund their charitable work. So it’s one major part of fundraising of a nonprofit organisation to invest into yielding investments. This is something which, for normal people, sounds [strange], because it’s ‘not-for-profit’. Why does a nonprofit organisation look for [investment income]? They have to, because they have to finance their activities!
It’s not-for-profit, it’s not non-revenue? Yes, money is not falling from the sky. They have to earn money. This is something which we are also trying to communicate, that it’s not a contradiction that a nonprofit organisation is investing its money. The more yield, the more they can invest into their projects and they can have more impact.
Do you think that’s going to be your main audience in terms of investors? I think so. The not-for-profit sector would be the main sector on the investor side. But to complete the picture, in my opinion, a nonprofit organisation is not just Caritas or the Red Cross. It’s also the typical pension fund, because a pension fund is not earning money for itself. It’s earning money in order to pay the retirement plans of its clients. Therefore pension funds and charitable organisations are the main investors for the platform, yes.