Since its launch in late 2018, fund boutique Proxy P Management has managed a directional long/short equity fund focused on renewable energy and energy technology. Given the fund’s growth-oriented and higher-risk profile, traditional power utility companies have historically been less attractive from an investment perspective. However, a combination of attractive sector valuations and accelerating structural demand for electricity has led Proxy P to plan the launch of a new long-only strategy. The fund will focus on power utilities, offering a lower-risk, income-oriented profile while preserving optionality to benefit from the long-term upward trend in global electricity consumption.

“Power utilities have always been part of our analysis, and we have held some in our existing fund,” says Dan Lindström, CEO and founding partner of Proxy P Management. “By nature, power utilities are almost like real estate companies: they build and operate regulated infrastructure and sell electricity. In that sense, they resemble a grocery store, defensive in terms of revenue stability and dividend generation,” he explains. Historically, however, the sector has rarely produced the type of growth stocks suitable for Proxy P’s long-biased, long/short equity strategy. “Even though we analyze them closely, they have never really qualified as core holdings from a growth perspective.”

Shifts in Power Demand

About a year ago, however, the team at Proxy P began to observe a clear shift in power demand, prompting them to explore the launch of a fund dedicated exclusively to the sector. While electricity demand in the Western world has remained broadly unchanged for decades, “there was always an expectation of increasing demand from the 2030s, driven by electrification in industry, transport and other sectors,” says Lindström. 

“That trend has been in the pipeline for some time and still is. However, over the past 25 years, power demand has actually declined in Europe, and in the U.S., it has grown only modestly, at around 0.5 percent per year. Essentially, it’s been flat,” he adds. “Then, last winter, we started to see genuine growth in demand, largely driven by AI and data centres. In that sense, the development has taken the market by surprise.”

“Then, last winter, we started to see genuine growth in demand, largely driven by AI and data centres. In that sense, the development has taken the market by surprise.”

The acceleration in demand has been most visible in the United States, with Europe expected to follow a similar path. “U.S. power demand has moved towards nearly 3 percent annual growth, and we expect this trend to persist or even accelerate over the next five to ten years,” says Lindström. While utility companies are stepping up capacity investments, the pace of expansion is still lagging behind demand. “This is a demand-led environment, which means margins are likely to remain stable or even expand, and power prices are expected to rise before meaningful new volume comes online,” he explains.

“This is a demand-led environment, which means margins are likely to remain stable or even expand, and power prices are expected to rise before meaningful new volume comes online.”

One potential solution to meeting the rapidly rising demand for electricity lies in renewables. “If you want a substantially faster build-out, there is really only one way to achieve that, and that is renewables,” points out Lindström. “If you order a gas turbine today, the delivery time is seven to eight years. A solar panel? You can get it in a few months.”

“For everyone else, from households to industrial users not directly linked to data centres, renewables will play an essential role,” Lindström explains. He notes, however, that renewables are unlikely to supply power directly to data centres. With the surge in electricity demand being driven primarily by AI and data infrastructure, the spotlight instead falls on traditional utilities and large-scale baseload providers capable of delivering stable, uninterrupted power at scale.

The Investable Universe and Fund Structure

The global utilities sector encompasses more than 600 listed companies. Applying filters such as a minimum market capitalization of $3 billion, sufficient liquidity and a focus on developed markets, Proxy P narrows the investable universe to around 140 companies. The Proxy P Power Utilities Fund, structured as a long-only alternative investment fund, will run a concentrated portfolio of approximately 15 to 20 holdings.

Lindström highlights the importance of active management in what is widely perceived as a defensive and homogenous sector. “Historically, utilities have been underinvested and under-analyzed, which means the dispersion has been higher than most people would expect, given the sector’s defensive characteristics,” he explains. For an experienced, fundamentally driven investor, it is relatively straightforward to identify the underlying factors driving that dispersion.

Alpha Generation and Return Potential

“The alpha generation potential in this sector is substantial, but it is highly expertise-driven,” emphasizes Lindström. “You need a deep understanding of power demand, grid dynamics and the full range of factors shaping the energy ecosystem. With our experience and sector expertise, we are confident in our ability to generate meaningful alpha for investors.”

He characterizes the opportunity as a “win-win” scenario. “Historically, the sector has delivered around 6-7 percent annualized returns, but we conservatively expect 10-12 percent going forward, assuming roughly 2 percent annual volume growth and 2 percent price growth over the next five years,” says Lindström. “On top of that, we target an additional 3-5 percent in annual alpha.”

“The beauty of it is that even if we are wrong on the magnitude of the demand growth, investors should still be looking at returns in the region of 6-7 percent.”

Even if the anticipated surge in electricity demand fails to fully materialize, the downside risk remains relatively limited. “At its core, this is still a defensive equity strategy, where we would expect to deliver around 15 percent annually, which is substantially better than the MSCI World Index, but with lower volatility,” says Lindström. “The beauty of it is that even if we are wrong on the magnitude of the demand growth, investors should still be looking at returns in the region of 6-7 percent,” he adds. What further supports the case is that the sector continues to trade at the lower end of its historical valuation range. “Despite all the discussion around power as a potential bottleneck for AI expansion, that risk is still not fully reflected in equity prices.”