With three energy funds under its belt, Actis is a leading investor in electricity generation and distribution in Latin America, Africa and Asia. Its portfolio of six majority owned renewable energy-focused companies includes the leading renewable energy company in Central America Globeleq Mesoamerica Energy, Brazilian wind power and hydro-electricity operator Atlantic Energias Renovaveis, Chilean renewable energy company Aela, Mexican renewable energy platform Zuma, pan-African renewable energy business Lekela and Indian renewables platform Ostro Energy. PEI caught up with partner and co-head of energy Mikael Karlsson to find out why renewables have become such a key area for the emerging markets-focused investor.
Renewable energy has become an increasing focus for Actis over recent years. Can you explain why?
“We’ve seen a renewable energy revolution in growth markets over the last few years. We had been watching the space for some time, but needed to wait until alternative sources of energy became cheaper than traditional sources. We saw that happen around 2009, when we first started investing in renewables. The cost of wind power production is down by 60 percent and solar by 80 percent, making them the most competitive sources of energy in growth markets.
“This is really a growth-market story. In countries like Germany where wind and other renewables have been heavily supported, there is over-capacity in the system and no great need for further generation of power. This means that investors are reliant on government support through payments such as feed-in tariffs. Compare that with a country like Costa Rica, where there is a huge unmet demand for electricity and where you can generate three times as much wind power. You just don’t need subsidies in these markets.”
How is the market expected to grow?
“Between now and 2035, it is estimated that $16 trillion will need to be invested in power globally and half of that in renewables. Of this, $10 trillion needs to go into non-OECD countries – so there is scope for significant growth. Factor in countries like Chile, which is seeking to source 70% of its energy from renewables by 2050, and you can see the potential. Technological advances will reduce the price of renewables further, making them even more cost-effective.”
What are the key factors in making successful investments?
“Our strategy is to build scale so that the assets are attractive to potential buyers when we come to exit. For that, you need a number of elements in place. First, you need to pick your markets with care. We look for a history of private involvement in power and therefore clear frameworks for how companies and the power market operate and established legal frameworks that protect us as investors.
“Having the right management team in place is also highly important. Our energy team at Actis is drawn from people who’ve worked at a global executive level in the power sector. So we have the right expertise to create value in investments but also strong networks so we can pick the best management teams. In Latin America that usually means hiring locally; elsewhere, as in much of Africa, it may require drawing on international talent.
“And you need a licence to operate – this is vital as the owner of a company that generates a significant portion of a country’s electricity capacity. We also take a responsible approach to investing. Our Energy Impact Model implemented in 2011 assesses company performance across six categories – finance, people, social and community, infrastructure, environment and governance. By measuring and working across all these areas, we are not only seen as a professional and ethical firm, but we mitigate risk by ensuring we have good relationships with all our stakeholders including regulators and local communities, and we create value that can be realised when we come to sell.”
How adaptable do you have to be?
“We have to take a pragmatic view. Our industry knowledge allows us to put in place best international industry practice in the companies we back; however, we also understand that there is sometimes a need to adapt that practice to local markets. Having local teams on the ground across our investment activities at Actis really helps in that regard – these teams know and understand the local markets and business environments and can help with identifying the right local teams.
You mention value creation and industry experience. Why are these so important for renewable projects in growth markets?
“In many developed markets, pretty much anyone can set up a renewables company and simply outsource all the work to experts. That’s just not possible in emerging markets, where this expertise doesn’t exist. You need the full skill set, which is why we look for teams that match the best in the global market. We can then supplement their skills and experience with our own because we understand the challenges involved in managing and scaling up these companies.”
How do you build scale in these investments?
“We focus on buy-and-build opportunities as these provide the attractive risk-adjusted returns we seek. Usually, you find that local players do the early-stage development – they source the best sites and get the go-ahead, so we don’t take the development risk. These players seed deals for us so that we can provide the capital that they need to expand or build projects. In Brazil, for example, we acquired a project from a regional conglomerate that had a 70MW wind farm in construction but didn’t have the financial or managerial resources to scale up the company. In Mexico, we bought a ready to build project, put in a management team and are now seeking to build a $500 million-plus business.
“We also don’t take construction risk as we build these projects using turnkey contracts with experienced contractors and new projects are financed on a non-recourse basis and our returns are backed by 20-year power purchase agreements.
“One of our previous investments – Globaleq Mesoamerica Energy – is a good example. We bought a 70 percent stake in 2010, acquiring the first-ever wind farm in Latin America, with Mesoamerica keeping the remaining 30 percent. We grew the company’s generation capacity from just 24MW to 400MW in operation and construction and nearly 300MW in the pipeline across Central America. We did this by aggregating energy assets into the platform business so that it had the scale that appeals to strategic buyers.”
How do you see renewables developing in the future?
“I think we’ll see similar developments to those we saw in Africa with mobile telephone technology. The uptake of mobiles there meant that the continent effectively leapfrogged the fixed telephony stage. Similarly, I think we’ll see the development of off-grid solar take off as technology advances. The key is having batteries that are effective enough to store power during non-solar hours, but the combination of cheaper solar and battery technology advances will make this happen. This will be a game changer in areas where solar power is a viable source and where current, frequent power outages from the grid hamper economic development.”
This article is sponsored by Actis. It first appeared in the 2016 Investing in Energy supplement of the July/August 2016 edition of Private Equity International.