Emerging market renewables to see ‘explosive’ growth

An ‘interesting relative value play’ has emerged, especially in Latin American markets, according to Partners Group.

A research report on infrastructure investments in emerging markets has concluded that renewable energy offers “an interesting value play” and that Central America, Chile, Mexico and Brazil present “compelling investment opportunities”.

The study – “Emerging markets infrastructure: an appealing investment opportunity?” – was conducted by Swiss private markets specialist Partners Group and will be officially released later this week.

It identifies three so-called “mega trends” that are the basis for the emerging markets opportunity: the need for energy as a primary infrastructure demand; disconnect between production and consumption; and urbanisation and mobility.

While business model risk, currency risk and political risk need to be factored into emerging market deals, Partners Group believes that returns can more than compensate for this risk.

Energy is the focus for much emerging markets deal activity at the present time, and this is no surprise to report co-author Dmitriy Antropov, vice president of private infrastructure at Partners Group.

“In many emerging markets, energy is the first sector to be liberalised and offer opportunities to investors. Sectors like transport and water often remain subject to government interference for longer,” he told Infrastructure Investor.

In particular, the study alights on prospects within renewable energy – especially Latin American markets that are no longer reliant on government subsidies. Partners Group predicts “explosive growth” over the next few years.

“Mexico and Chile have renewable energy markets that are economically viable without government support, but there are implementation challenges,” says Antropov.

Among the challenges are that emerging markets projects “tend to be more complex in terms of execution due to their larger size, the need for longer transmission lines and potential social issues, for example disputes over land ownership or over direct sharing of the benefits of the project with the local communities”.

Furthermore, the study does not underestimate the difficulty of assessing emerging market opportunities and the lack of meaningful comparators to act as guidance.

“Our conclusion is that you can’t make apples to apples comparisons between developed and developing markets,” says Antropov. “You can have an asset that looks similar but is, in reality, very different. A water utility in the UK, for example, cannot be meaningfully compared with a water utility in Brazil.”