Overheated China is a good thing…

A question exercising the minds of many an infrastructure fund manager is how to marry private capital with the rapid economic rise of China. It’s no easy thing. Lack of available capital sources has not been an issue in many business sectors in the country, so the challenge is finding a way to gain access to the market. According to observers, however, there are certain unexploited niches where opportunity is ripe  – and Swiss-Asia Financial Services is hoping it has identified one of these.

The Singapore-based firm, which has hitherto been noted more for its hedge fund strategies, has launched the China District Energy Fund, which is aiming to capitalise on the rapid spread of industrial parks in the Chinese interior – rather than the more saturated coastal region – by backing asset operators which provide businesses based in the parks with all their energy requirements.

The fund brings together private equity veteran Pying-Huan Wang, who was previously head of the private equity group at Deutsche Bank and who joined Swiss-Asia in January as head of infrastructure investments, with Dalkian, the French energy services firm. Dalkian – a division of France’s Veolia Environnement and Electricite de France – was a cornerstone investor in the fund, which has so far raised around €84 million, and will seek to source exclusive deals in its role as the fund’s primary industrial partner. The firm has operations in six major cities in Greater China. 

€500m target 

The fund, which will now seek commitments from institutional investors, is aiming ultimately to raise €500 million. Wang says it has a pipeline of potential opportunities worth around €1 billion and that, therefore, it provides would-be investors with transparency, in contrast to the blind pool concept typical of private funds.

Wang says the fund has a “very niche” strategy, which involves the purchase, refurbishing, upgrading and expansion of brownfield district energy assets (combined heat and power projects) in Greater China and then exiting them over a period of seven to ten years with a target internal rate of return of 18 percent. She believes that, while district energy will benefit by proxy from China’s rapid economic growth, the sector will grow faster than the overall economy.      

“Due to the steady cash flow-generative nature of district energy assets, the fund presents a relatively low level of uncertainty in the return drivers and offers an attractive investment proposition in an inflationary environment,” says Wang. “Investors will also be able to take advantage of the expected RMB appreciation in the medium term.”

So-called district energy asset operators provide cleaner and more efficient forms of energy to the industrial parks. Previously, individual companies within the parks would tend to have their own inefficient and highly polluting boilers. Wang says that these boilers typically have an energy conversion rate of 40 to 45 percent, with waste products comprising the remaining 55 to 60 percent.

These boilers are increasingly being replaced by co-generation plants, which cater for an entire industrial park’s energy needs while increasing efficiency and reducing pollution. These co-generation plants boast an energy conversion rate of around 80 percent. As well as water and electricity, they also provide steam for companies in those sectors which have demand for it such as chemicals and pulp & paper. Crucially, the move to energy efficiency is backed by the Chinese government, which provide district energy asset operators with various stimuli and incentives.

The fund has just made its first investment, the size of which was undisclosed, in a combined heat and power plant based in Chengdu, the capital of Sichuan province. If the pipeline is as large as Wang insists, further investments will probably not be long in coming.