What do Honduras, Brazil and Costa Rica all have in common? Three times as much wind as onshore Europe, according to Actis. And, judging by the emerging market fund manager’s energy strategy, this observation extends in some shape or form to much of the developing world.
The firm last month teamed up with developer Mainstream Renewable Power to launch Lekela Power, a pan-African platform that aims to deploy $1.9 billion in 700 to 900 megawatts (MW) of clean energy assets. The business, which is 60 percent-owned by Actis, rests on a cornerstone portfolio of South African plants with a combined capacity of 360MW; it eyes a pipeline that also includes the 225MW Ayitepa wind project in Ghana, further wind and solar assets in South Africa and 100MW of wind and solar power in Egypt.
The move replicates the firm’s launch of Ostro Energy in India a week before, in a bid to build a standalone renewable power company with about 800MW of mostly wind capacity by 2019. It also comes after the creation of Globeleq Mesoamerica in Central America, Aela Energía in Chile, and Zuma Energía in Mexico, all with the intention to build businesses capable of generating 600 to 700MW of electricity within a five-to-seven year time frame. A similar logic was pursued when the firm acquired a controlling position in Brazil’s Atlantic Energias Renováveis in September 2013.
Actis’ renewables platforms have other features in common. Except for Globeleq Mesoamerica, they are all funded by the firm’s Energy Fund III, which reached its final close on $1.15 billion last December. The equity cheque size is roughly similar across the board, as is the stake Actis owns in each business (around 60 percent). The strategy followed by the firm to build them – bolt projects onto a portfolio of seed operating assets – is very similar. And more often than not, a long-time partner will be called on to help in the task: Aelia Energía also involves Mainstream, while Zuma is part-owned by Mesoamerica Energy, with whom Actis teamed up through its Globeleq business to set up Central American wind business GME in 2009.
The similarities are no coincidence. Actis’ ambitious plans all rest on the same rationale: the rise of the consumer in emerging markets, and the power capacity required to support it. And it just so happens, contends Actis investment director Lucy Heintz, that renewables are currently the cheaper source of electricity available in many developing economies. “In Nicaragua, for example, we have a wind farm where every time the wind is blowing, the overall cost of generation falls because the alternative is to run diesel,” she told Low Carbon Energy Investor, a sister website to Infrastructure Investor, in November.
Enticing a premium
Actis’ previous forays in the power space have involved backing other energy sources, such as gas-fuelled stations and hydro. But this time round is likely to be different: almost all of the money Fund III will deploy in electricity generation – 70 percent of the vehicle, with the remainder allocated to distribution – will go towards backing facilities powered by renewables. The fund’s exit strategy, however, remains the same: by providing its platforms with functioning assets, a pipeline of projects and in-house investment teams, Actis hopes to attract potential buyers such as utilities, fund managers and pension funds – and entice them to pay a premium.
The model already seems to be delivering good results. Last month, Norwegian development finance institution (DFI) Norfund and UK counterpart CDC announced plans to take direct control of Globeleq, in an effort to add at least 5,000MW to Africa’s generating capacity over the next 10 years. The transaction turns on its head the traditional cycle of private equity in emerging markets, where assets tend to “graduate” from DFI support before being snapped up by commercial buyers: Norfund paid Actis Fund II $225 million for its stake in the business.
If that is any guide to the future fortunes of Actis’ new platforms, hopes are high that the strategy will distribute strong dividends to Fund III’s limited partners – and plug much needed cash into the developing world’s fledging energy sectors.