Nothing to fear

Apparently, Torbjorn Caesar is not averse to taking risk. As a keen skiing and golfing enthusiast, the danger of a painful tumble on the slopes – or of potential embarrassment following an errant drive off the tee – are ever present. However, Caesar does not agree that risk is anything to fear when it comes to his day job of investing in the energy sector in emerging markets.

“The challenge is one of perception,” he insists. “It’s not necessarily riskier in emerging markets. Electricity is a scarce commodity and people really want our product, so it’s commercially viable. In the OECD markets, by contrast, you have renewables over-supply and politicians deciding who makes money through tariffs and subsidies. So where’s the risky place to be?”

Caesar, a partner and co-head of energy at Actis (the other co-head is São Paolo-based Michael Till), is speaking from the top floor of 2 More London Riverside – an imposing modern building on the south bank of the River Thames where the firm is headquartered and which fellow private equity firm Terra Firma also calls home.

He continues: “You look at media coverage today and you get the impression that it’s very difficult to invest in supposedly dangerous, far-away countries. But when you go to these places, you realise it’s rather different. I’ve been operating in emerging markets for 28 years, working with governments and seeing fantastic opportunities. But you need credibility and expertise. It’s not about three investment bankers turning up with a spreadsheet and a bag of cash.”


Actis has strong claims to credibility based on its track record in emerging markets, with its roots stretching back over multiple decades as a former part of the Commonwealth Development Corporation, the UK’s development arm. The Actis website will tell you that the firm, with $7.6 billion under management, has invested $4 billion in emerging markets and realised $2.2 billion from $867 million invested since 2004.

A private equity, real estate and energy infrastructure investor, the firm has so far raised three energy funds. The first two funds raised $606 million and $752 million respectively, while the most recent – which closed in December 2013 – raised $1.15 billion (plus almost $300 million in co-investment capital), easily beating its $750 million target.

Caesar voluntarily points out an interesting anomaly. While funds one and three were branded energy funds, only the second one was branded an energy infrastructure fund – despite all three involving infrastructure strategies. Explaining why the infrastructure label was dropped, Caesar explains: “When we were fundraising for fund two, we thought we would name it infrastructure because we were, after all, an infrastructure investor. But, to many people, the meaning of infrastructure was 10 to 12 percent internal rate of return (IRR), yielding investments in the OECD markets. And we had a mid-20s IRR capital gain strategy in emerging markets, which was really a private equity strategy in the infrastructure space. Some thought we were private equity, others thought we were infrastructure and some saw us as a commodities investor so, to avoid confusion, we went back to the energy label.”

The energy team is only part of Actis’ overall activity. Of approximately 90 investment professionals in total, there are around 20 – including six partners – in the energy team spread across offices in London (which covers Africa), Mumbai, São Paolo and Mexico City. Private equity is the dominant activity with about 55 professionals, with around 10 focused on real estate.

It was back in 2002 that the opportunity for Actis’ infrastructure strategy presented itself, and the first fund was poised to take advantage. It was also an opportunity that reflected Caesar’s apparently sanguine attitude to risk. “There was huge demand for electricity in emerging markets,” he reflects, “but you’d had the Enron scandal, 9/11 and the Asian financial crisis and the international developers all decided to leave emerging markets and head home. We saw a great chance to build energy platforms. We initially bought power plants in Bangladesh and Tanzania and then we continued to see opportunities in many other markets.”


Since then, Actis has taken as the starting point of its thesis two elements: high growth markets and a strong need and demand for electricity. It then invests in two types of opportunity: one is electricity distribution businesses and the other is bundling together power plants into a business that has a good chance of attracting buyers.

An example of the former is Umeme, the national electricity distribution company in Uganda which was privatised in 2005 having suffered many years of neglect and which was backed by Actis in 2009. The firm focused on capital expenditure, improving the quality of management and formalising procedures. From 2009 to 2013, the number of customer connections increased from 355,000 to 574,000. The oversubscribed initial public offering (IPO) of the business in November 2012 was strongly backed by retail investors and East African institutions. A further tranche of shares was sold in June last year to institutional and retail investors.

Reflecting on the deal, Caesar says: “We took it from being a previously less well managed business to an IPO and delivered a significant return to our investors. In the process, we tripled sales of electricity in the country, halved electricity distribution losses and created a top-notch company with Western governance.”

The second strategy involves creating energy platforms whereby a number of power plants are acquired and bundled together to achieve “diversification and scale, with a management team which will look after the business and grow it to the point where we can sell it at a good multiple”. There have been numerous examples of this approach over the years, with a recent one being the $250 million Actis invested to create a Mexican energy platform known as Zuma Energia in September last year.

The way Caesar describes the strategy, it sounds quite simple in theory. “The trick is in the implementation,” he insists, and points to the long experience of the Actis team. “We’ve been together through funds one to three for 13 years and some of us have been together for longer than that at ABB Equity Ventures [a division of Swiss engineering firm ABB, where Caesar worked for 13 years until 1999]. My background is in operating and managing assets, and many of us came from industry to the investment side. That’s a differentiator for us.”

This experience helps to establish credibility – a vital quality when venturing into emerging markets, says Caesar. “We have hands-on operational expertise and insights and that’s so important because when you go into a country like Cameroon [where Actis invested in three power assets in June last year in a $202 million deal], the first question is ‘who are you?’”


He adds that this is thankfully not a question the firm gets asked very often by the network of financiers, advisers and others that tend to be involved on the same deals. “When you do what we do, you come to an appreciation of how small our world is,” says Caesar. “It tends to be the same development institutions, the same banks, the same law firms, the same EPC contractors, etc. It’s an established network and you’re obviously in a good position if you’ve been doing deals alongside them for many years.”

If this sounds like an activity which has a high degree of repetition, that’s no coincidence. “We try to standardise what we do every single time,” notes Caesar. Deals typically come from either power companies such as EDF or Edison, the development finance institution (DFI) community or from proprietary access. But the formula for success is always the same: Actis will be very hands-on in the early stages of ownership (arranging project finance, injecting capex etc.), then introduce an independent board and management team on the way to creating a standalone business.

But having a standard approach certainly does not mean doing the same as everyone else. By way of example, Caesar describes Actis’ contrarian approach when it comes to timing its entry into markets: “When the BRIC concept was relatively new, a lot of people went into India and paid a lot for assets. Then the wind changed and people left, but now – with the new Modi administration – people love India again. So there has been a lot of movement.

“When India was perceived as very attractive, we were going into Bangladesh and Pakistan and Sri Lanka. But with fund three, at a time when people were having sceptical thoughts about India, we saw an opportunity to go in and buy power assets [the firm invested $230 million in the Ostro Energy wind platform].”

Having turned to the subject of wind, Caesar says that renewable energy has been the focus of his team’s activities recently – even though he stresses the approach is “technology agnostic”. He points out: “In fund one, there was no renewable energy, in fund two there was a little, and in fund three there is a lot.” One example was the firm’s launch of $1.9 billion pan-African renewable energy platform Lekela Power in February this year. The firm also has the largest renewable energy platform in Central America.

So why the switch to renewables? “The mass production of components (e.g. wind turbines) over time has pushed the price down dramatically at the same time as the oil price has gone up,” Caesar points out. “Ten years ago, it was cheaper to burn oil such as diesel than to introduce wind power. So why would you choose the latter? If you’re a power-starved nation, you can’t have the Energy Minister saying let’s opt for wind and we’ll give you less power. You can’t do it.”


But, with renewable energy having long since achieved grid parity in many markets around the world, the timing has been right to focus on that area – and, in Caesar’s view, remains so today. “The oil price has edged up a bit recently but renewables remain very commercially viable.”

With the firm’s third fund now fully committed, Caesar says it has moved into the “implementation phase” leading, he hopes, to the creation of successful companies. In around a year’s time, he thinks Actis will return to market for a fourth fund for which the strategic approach will be the same though he suggests there will be “real opportunities” in clean gas.
What he does not in any way envisage is a drying up of deal flow as the years go by.

“With electricity demand growing above the rate of GDP, the supply/demand gap is growing rather than going down,” he asserts. “So over-supply in emerging markets is a situation that is a very long way down the road.”

Despite the concerns about risk that some investors would have, Caesar makes a solid case for the attractions of emerging markets energy investment. So is it logical to therefore expect an increase in competition? He nods in agreement, but believes that this will come with an upside.

“In our markets competition means more privatisation and that makes the pie bigger for everyone,” he claims. “There will not be privatisations without competition as there won’t be enough takers for the government to feel confident in the process.”


Given the past roots of Actis as part of a development finance institution – it spun out of CDC Group in July 2004 – I ask whether the societal impact of Actis’s investments has a special meaning for it, or whether it is simply a welcome side-product of what it does.

“We are proud of the fact that we create low-cost, affordable electricity which in turn helps drive economic growth,” says Caesar. “But we also need to be hard-nosed commercially, otherwise it would undermine the confidence of our LPs.”

So far there is little sign that investor confidence is on the wane: after all, Caesar says Actis has achieved the mid-20s IRR that it has targeted through its first three vehicles. Fear of emerging market risk is, it seems, something for others to worry about.