Lightbulb moment

Nice find for Google. The tech giant in October announced its intention to purchase the 12.5 percent stake owned by turbine maker Vestas in Kenya’s Lake Turkana wind park, the largest in Africa. The 300-megawatt facility, which has been in development for almost a decade, is expected to be completed in 2017. 

The timing was helpful, at a time when a darker mood is prevailing across the emerging world. As was noted in late October at the second edition of our Emerging Markets Forum, these are facing dimmer prospects: wobbles in China, the oil slump and flagging global trade are having a sobering effect on countries until recently seen as the world’s growth engine. 

But in places like South Africa, Pakistan or Nigeria, near-daily power outages are causing darkness in a more concrete sense – a reminder that many emerging markets have yet to build the infrastructure needed to meet their citizens’ most basic needs. Hence the scope and scale of the opportunity, participants in our forum were keen to underline. A recent report released by the Emerging Markets Private Equity Association (EMPEA) anticipates that $10.2 trillion will be invested in emerging power infrastructure between now and 2035. 

For institutions with capital to spend, this is great news. The issue is that many limited partners and fund managers continue to consider investing in developing economies a very risky business. And even when investors are willing to gain exposure to emerging market infrastructure, they’re finding that the roads to access it are sparse and convoluted. 

The first point has some substance. It is precisely because emerging markets are riskier that they command higher returns. But these risks vary along a spectrum. South African renewable assets, for example, are often seen as safe as a utility play and countries across the continent are setting up independent power producer frameworks to replicate Pretoria’s success. Others are far behind. 

A number of nations also offer investors revenue guarantees and protection against surprises, such as availability-based payments and inflation-hedging mechanisms. Worth noting too is that developed markets are not themselves devoid of risks, with sometimes weighty impact on the performance of renewable funds, as our recent story on HgCapital illustrates (see page 28). 

But a more novel argument can be made in response to the second objection. As the EMPEA report asserts, the share of capital going into power projects provided by investment funds has been steadily growing since the late 2000s. What’s more, generalist funds have gradually been overtaken by specialist vehicles, experts in operating and managing those assets. 

Equally remarkable is the ingenuity demonstrated by a number of dedicated firms in creating smarter investment propositions. A fund manager we recently spoke to, for instance, is working on a structure that would initially target power generation assets through the support of a handful of anchor backers – which would then cash in once long-term investors buy stakes in the vehicle after a couple of years. 

Such initiatives aim to benefit from a window of opportunity created by the emerging market downturn: a number of industry players looking to raise cash have assets on their books that, while lacking a track record, have already been significantly de-risked. 

The fund manager we met reckons he can return double to triple money to his early investors, while providing a double-digit IRR to his later backers. This tiered offering could help it meet the expectations of both time-bound, capital gain-focused investors – such as private equity funds – and long-term, more conservative institutional investors, like pension funds. 

Platforms, most often involving co-investors and developers, are also being popularised by the likes of I Squared Capital, Denham Capital and Actis, while smaller specialist funds like Armstrong Asset Management, Berkeley Energy and Crescent Capital are fine-tuning their offerings to suit LPs from further afield. Emerging markets may be slowing down, but astute fund managers are wasting no time in designing new ways to attract fresh money.