Actis has made itself at home in Latin America. It has an office in São Paulo and set up another in Mexico City last June.
And as governments continue to open their energy sectors to private investment, it seems Actis has received a warm welcome. “I don’t think you can pick a region that’s been more open to private investment than Latin America,” argues Michael Harrington, a partner specialising in energy at Actis.
The emerging markets fund manager has invested in private equity, real estate and infrastructure for decades, but Latin America’s energy sector has been a growing focus of late.
In October 2009, the firm closed its Actis Infrastructure 2 fund on $750 million. It closed its Actis Energy 3 fund on $1.15 billion four years later.
Actis committed about half of those funds to Latin America – all dedicated to the energy sector. “If there’s a common theme around our fund strategy, it’s that Latin America has represented a significant portion of each one of our portfolios.”
The reason Actis may feel at home investing in Latin America is that opportunities there fit well with the strategy the firm has developed, scaling power generation businesses and operating high-growth distribution businesses. A major theme in power generation right now is renewables. Governments and stakeholders want low-cost and clean power solutions, and renewable technology improvements have provided both. Harrington says it helps that the region has “very attractive natural resource endowments” for wind and solar projects.
“We have seen renewables making a very strong foray into the energy matrices of most Latin American countries,” Harrington points out. “In Brazil, in Central America, in Mexico, plant capacity factors for wind projects reach 50 to 60 percent,” he adds, nearly three times the production of wind in some European markets.
With stable 4 to 6 percent demand growth in the region, countries like Mexico and Chile are offering project tenders as quickly as they can hold auctions to meet power needs. A month after Mexico’s energy regulatory agency awarded contracts for circa 2GW of renewable projects, it announced another circa 4GW up for auction in September. Chile has around 10.8GW of projects approved and 4GW waiting for qualification.
To take advantage of these opportunities, Actis has adopted “a strategy to build power generation platforms, targeting 500-1,000MW of projects in operations and with a growth engine driven by high -caliber teams and strong pipelines of development projects. This is the firm’s “sweet spot,” according to Harrington.
Opening the energy sector to private investment in Latin America several decades ago has “created a substantial installed base of operating assets. Further sector reforms across the region have put in motion routine auction programmes targeting further capacity additions creating “significant growth opportunities via M&A and greenfield development for our platforms,” he explains.
“The size of the market opportunity, world class natural resource, deep project finance markets, and rapidly improving supply chains provide the ingredients for a compelling renewable energy investment thesis in the region, in Brazil, Chile and Mexico in particular,” Harrington says.
Building generation platforms has been a hallmark of Actis in Latin America. Harrington argues this is an important distinction from some competitors: “Our strategy is to invest in businesses, not to be asset aggregators. We believe we add value through a tested model that builds tier 1 management teams and implements international best practices around governance, health and safety, environmental and labor practices. We also ensure our businesses learn and leverage Actis operational models that focus on disciplined and responsible industry practices across development, construction and operation.”
This repeat strategy led to Actis launching one of its most successful businesses, Globeleq Mesoamerica Energy. In 2010, Actis entered into a partnership with a local Central American fund, Mesoamerica Investments, and through development and acquisitions, GME became Central America’s leading renewable energy platform. Its portfolio includes Latin America’s first wind farm, the 23MW Planta Eolica Tilaran in Costa Rica, an additional 130MW of wind in Costa Rica through the Orosi and Alisios projects, the 44MW Eolo project in Nicaragua, and the 126MW Cerro de Hula in Honduras.
After its businesses reach scale, Actis looks to exit and Harrington is currently leading the sale of GME, which will be the last deal to close out its Infrastructure 2 fund.
Another example of this strategy is in Brazil. Actis created Atlantic Energias Renováveis in 2013 with a $355 million investment. The business had a goal to develop more than 600MW of wind farms, as well as a small run-of-the-river hydro plant, by 2018. Atlantic is a “very advanced platform,” Harrington says, and it is likely Actis will look to exit after it finishes its construction on its current contracts.
Chile led the way for Latin America in opening the door to private sector energy investments. What followed was the adoption of the Independent Power Producer model that allows private companies to bid in auctions for project contracts allotted by the state.
“Chile was one of the first countries in the world, actually, to fully liberalise the entire system back in the 1980s. Most of Latin America followed Chile in the 1990s,” Harrington recalls. “If you take a look at Chile now, every single part of that market is owned by portions of the private sector.”
In 2013, Actis partnered with Mainstream Renewable Power and committed $290 million to launch a business that would build up to 600MW of wind and solar assets in Chile.
In Mexico, state-run energy agencies have maintained control of the sector, but in 2014 that started to change. In an effort to rapidly meet energy demands, Mexico opened its energy sector to private investments, and it is here where Actis sees potential to grow. The firm partnered with Mesoamerica again in 2014 to launch Zuma Energia. It committed $250 million to take a 70 percent stake in the platform, which is acquiring and developing renewable energy projects across the country.
Zuma Energia was created to take advantage of Mexico’s first large-scale renewables auctions, Harrington explains. “Mexico initiated truly historic reforms in the energy sector, opening a programme that is attracting significant private investment. To attract the private sector to build power plants, you need power purchase agreements, and that’s what the government has done, it’s created a large-scale programme tendering PPAs to add low-cost power to the system.”
Harrington, however, said the opportunities Actis is eyeing in Mexico do not stop at renewables. Unlike other Latin American countries, Mexico has natural gas deposits and is interconnected to gas infrastructure with the US. According to Harrington, Mexico wants to add around 20GW of natural gas generation over the next decade, which is “clearly an opportunity set for investors like ourselves”.
KNOW YOUR MARKET
Part of Actis’ success in Latin America, and in emerging markets in general, has been its commitment to a focused strategy. Harrington says the team in Mexico City, where he works, has “deep sector insight and an appreciation of the importance for on the ground execution”. Harrington has spent most of his career in the energy sector and Latin America. Prior to Actis, he started with Arthur Andersen in Houston consulting energy clients before working in Honduras with the US Peace Corps. He also studied in Mexico as a Fulbright Scholar and worked for NM Rothschild & Sons in their Mexico City office.
“If you take a look at our fund team, we are not a group of financial analysts,” he points out. “It’s a specialised group of investors with many team members coming from industry, having operated power plants, worked in utilities or power development companies.”
So what does the future hold? Harrington says Actis will continue to do what has worked for their previous funds. “For us, I think what’s worked is focus and repeating the strategy. It’s funny. By doing that, you get better at choosing opportunity, and you get better at mitigating risks.”