Establishing a Southern Africa-focused clean technology fund in a region where the private equity industry is still emerging is an undoubtedly bold move. However, with suitable experience and a deep understanding of the nature of an immature investment market, the opportunities are there, says Wayne Keast, chief executive of private equity investor Consensus Environment.
As a member of the investment committee of Consensus affiliate Inspired Evolution, a South African, clean technology-focused private equity firm, the twin challenges of underdeveloped energy and private equity industries mean that structuring deals is as much a challenge as identifying these opportunities in the first place.
He says, ‘In the South African market, not only is it an early stage energy and renewable energy market, it is a very early stage private equity market. So a lot of the challenges hinge on the ability to structure the right deals that properly allocate the risk and return profile with the right private equity terms. We find we need to be more actively involved in structuring the terms of the transaction.’
Keast also sits on the investment committee of the $250m Masdar Clean Tech Fund, which targets growth stage investments in technologies with application in the Middle East. Other partners include global financial group Credit Suisse and the Abu Dhabi Future Energy Company, the state organisation behind the planned Masdar City.
With all three parties responsible for sourcing and screening potential investment opportunities, the benchmark is set high, Keast says.
‘Although each party takes control of the investment opportunities it brings to the table, the other members will also be closely involved with each deal.’ He adds, ‘Each partner is responsible for our own investments once the decision has been made. What we tend to do is a have a cross-partner review on deals, as well as cross-representation for responsibility across all investments.
‘For instance, if I led and closed a deal, I may have an analyst from ADFEC who will follow the same transaction as a support, to make sure that all three parties are well-informed and kept up to date on each other’s investments,’ he adds.
The fund has almost been fully committed and has made 12 direct investments, as well as investments in four clean energy-focused private equity funds.
‘The objective was to identify technologies that have applicability to the Sun Belt and can be commer-cialised in Abu Dhabi. Because of that, we have found that we have a high exposure to solar and water technologies, but we have had a look at other sustainable and alternative technologies,’ says Keast.
With the fund set up under the auspices of the Abu Dhabi government, the focus is on technologies which can be commercialised in the region, meaning that a company seeking investment from the funds should have applications within the Middle Eastern market, particularly Masdar City.
‘The bidding process is competitive, but we would expect all of our appropriate companies to at least bid for selection to be used in Masdar City,’ says Keast.
Appropriately, given the fund’s focus, investments so far have concentrated on solar power and water efficiency technologies, Solar investments have included Solyndra, a thin-film solar company based in Silicon Valley; Texan solar company Heliovolt, which produces high efficiency, low cost solar units; Berlin solar firm Sulfurcell; and Nanogram, a Japanese company with technology that allows the manufacture of nanoscale compositions for optical, electronic and energy products.
Inevitably, with water scarcity an ongoing issue for Middle Eastern countries, the fund also has a strong focus here too. Water companies in the fund’s portfolio include HaloSource, which provides antimicrobial water purification solutions, and wastewater treatment company EnerTech Environmental.
The focus, according to Keast, is less on infrastructure, with more of a technology-driven perspective. Although the fund has made a couple of seed investments, the focus has predominantly been on later stage companies, where uncertainties about technology risk have been ironed out and the investment committee is able to make an informed judgement on the potential to commercialise the technology.
‘We would need, in most cases, to feel comfortable with the level of technology risk we were taking, and confident about the market adoption of technologies,’ says Keast.
The Masdar Clean Tech Fund was also set up to make $60m of commitments to up to five private equity funds, to obtain the higher level of deal flow offered by such a portfolio, as well as to obtain co-investment rights and market intelligence. According to Keast, the three partners have turned out to be more prolific than originally anticipated.
‘What we have found, over time, is that because of the strength of the parties – Masdar, Credit Suisse and Consensus Business Group – we have sufficient deal flow, and we committed most of our capital in less than 18 months,’ says Keast. The relative speed of these commitments offers a clear testament as to the attractiveness of the sector.
Land of opportunity
Keast is also closely involved in Evolution One, the first clean technology fund targeting Southern Africa, with a focus on the Southern African Development Community member countries, which include South Africa, Angola, Mozambique and Botswana. Based in Johannesburg, South Africa, the fund reached a second close just short of $100m in early 2010.
The first close, held in July 2008 before the financial market crash, attracted commitments from development finance institutions including the International Finance Corporation (IFC), the Swiss Investment Fund for Emerging Markets (SIFEM), and Finnfund. Investors joining for the fund’s second closing also include the Norwegian Investment Fund for Developing Countries (Norfund), the Global Energy Efficiency & Renewable Energy Fund (GEEREF) and the African Development Bank (ADB).
According to Keast, it had always been the firm’s strategy to approach development finance institutions and sovereign investors for the fund, as opposed to institutional investors.
‘We found that development finance institutions and sovereign-backed entities had a stronger appetite for cleantech investing in Southern Africa,’ he says.
South Africa is an undeveloped market for clean energy technologies at present, with 90 per cent of its power coming from coal plants, and five per cent coming from the country’s sole, crumbling nuclear power plant. The country currently suffers from crippling power shortages, with state utility and monopoly energy supplier Eskom often forced to institute rolling blackouts at peak periods. The shortages have implications for neighbouring countries in Southern Africa, with South Africa the key energy supplier in the region.
Although the country has almost no installed renewable energy capacity, the government is starting to take notice of the potential for renewable energy to make up part of its power mix, with a series of feed-in tariffs for wind and solar, and promises of power purchase agreements for renewable energy projects.
Although the government and Eskom have been slow to finalise and approve the measures, the commitment to renewable energy growth is real, according to Keast.
He says, ‘We think there is a genuine focus by the government to ensure that some of Eskom’s power comes from renewable sources, and over time to allow independent power producers to supply power directly into the grid and to third parties,’ he adds.
The feed-in tariffs represent a significant aspect of the investment case for renewable energy in South Africa, Keast says, with opportunities evaluated through careful scrutiny of regulatory incentives.
‘At this stage we’ve been analysing the feed-in tariffs. We are following the opportunities, and the opportunities are currently around wind and solar, and so of course when it comes to wind and solar infrastructure there is less technology risk,’ he says.
Aside from wind, solar and other renewable generation, the fund also targets other aspects of environmental technology, such as waste recycling, cleaner production and manufacturing processes, and water quality and management. In search of deals across the breadth of these technologies means that a global focus is all but essential.
‘We make investments on a global basis,’ says Keast, ‘and find negotiating transactions easier in some locations than other locations. US-based transactions are easier to close as counterparties are a lot more familiar with standard private equity and venture capital terms. We find that Europe is probably a close second, but there are a lot of smaller family-based businesses and it can sometimes be more difficult to get the right private equity terms.’
Concomitant with the associated challenges surrounding such an immature sector are the inevitable opportunities attached to an emerging market, with the prospects for widespread adoption of new energy technologies and next generation infrastructure.
Copyright © 2010 NewNet
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