Ai CEO Infrastructure & Sovereign Investment Summit 2016
Marc Mandaba, MD – Themis Energy
If we take one step back to see where Abraaj is coming from; it is a large PE (private equity) platform present for more than 15 years in Africa. It is made up of one-third institutional money.
However, when we decided last year to launch a new energy platform, it was because energy assets in emerging markets fit very well with institutional investors’ appetites. So if we just summarize, energy projects are public goods – based on demography and economic growth – with “impact”, which we used to call development projects for the last two decades on the continent. You have long-term predictable cash flow, contractual cash flow, you have no market risk in Africa, usually because you don’t have wholesale markets. You also have inflation-protected or adjusted return/cash flow, structured finance and in our PPAs (Power Purchase Agreements) most of the time, we have protection against USD or Euro; except in the large markets like South Africa where you have a local batch of investors investing with their own currency.
So if you put all this together, this is the dream of any institutional investor, any pension fund placing money for their pensioners, they want to have this 20 year cash flow guaranteed contractually. That’s why when we hear the word “IPO” (Initial Public Offering) for our assets, it’s a bit strange because a power plant will never become a Facebook, WhatsApp or Apple. It’s something that is quite well defined and very well designed for institutional investors. This is the way the market grew in Europe and the US in the beginning.
So now what are the issues we face when we try to fundraise from institutional investors? Still, it is the risk perception for wrong or false reasons, but this is what we are getting from the market. The political risk is the number one always, so we have more and more political risk insurance products coming. Still, I think there are bandwidth limitations when trying to get a half a billion-dollar PRI (political risk insurance) today.
It’s also a perception issue because we looked at a Moody’s study on PPPs (Public Private Partnerships) in all markets. We found that in OECD, default rates are around 5% of PPPs. In other emerging markets – Asia, Latin America – the default rate is around 8%. Now you come to Africa it is 2.2%. So in effect, Africa defaults two times less than OECD countries and four times less than other emerging markets; yet people think it’s risky. What is clear is that reaching financial close is more difficult in Africa but once you reach it, the project goes well.
So this is the first risk; political/sovereign risk. The second one I think, is construction risk and this is really something which we need to work to get institutional investors in because they all agree to come on board projects after construction.
Actually, we are establishing a new vehicle to invest only after construction because what people fear is to invest in a project when it is Greenfield. There is no construction risk, so now we are slicing our investment into three phases; development phase – which is what I’m doing – the normal private equity phase, taking construction risk; and we are putting another vehicle which will not take construction risk. Then I think we can make a link between our local commercial bank – that can take four or five years construction risk – and then after this period, hand over to institutional investors who are risk-averse for long term operational risk.
So basically, power projects fit extremely well because of the PPA and so on. But still we have to address these two risks that institutional investors see; political risk and construction risk.
Watch the full video here
