The following key attributes are converging to create an increased need for energy infrastructure
Increasing Urbanization & Mobility
Africa, with only 37.3 % of the population living in urban areas in 1999, and a growth rate of 4.87%, is the continent with the fastest rate of urbanization. In last ten years, urbanization has been growing at an average 4% in Africa and 2.9% in South Asia as compared to World Average of 2.1%.
Growing Middle Class
2.8 billion people from growth markets will enter the middle class by 2030. Rising income has a direct correlation with energy consumption resulting in increased need for related energy infrastructure to support the growth.
Historic underinvestment in Infrastructure
Investment is needed in both new and existing infrastructure in almost all growth markets, especially in Sub-Sahara region. Over 65% of the people living in Sub-Sahara Africa do not have access to electricity (World Bank: 2012 figures).
These factors are driving the demand for additional investments in the power generation sector
Power is a priority investment sector in the Sub-Saharan Africa and South Asia “Target Region” in the coming decade to support economic growth.
- Investment in excess of US$ 40 Billion is required in Africa alone to meet current and projected demand.
- Opportunity for private investors to participate in well structured IPP projects with bankable security packages.
- OPC provides a ready and executable pipeline of projects in the Target Market to capitalize on the opportunity
In some emerging markets, renewable energy provides a cheaper power alternative, while also providing short-to-medium term solutions for off-grid consumers.
Favorable Markets & Regulatory Framework
High economic growth in the Target Market underpinned by rising middle class and urbanization but constrained by significant power/energy gap. Significant regulatory and structural reforms to facilitate private “growth capital” investment in the power sector.
Availability of Long-Term Funding
Power sector is a priority area for DFIs with significant pool of debt available on non-recourse long term basis. Local Banks participate actively in DFI supported projects in view of credible security structure.
A strong team with extensive experience in the Target Region. Rich experience across the development, financing, construction, and operational phases of power and related infrastructure projects. Deep industry-wide relationships with governments, regulators, developers, and capital providers.
Secured Cash Flows with Attractive Returns
Secured cash flows through long term PPAs and other arrangements. Hedging of currency and inflation risks through contracts & other down-side protection structures. Attractive cash-on-cash dividend yield on project commissioning. A well thought-out target portfolio blended across geography (zip code), sub-sector (conventional and renewable), and stage of investment cycle (green-field, operating, etc).
Robust & Actionable Deal Pipeline
A robust, actionable and visible deal pipeline across the Target Region
Ability to quickly deploy the paid up capital to enhance the net Investor IRR.
Investment Strategy & Value Creation
Basic Investment Process
- A proprietary deal pipeline across the Target Region
- Professional relationship with key policy makers, regulatory bodies, and local business groups
- Extensive relationship with local developers, EPC contractors, OEMs and technical service providers lead to a robust and actionable deal flow.
- All investment opportunities are passed through a “Dashboard” to filter out those projects meeting the basic Investment criteria.
- This primarily is an internal desktop analytical exercise, employing both qualitative as well as quantitative tools and skill set, based on experience and against a defined framework.
- The BD Team commences a comprehensive Due Diligence on all screened out projects.
- Such DD would include all components of a bankable security package (such as PPA/Tariff, FSA, EPC, O&M, Capital Structure, Financial Model, etc) to gauge the economic viability of each project.
- A Preliminary Standard Investment Proposal (PSIP) for each feasible project is submitted to the Investment Committee (IC) for approval.
- The IC evaluates each project against a defined investment criteria and target portfolio of the Company.
- The IC comprises four members including three non-executive shareholders and the Company CEO.
Contracts & Agreements
- For all IC approved projects, external legal counsels are engaged to negotiate and draft the relevant Shareholder and Subscription Agreements .
- A final Appraisal Report is submitted to the Investment Committee for funding approval .
- All conditions precedent (CPs) to Financial Close have to be satisfied before the equity funds are deployed in the project.
- A detailed Business / Value Creation Plan is an integral part of the Closing formalities.
- Quarterly reporting of all KPIs identified in the Business / Value Creation Plan.
- Involvement in all strategic matters of the investee companies through the Board, Reserved Matters, etc.
- Site visits, at least twice a year for green-field projects .
- Upon realization of the Business / Value Creation Plan for each project, all exit options (Trade Sale, IPO, Dividend Recap, etc) are proactively and opportunistically explored (vis-à-vis the Platform) to achieve the Target Investor IRR.
Investment Screening Focus
We adopt a disciplined investment approach through the following structured screening criteria/filters:
Willingness of the Customer to pay
Ability of ultimate customer to pay
Predictable cash flows
Unlinked from commodity risk
Regulatory frameworks and government buy- in in place
Potential for proprietary opportunities
Consistency of government policy
Ability to leverage core in-house team’s expertise
Ticket sizes within sweet spot
Risk / return profile matching our targets
Appropriate risk allocation structures Ability to leverage core in-house team’s expertise.
Developer risk OK, but VC risk not OK
Ability to get sufficient and timely debt financing.
Potential ability of Sponsor to add value vs. Strategics.
Potential Exit Strategies (Platform vs Individual Asset).
Favorable Markets & Regulatory Framework.
A power portfolio with investments in IPPs in diverse countries and offering a stable dividend yield would command a premium valuation and strong interest from large global power developers and yield-seeking financial investors.. A track record of stable dividend stream would also solicit strong interest from pension funds / insurance companies that have fixed liabilities and are looking for yield.
Placement / Trade Sale of Individual Projects.
Investments in large projects with operational track record of 2-3 years, attractive dividend stream and strong minority rights/board representation will be an attractive proposition for PE funds and local investors in each market. We foresee considerable developments in the capital markets in our Target Region in the next 5-7 years which would offer opportunity for domestic listing of large individual projects.
Distributing Shares in the Subsidiary Project Companies.
At the option of specific investors, the Company may consider distributing shares in the subsidiary project companies to such investors who can continue to earn long-term stable dividend stream. The distribution can be made either pre or post IPO. Post IPO, the investors will also have an option to sell their individual stake directly through the stock exchange.
Dividend Recapitalization of Projects / Portfolio Companies
Once the individual projects have established a reasonably long operational track record, and also started repaying the senior project debt, a dividend recapitalization exercise can be initiated at the local level. Alternatively, the Company can leverage the Portfolio through securitization of its dividend stream. Due to stable and secured dividend stream, the Company should be able to attract banks / mezzanine PE funds and other financial institutions to provide such debt capital.