Investing in emerging markets can be challenging, but making investments in the typically highly-regulated energy sector of emerging markets can be even more difficult, particularly if one is seeking to create new assets rather than acquire existing ones.
One group that has made its mark in emerging markets energy investing is Houston, Texas-headquartered Globeleq. Globeleq was established in 2002 to manage the power assets portfolio of the UK’s CDC Group (formerly known as the Commonwealth Development Corporation), as well as CDC’s allocation of its equity capital to the power sector.
Globeleq currently manages investments of over $550 million (€466 million) and focuses on energy investments in the emerging markets of Asia, Africa, and Latin America.
However, Hart sees Globeleq’s acquisition of existing assets as merely a first step of the operating company’s strategy to grow deeper roots in the emerging markets, after which it can begin building energy projects from the ground up. “Our real purpose is greenfield – to add capacity and availability of power,” says Hart.
“We are absolutely clear that the game of musical chairs adds very little value to the planet. So buying projects that have been built and operated well by other companies does not help the country or customers,” says Hart. “But we also recognise that two guys and a spreadsheet don’t do well in developing greenfield capacity. It is important to get a group off the ground quickly and gain a scale of operations in the emerging markets that would fairly justify our building new plants.”
According to Hart, Globeleq is now nearing the end of the acquisitions phase and already moving into greenfield projects. The company won the bid for El Paso’s Asia portfolio earlier this year, and it is well known in the market that Globeleq is also one of the bidders for El Paso’s Central America portfolio. In fact, Globeleq now has greenfield efforts underway in all of the markets which it has targeted for acquisitions, including South and Southeast Asia, sub-Saharan Africa, and Latin America, which are supported by the firm’s offices in the US, UK, Egypt, Bolivia, Tanzania, South Africa and Peru.
It is a logical strategy, says Hart. “The presence of our executives in those markets and their knowledge of those markets will make the projects more likely to succeed.”
Hart says that the toughest challenges to emerging markets energy investing are essentially the same as other types of emerging markets investing. Low levels of credit availability combine with new and untested regulatory requirements to create difficult market conditions.
Despite the intricate investing environment, Globeleq has been doing well on the realisation front. “Trade sales have been successful – surprisingly so,” says Hart. “We didn’t think we would have as much success as we have had.”
Globeleq is also considering using the IPO market to exit some of its investments, although according to Hart, Globeleq is not in any great hurry to take that path. “It’s something good that will happen if we build the type of company we are trying to build,” he says.
While Globeleq has done well within its niche, Hart warns that investing in energy assets might make less sense for other types of investors, including private equity firms managing funds with the typical 10-year lifespan.
“The essential premise of private equity is relatively short term investments, and that whole logic is antithetical to the power business,” says Hart. “We enter into contracts with governments for 20 years, which is beyond the term of most private equity fund lives.”
“It’s not high returns,” he adds, pointing to Globeleq’s mid-teens return on its equity investments. “In bad times, it’s worse than that,” says Hart.
Ultimately, the most important thing for those entering the space is to understand the attitude and strength of the domestic regulatory bodies. “Over and over again, the reason why most projects run into difficulties is because the governance structure is not right,” concludes Hart.