Here comes the wave

Governments and development banks across Latin America are encouraging investors and developers to take up the cause of renewable energy. And in some cases, local limited partners – which are able to avoid the currency risks that threaten foreign investors – are beginning to invest in private funds.

Two recently-closed Brookfield funds can potentially invest in Latin American renewable energy. Last year, the Brookfield Americas Infrastructure Fund closed above target on $2.7 billion while Brookfield’s Peruvian infrastructure fund, which raised capital from local limited partners, closed on $440 million. Both are at an early stage in their investment cycles. They have not yet invested in renewable energy, but are considering the sector, particularly hydroelectric assets, according to a spokesperson.

Scott Swensen, chief executive of Conduit Capital Partners, a New York-based private equity firm that invests in Latin American infrastructure assets, says his firm is planning to open an office in Mexico City by the end of the year. He says renewable energy will be “more than 50 percent” of the office’s focus.

“We think the economics are doing nothing but getting better as oil prices rise,” Swensen says.

The new office will be launched in partnership with Mexican renewable energy developer Asergen. Swensen previously told Infrastructure Investor that Conduit is looking to raise about $150 million from Mexican pensions through an offering of certificados de capital de desarrollo, stock certificates that allow pensions to invest in private funds previously barred to them.

The Macquarie Mexico Infrastructure Fund, which raised Ps$3.4 billion (€200 million; $289 million) from local pensions through such certificates in 2009, finalised its first investment in renewable energy last month, acquiring a wind farm in Oaxaca for Ps$1 billion. The fund held a first close on total commitments of Ps$5.2 billion last year. 

Paula Chirhart, spokesperson for Macquarie Group, says the fund is expected to consider future renewable opportunities. 

It is impossible to treat Latin America as a homogenous entity, but a look at investments in Mexico and Brazil can illuminate some ways in which infrastructure funds are making inroads in countries with rapidly growing, increasingly stabilised energy markets.

New in Brazil

About 75 percent of Brazil’s energy comes from renewable projects, primarily from hydroelectricity, making it one of the top markets worldwide for renewable investors. 

Swensen says the Brazilian government has established the “best incentives” for small hydropower projects, and that the combination of government incentives, long-term power contracts and financing from BNDES (Brazil’s national development bank), have created a favourable environment for energy investment.

In Brazil, Conduit has invested in GLEP Energias, a local hydroelectric project developer. Conduit acquired 50 percent of GLEP in 2008 in a deal understood to be valued at around $50 million. 

But hydro power isn’t the only form of renewable energy in Brazil, and by various accounts, the government has tried to diversify in order to avoid heavy reliance on one renewable source. 

Ten years ago, the Brazilian government embarked on a regime called PROINFA which promoted wind and biomass in addition to hydroelectric projects. 

Eduardo Farhat, executive director at Darby Overseas Investments’ Brazil Mezzanine Infrastructure Fund, says the PROINFA programme was “very important in the infant phase of the industry”. Now, he says, wind power, biomass and hydropower “are competitive by themselves”.

The PROINFA programme aimed to create 1,400 megawatts of wind capacity, and has resulted in 900 megawatts of installed capacity and an additional 390 megawatts coming online this year, according to the Global Wind Energy Council. 

“It is a sector that has matured enough to be self-standing,” Farhat says.

The Brazil Mezzanine Infrastructure Fund, which closed on R$387.5 million (€169 million; $243 million) in 2008, is a joint venture between Brazilian private equity manager Stratus Group and Darby Overseas Investments, the emerging markets private equity arm of Franklin Templeton Investments. The fund raised capital from Brazilian limited partners, including BNDES.

In the energy sector, the Brazil Mezzanine Infrastructure Fund only invests in renewables, Farhat says. The fund has invested in a combined hydro and biomass plant in the north of Brazil, and is currently closing on a wind farm as well.

Farhat says the fund typically makes investments of about R$50 million to R$100 million, focusing on projects of around R$400 million to R$600 million. Farhat also says the limited partners in the fund can co-invest in projects that require significantly more capital.

Farhat says “the quality of the sponsors we have found in the renewable sector is quite strong”. 

He also points to strong support from BNDES. In March, BNDES approved financing of R$790 million for eight wind farms including several in the northeastern state of Ceará. The development bank has set a goal to provide R$4.2 billion for wind energy in the country.

Farhat is optimistic about possibilities for wind energy, and says it is an area, along with biomass and solar, that the fund will focus on in the future.

Swensen isn’t so sure that all is well with the wind sector.

“We are concerned that the market may be overheated. We are interested but we have not found anything that has met our hurdle requirements,” he says, adding that he’s skeptical that such projects will generate returns to justify the prices paid for them.

But Farhat challenges the idea that the market is overcrowded. He argues wind power is still a relatively small portion of Brazil’s electricity matrix despite having sufficient natural resources to grow, and the business is “blossoming” on account of regulatory and government support.

Farhat also emphasises that “cherry-picking” sponsors and developers can help determine the successful outcome of a project – something for which local presence is crucial.

“For an outsider it gets much more difficult to separate the good ones from the less good ones,” he says.

Mexico: self-supplied

In Mexico, renewables account for a small portion of the government’s targets for energy investment, but the industry is still growing rapidly. Mexican installed wind capacity more than doubled in 2010, for the second year in a row. The region of Oaxaca is home to the majority of operating wind farms, and another 19 projects are in the pipeline there, according to the Global Wind Energy Council.

A model known as self-supply, or autoabastecimiento, has helped attract the interest of the private sector. Under the typical self-supply model, large commercial entities will negotiate contracts with the developer to purchase the project’s energy supply.

Two large farms, located in one of the windiest regions of the world – the Isthmus of Tehuantepec in Oaxaca – use self-supply to provide power to Cemex and Wal-Mart de Mexico respectively.

Both projects are backed by the International Finance Corporation (IFC), the private investment arm of the World Bank. Cheryl Edleson Hanway, principal investment officer at the IFC, previously told Infrastructure Investor that Oaxaca is one of the most promising regions for wind energy development, with 500 megawatts currently installed and many more projects coming online.

“The vast majority of that capacity represents self-supply projects that are in the hands of private developers,” Hanway said.

The Macquarie Mexico Infrastructure Fund (MMIF) acquired a 396-megawatt late-stage wind energy project last month along the same Isthmus of Tehuantepec. Subsidiaries of Macquarie’s 45 percent equity partner, Mexican consumer conglomerate FEMSA, will buy electricity from the wind farm. FEMSA owns a 20 percent stake in Heineken, and subsidiaries of Heineken will be using the farm’s power.

Chirhart, the Macquarie spokesperson, says the self-supply model was one of the factors behind the fund’s investment in the Oaxaca wind farm.

“The self-supply model in Mexico is such that the economics of the investment do not rely on long-term government subsidies or tax credits,” Chirhart says.

There is broad support for Mexican renewable energy. Conduit Capital’s Swensen says the Mexican government has been “extremely supportive of private investment in the energy sector”. But there is another, more practical element that makes renewable investing so attractive in Mexico: renewable energy projects often make for easier exits.

“We find many buyers that are interested,” Swensen says.