There are some parts of the world where many investors fear to go.
Take South America, which is unfairly tarnished as being rife with social problems and corruption. However, firms like private equity investor Actis are making a success of expanding in these areas.
We heard more about this at our Quarterly Drinks networking evening in London last week, which featured a Q&A with energy director, Lucy Heintz. She explained some of the company’s key considerations when expanding into emerging markets.
Actis was founded in 2004, but its pedigree in emerging markets is much longer. It was spun out of CDC Group, which was set up in 1948 as the Commonwealth Development Corporation to invest in markets including Africa, Asia and the Caribbean.
So far, Actis has invested $4bn in emerging markets, with around 13% of this in energy. So what lessons are there for others in how Actis has approached South America? In short, quite a few. Sure, none of them are brand new, but they are important nevertheless.
Lesson one: focus on market fundamentals. Actis moved into central America in 2009 by buying Globeleq, which builds power projects in Africa and central America, from CDC.
Heintz said Actis was particularly interested in Chile around this time because the capital costs of developing wind farms had fallen sharply; the cost of fuel in Chile was high because it had problems sourcing cheap gas from Argentina; and the country benefited from attractive wind resource. In short, a compelling investment case.
Lesson two: work with those who know the country, whether that is established businesses or recruiting local people. It has done this as it has built up businesses in the region. It is tough to build a project from scratch without the knowledge that locals can provide.
The aim for Actis has been to build self-sustaining companies in overseas markets, rather than portfolios that it needs to manage centrally. In Chile, it has done this through Aela Energia, which it first backed in 2013.
It also invested $169m last year in Brazilian firm Atlantic Energias Renovaveis; and has this year backed Mexico’s Zuma Energia.
This approach means that these businesses can subsequently develop other projects, which creates a pipeline of future initiatives without Actis having to do all of the legwork.
And lesson three: have an exit strategy. Heintz said the aim for its investee firms is to build them and sell them on to a larger financial investor. It looks viable, but it will only be possible to tell whether its current investments have been a success when it sells out.
These ideas don’t just apply to South America, but to all emerging markets. And investors would do well to bear them in mind, given that 85% of the growth in global energy demand between now and 2035 is set to come from emerging markets.
Simple principles like this can take some of the risk out of new markets — and help get beyond over-reliance on cliches.
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