DealStreetAsia interview of Anand Prakash

28 March 2016

After its recent acquisition of stake in Indian cold chain logistics company ColdEX Logistics Pvt Ltd, ADB-backed private equity firm Asia Climate Partners is in talks for another investment in the country, but this time in the renewable energy space, Anand Prakash, managing director of Asia Climate Partners said. Aimed at a diversified portfolio, Asia Climate Partners, which is a joint initiative of the Asian Development Bank, ORIX and Robeco  to make private equity investments in the clean energy, resource efficiency and environmental sectors in Asia, is also looking to invest around $100-125 million in opportunities in China and Southeast Asia, which are its target areas.

In a telephonic interview with DEALSTREETASIA, Prakash also said that the Hong Kong-based firm, is also in talks with various investors to bring an additional $300 million for its fund by the end of the year, to take the total to around $750 million. 

How do you view investing in the renewable ecosystem?

Investing in renewable energy is always the triumph of hope over experience. We are all hopeful that the sector holds better promise for the future. A lot of factors have come together to suggest that probably now is the time that we will probably do better. The rates that you see coming out of some of these solar bids, wind tariffs etc. have been very attractive. Probably one of the areas where renewable energy was not able to deliver returns were that the portfolios were not able to reach scale. If you get stuck at 300-400MW then you don’t have enough revenue to distribute your costs, you can’t hire the right people, the banks don’t give you the right financing, it’s a bit of a vicious circle. And now we are seeing at least 10 portfolios, if not 15, who have ambitions to be above a 1000MW some approaching even 3,000MW. So hopefully that gives them a good scale and that would help.

Are the returns as lucrative as they seem? What are the things that you look at before making an investment?

Our investment strategy is not a project-by-project strategy. We’re definitely looking to invest with a credible partner with operating assets, and operating portfolio. What we are looking at first, is the quality of that asset base and what have they been actually able to do. Second is if their own capital is invested in the business. It usually works better when everyone’s money is at stake. Our focus is that we want to address the sector through scale. For the renewable energy sector we are looking to make a $100-125 million commitment to one player. We are still in the process of speaking to a number of people who could potentially be that partner.

So, if its $100 million then it’s not exactly startup space right?

This is more of a private equity space. We find that in a startup the time and expenses involved and getting things going always takes long than you wish for and cost more than you wish, no matter if you’re in India or elsewhere, but especially in India. We are trying to construct a strategy that gets around some of these points.

After your recent investment in ColdEx, have there been more investments?

We are actually in advance discussions with some renewable energy portfolios. We may be looking at making an investment in the next 3-4 months in one of these larger portfolios. But obviously being a larger bet from our side we are approaching it more cautiously.

This would involve $100-125 million investment?

Yes, but this is specifically for renewables

What are the other categories you invest in?

We divide our potential investment areas into three categories, renewable energy,  resource efficiency, and environmental Industries. We are a fund that focusses on the broad sector, and within that broad sector we try and be as broad as possible, because the tendency is to try and be so narrow that you don’t have enough deal flow to look at.

Is there any particular area that you are more focussed on in the environmental finance space?

We are obviously looking to construct a diversified portfolio, so we made a cold chain bet, which is on the smaller side right now, we hope that as the company grows we have capital to enable that company to grow. We will definitely be making one renewable energy bet in India. After that we would be looking at some sectors that could be as broad as looking at the sustainable farming side, or look at stuff further on in logistics and infrastructure, waste and water management that have always been something that are interesting but they are tough sectors to make money in India.

Is India your main focus in Asia?

ADB is a key shareholder in the company, so we can look at all ADB countries, what we could call emerging Asia. The three main regions which we are focussed on at the moment , while keeping our eyes and ears are India, China and South east Asia, but we are open to looking at say Bangladesh, we are comfortable with the politics there, Sri Lanka could be interesting. Under certain circumstances even certain deals in Pakistan could be interesting. The track record for investors actually making money in the energy sector in Pakistan and Bangladesh is frankly a little better than India for foreign investors.

How do you view regulatory challenges in the countries you are looking at?

It depends on sector to sector. In renewable energy its getting better, in fact I would say because for starters if you’re dealing with wind and solar, you’re not dealing with the fuel side at all, so already you’ve saved 90% of the headache that people have had in the past. You don’t have to get coal, you don’t have to get gas, you don’t have to find biomass. And the predictability of wind and solar is better than hydro. So that’s a positive.

It was announced that ACP would be initially be capitalised with US$400 million, is that fund in place? What is the total value of the fund now?

The way funds work, it’s on a committed basis, you don’t draw it down until you need money, so we’re at $440 million right now and our target is to finish it at $750 million.

By when do you think you can raise till $750 million?

We have till this year to raise the capital, and if we can’t raise then our fund raising period is over. So even if we don’t reach the $750 million target we hope to reach closer to it.

Would these be from your existing investors or would there be other investors?

Existing investors have already made the commitment they had to make to the fund. We’re talking to a number of other investors in the market, so we hope that some of them will come in.

How many investments do you plan to make this year?

Our target for the fund is to invest around $100-125 million this year. We hope to be able to distribute it around geographically and in each of the regions we do at least one more deal. In a fund you never want to spend your money too quickly.

What is the size of deals you are looking at?

If we do a renewable energy deal of a $100 million in India, then we would take $50 million and one of our exiting limited partners would take another $50 million. This would typically happen in larger transactions, for e.g. in the cold chain investment it was only us, where the size is smaller and the business is also relatively small.

How do you structure your investments? Is it pure equity or debt or hybrid structures?

We are trying to find the best structure that works from deal to deal. In some cases, no matter what the structure is, what we are seeking is an equity-rated-return. So that’s always a starting point. We are open to mezzanine type structures, which convert. Generally what we don’t do is senior debt. But we may do CCDs, compulsorily convertible debt instruments, CCPS, preferred instruments. Also, we could look at straight common equity as well.

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