Swiss energy investment firm SUSI Partners, through its recently launched Asia Energy Transition Fund (SAETF), is committed to investing in Southeast Asia – a region the firm sees as being “overlooked by private capital” when it comes to investments in the sector.
“The number one reason is that it’s fragmented. If we can create a platform that’s cross-border, that will be very attractive to an institutional investor,” SUSI Partners co-CEO Marius Dorfmeister told DealStreetAsia in an interview.
SAETF is slated to focus on markets such as Indonesia, Vietnam, Thailand and the Philippines in Southeast Asia.
Since the clean energy sector is at a nascent stage in the region, the fund aims to fill the existing gaps in terms of development risks, environmental and social risks, regulatory compliance that could help businesses grow in a more sustainable way, added SUSI Partners managing director Wymen Chan, who is heading the firm’s Asia strategy.
SUSI Partners made the first close for SAETF at $81 million last week, thereby raking in an amount higher than an anticipated $60 million target.
Dorfmeister said the firm plans to raise a similar amount and make the second closing by the fourth quarter of this year, with the final closing planned for 2022.
The total size of the fund is targeted at $250 million.
“The Asian energy transition market is a little bit less mature, but the concept and risk-return profiles are quite similar [to Europe]. Both from an ESG perspective and a return perspective, the energy transition plays in Southeast Asia are even more attractive, since the market is not yet as efficient as for example Europe,” he added.
Edited excerpts from the interview:-
You said SAETF will prioritise its investments in countries such as Indonesia, Thailand, Vietnam and the Philippines. What are the opportunities you’re seeing in these markets?
Chan: We see the opportunities through the lens of the value we bring to the table, rather than looking at what’s going on in a country. In addition to financial capital, we are trying to make this very nascent sector [clean energy] in Southeast Asia something that’s investable to institutional investors. So, whether it’s solar or wind power, we are working with development partners to fill the gaps in terms of development risks, environmental and social risks, regulatory compliance, and growing the businesses in a sustainable way. For newer sectors like energy efficiency, there is still a gap in facilitating projects in Southeast Asia. We want to bring our experience in this crucial sector from Europe and make it a sorely needed part of Asia’s energy transition. In addition, there are a lot of opportunities to electrify off-grid areas, given the archipelago geography of Southeast Asia.
How about your pipeline? Bridging the gap between Europe and Southeast Asia in terms of investment standards must be quite hard.
Chan: You have a full spectrum of developers in Southeast Asia. There are businesses that merely own some land to build solar plants on. There are also fully skilled developers who understand the technical work, regulations, and environmental and social work. We aim to plug the gaps that development partners may have through active management by our team which was built from scratch in Asia. We are focused on greenfield projects, and to a certain extent can even take development risks.
Our pipeline is very robust. Three projects have got Investment Committee approvals, including a regional energy efficiency platform, a regional microgrid system platform, and a renewables platform in Vietnam. At least two will be executed within this year. Being an active manager, we would obviously want to fly out and meet people, which has been difficult during the pandemic. But we have a network of local partners that help us conduct the due diligence process.
What are the types of assets for SUSI in this region? Will you invest in individual projects, operating companies, or joint ventures with existing local businesses?
Chan: It will be a mix of all of the above. We are very much focused on assets. But our end goal is to build scale through long-term partners, and that sometimes necessitates the forming of joint ventures. We will also look at operating companies if there’s a greenfield pipeline for us to invest in.
Investments in the energy sector in SE Asia have primarily been through direct lending by DFIs or the M&A routes adopted by corporates. PE firms like KKR and Actis, among others, and even local trusts have dedicated capital for infrastructure and energy investments across APAC, let alone global pension funds. Does that mean high competition for you?
Chan: Yes, there is competition. But generally, the larger funds tend to be generalist infrastructure funds. They’re not specialized in only energy transition like us. The sizes of projects in Southeast Asia are also not large enough for some of these players. Meanwhile, corporate players wouldn’t take development risks. And they wouldn’t focus on greenfield assets. What we’re doing is to take that early risk to create and scale-up projects that ultimately would fit the mandate of a corporate player or another fund manager.
How would a PE play in clean energy change the investment landscape in SE Asia?
Dorfmeister: What we can do is catalyze more private capital into the markets. This region has generally been overlooked by private capital. The number one reason is that it’s fragmented. If we can create a platform that’s cross-border, that will be very attractive to an institutional investor. At the same time, creating projects with a positive impact in terms of ESG and the Sustainable Development Goals is still new to this region. That’s where we can bring our experience in to create this positive impact for the next buyer of our assets.
How does value creation in this sector differ from that of conventional sectors for PE firms?
Chan: It’s very different. Consumer businesses are dependent on growing their EBITDA. The infrastructure business is a real asset business, so the growth is not organic. It’s not a revenue-building exercise. The focus is on building an asset of quality that would last 30 years. That’s where additional costs would come in and affect an asset’s performance. The idea is to improve the asset performance over the long term, which is very different from growing EBITDA.
Holding an energy asset might be longer when compared to other assets. Will it impact your exit return?
Chan: We try to balance the IRR and MOIC of our portfolio. Our focus is more on the cash flows in the long term. We hold projects for five to seven years, and when we exit, we want the portfolio to become a development pipeline of credible, high-quality assets. The future growth of the platform is expected to give us a premium.
There is an increasing awareness about the importance of ESG for investors. With a heavy ESG element, will the energy sector be much more attractive going forward, and generate high, quicker returns?
Dorfmeister: There has been a lot of greenwashing in ESG with fund managers over the last few years. However, the EU’s Sustainable Finance Disclosure Regulation (SFDR) and the ongoing implementation of the EU taxonomy have now issued clear guidelines for a manager to label their funds as highly ESG compliant. Our Asian Energy Transition Fund is amongst those that meet the EU’s highest standards in terms of sustainability and has received the respective classification. Today, clean energy infrastructure has become an asset class in several jurisdictions with a clear focus on sustainability. As a fund manager active in the sector, you have to meet certain criteria, one of which is fulfilling ESG requirements.
Chan: The ESG component for us comes naturally. We want to start with greenfield assets so that we can build assets that are fully compliant. There are breaches of ESG in brownfield assets that cannot be cured. So, it’s a core part of our risk assessment as we look at projects to invest in. If a project is not ESG compliant, the financial return for us in that project will be zero. We are generally very wary of E&S issues. I’ve seen some projects where value went to zero because of these issues.