Portfolio: Standard Chartered and Navigat

It started with a phone call made just over a decade ago to the Austrian ambassador in Jakarta. Jenbacher, a gas engine manufacturer based in Western Austria, wanted a distribution partner in Indonesia. The question put to the ambassador was whether there were any Austrian citizens living in the country with a track record in trading capital goods. He made the introduction to Willi Goldschmidt.

Goldschmidt and his business partner, Sebastiaan Sauren of the Netherlands, already had several years' worth of experience in textiles and trading in Indonesia. They formed Navigat Group and got to work, retaining the distribution licenses for Indonesia, and then Singapore and Thailand, when Jenbacher was bought by General Electric in 2003.

The Navigat Energy division has sold more than 1,000 megawatts of units, typically serving either as backup to existing power generation systems or the sole source in remote locations not covered by the electricity grid. But the business did not stop there - Navigat's approach evolved as it became clear how much demand existed not only for equipment but also the expertise to make this equipment work.

"Buying an engine isn't like buying a Mercedes where you can just turn the key and drive off. Installing an engine requires technical expertise and then there is ongoing maintenance," says Greg Karpinski, managing director and co-head of the energy, resources and infrastructure practice in Standard Chartered Bank's principal finance team. "As the guys got more experienced clients asked them to do more. And then one said, ‘I just want cheap, reliable kilowatts. Can you own everything and just sell me the energy?'"

Strategic shift

Navigat made its debut as an independent power provider (IPP) in 2009 by putting together a 16 MW build-operate-transfer (BOT) package for a steelmaker called Gunung Garuda with a factory in Bekasi, West Java.

Five years on, the Maxpower IPP division has established itself as a leading distributed gas-to-power developer, with more than 300 MW of installed capacity in Indonesia and Myanmar. Backed by Standard Chartered and two domestic investors - private equity firm Mahanusa Capital and conglomerate Gunung Sewu Group - it is targeting 1,000 MW by the end of 2015.

Indonesia is a good fit for a distributed power provider. According to Perusahaan Listrik Negara (PLN), the country's state-owned power utility, electricity demand will rise from 187 million MW in 2013 to 354 million MW by 2021. While PLN will cover a large portion of additional demand, IPPs are expected to play a more significant role. They currently account for 17% of the 44,450 MW in total installed capacity; 108 IPPs representing a further 16,812 MW are under development.

The other consideration is the country's low electrification ratio, which stands at 77.9%, compared to 99.4% in Malaysia and 87.7% in Thailand. The ratio plummets beyond Java and Bali, falling below 50% in parts of West Papua.

"There is an enormous shortage of power that can't be addressed just by building large coal-fired power plants. Indonesia needs distributed power and that means smaller plants to support decentralized grids," says Arno Hendriks, who recently replaced Goldschmidt as CEO of Navigat. Goldschmidt is now chairman, while Sauren remains COO.

Hendriks joined the company in 2010 as CFO and was tasked with finding the additional capital required to transition Navigat from equipment and service provider to installed power developer.

A Dutch national, Hendriks was doing corporate advisory work in Singapore when he came across the company. He recognized the growth opportunity and engineering and project management capabilities, but also the need for a more corporate organization, with human resources, M&A and finance competencies.

"I told the two founders, ‘I can give you advice and it will be a couple of years before you are ready. Alternatively, I can join you and we can work together on a strategic plan,'" he recalls. "The founders asked me if I thought Navigat could become a maybe $1 billion valuation company."

During 2010 and 2011, Hendriks reached out to three investors who could provide both financing and strategic support. Karpinski first met Hendriks and Goldschmidt at a conference in Jakarta in early 2011, but discussions ended that summer with the sides unable to reach a satisfactory agreement. However, after talks with another PE investor failed, Standard Chartered's proposal was reconsidered.

"In November 2011 they said they wanted to restart discussions," Karpinski says. "We agreed a term sheet two weeks after that and completed the transaction in January 2012. It was done in 45 days."

Navigat's confidence in its new partner was in part derived from Meiya Power, a Chinese IPP acquired by Standard Chartered Private Equity and Farallon Capital Management in 2007. It was sold three years later to China Guangdong Nuclear Power following a dual track IPO and trade sale process. When Hendriks made his initial presentations to the founders, Meiya was cited as an example of how to transform a power company into a listing candidate.

For Standard Chartered, there was a desire to move away from conventional power investments where it is difficult to achieve private equity-style returns unless buying in at low valuations.

Given the strong performance of London-listed Aggreko and APR Energy, distributed power went onto the short list as an area of interest. Karpinski notes that projects can be up and running in 3-6 months compared to a development period of 1-3 years and a construction period of 2-4 years with conventional power. The scale is smaller and contract tenures are shorter but payback is quick and the return on equity is high.

Aggreko and APR's success is predominantly built on large diesel-based fleets and temporary rental contracts. Aggreko, for example, is the official temporary power generator for the 2014 FIFA World Cup in Brazil, providing power required for broadcasting all 64 matches from the football tournament.

Not just rental

While Navigat's rental business is robust - high-profile appointments include the Singapore Formula One Grand Prix - it specializes in gas rather than diesel and prefers longer-term contracts. And Standard Chartered was most interested in how the equipment distribution business, coupled with energy performance certificate (EPC) and engineering competencies, had created a fully-integrated player that was beginning to make its mark as an IPP.

"What we talked about in early 2011 and later in the year was the same - distributed power and the fast power model Navigat was seeking to pursue," Karpinski says. "By the latter part of the year they had executed on a sizeable project, installing 35 MW in less than 60 days in South Sumatra and selling some extremely large pieces of kit. They had done very well from an operational standpoint and that got my practice very excited."

Standard Chartered invested $58 million in the company from the SCI Asia Infrastructure Growth Fund, a joint venture between Standard Chartered and IL&FS Investment Managers. Later in 2012 Navigat raised $150 million in financing from a syndicate of banks led by Standard Chartered. Last year Standard Chartered put in another $25 million in equity while the bank and OCBC were lead arrangers for a $270 million debt refinancing. Financing mandates were awarded following competitive processes.

Bolstered by the fresh capital and strategic support, Navigat was able to accelerate expansion of the Maxpower business. Installed capacity went from 74 MW at the end of 2011 to the current level of more than 300 MW, and it is expected to reach 600 MW by the end of this year. Maxpower has also become the primary revenue driver. When Hendriks joined the company, 95% of the business was engine distribution and services; last year 80% of revenues came from the IPP side.

Navigat posted revenues of $39 million in 2010. The figure swelled to $196 million in 2013.

The company employs nearly 650 people, the majority of whom are based in Indonesia. There is a 40-person team in Thailand handling distribution and 30 in Myanmar working on IPP, plus three in Singapore and three in Dubai, where Navigat has a logistics warehouse. Teams are dispatched to work on IPP projects as required.

"We have a power plant in West Papua, which is a six-hour flight from Jakarta and we have our own operators and service engineers," says Hendriks. "We sourced them locally, trained them in Jakarta for six months and then we sent them back to West Papua. That is one of the entry barriers for larger firms. It is not easy to have a team of experts all over the country."

Competition comes from a smattering of local or regional equipment rental companies and developers that compete for tenders on small-scale power plants on a one-off. Where there is consistent participation from IPPs, it is usually on large-scale coal-fired plants. These players don't have the mandate or the skills to target smaller gas-fired projects.

"We believe the Navigat model presents some significant barriers to entry or comparative advantages," adds Karpinski. "The company is familiar with the GE Jenbacher system and has come up with some good quality, low cost designs that would be difficult to replicate. And then breaking into Indonesia is not as easy as just showing up with money and equipment. The relationship angle and the ties to local communities, PLN and the government are important."

Focused expansion

For this reason, Indonesia will remain Navigat's core market, with a select number of high-value projects in Southeast Asia. Navigat Energy's customer base includes industrial companies - chemicals and metals manufacturers seeking better energy efficiency - in Java and agricultural enterprises in Sumatera and Kalimantan. As for Maxpower, the focus is Sumatra, Kalimantan and West Papua, where gas prices are more attractive and fast power solutions are needed.

The company made its first foray into overseas IPP last year, becoming the first international developer to sign a power purchasing agreement (PPA) with the Myanmar government. A Navigat delegation attended a conference in Yangon because it was interested in selling engines - like Indonesia, Myanmar has relatively low electrification in remote areas and ample gas reserves - but found that there was a more basic need for power generation expertise.

A local business partner provided introductions to the minister for electricity and state-owned Myanmar Electric Power Enterprise, which led to Maxpower winning a contract to build a 50 MW gas-fired plant in Yangon. The PPA is likely to be used as a template for deals with other developers.

Last week, Mahanusa and Gunung Sewu invested $21 million in Navigat. Another round of debt refinancing plus further equity financing could come next year. This would provide the capital to add more medium-sized power plants to the company's portfolio - at present it pursues projects of 5-100 MW in size - and support regional expansion. Standard Chartered currently has no exit timeframe in mind.

"We don't want to be a big power plant developer because it's competitive and the process is lengthy," Hendriks stresses. "Coal and hydro plants are being delayed so PLN will bring in diesel gen sets, which have high fuel costs. We can replace diesel-fired power but you have to start small - and think big - in remote areas."

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• Topics
• Expansion
• Industrials
• Southeast Asia
• Growth capital
• energy
• Southeast Asia
• Indonesia
• Myanmar
• Standard Chartered Private Equity