Portfolio: Actis Capital and Sprng Energy

When the call came from Actis Capital in late 2016, Gaurav Sood was ready for a new challenge. Over the past 10 years he had helped to build Indian renewable energy from the ground up. Now that the industry was moving into a new phase he wanted an opportunity to combine his experience with the formidable resources of a global energy player.

That made him a perfect fit for Actis, which hoped to capitalize on the lessons it had learned through four years managing one of India’s most successful renewable energy platforms, Ostro Energy. When invited by the private equity firm to run Sprng Energy – a successor to Ostro in the process of development, Sood saw a clear advantage over multinationals that might be interested in entering the market.

“In India, any player in renewable energy sometimes needs to take calculated, but aggressive calls, and for that they need a very good understanding of the sector,” Sood says. “Actis had demonstrated that, which gave me confidence that we could work together to become a leading player in the market.”

Two years later Sprng (pronounced “spring”) has already taken on more energy commitments than Ostro had when fully deployed. But Actis and Sood believe they have just scratched the surface of the opportunities in India’s renewable energy market, and they are preparing Sprng for the next stage of growth. As they take the platform forward, the partnership that they have established is seen as the key to success.

Market access

Sprng has its roots in Actis’ earliest approaches to India in 2013, when the GP realized that booming demand for electricity – the Indian Brand Equity Foundation (IBEF), a government-backed think tank, projected peak power demand to reach 690 gigawatts by 2036 – would likely spur interest in non-polluting energy sources. New investments in clean energy in the country had reached a four-year low of $6.8 billion that year, and Actis suspected there was a strong appetite for development capital.

The initial plan was to acquire an operating energy asset with attractive cash flow and a development pipeline and build a platform around it, a strategy that had worked for the firm in other markets. But local players were demanding valuations that the GP felt were out of line with the state of the market, and it also worried about the possibility of conflicts between management and the investment team. 

Changing plans, Actis established Ostro in 2014 to bid on power generation contracts and build and operate renewable energy assets directly. Over the next four years, it grew the platform from a single 50 megawatt wind project to more than 1.1 gigawatts of assets either operational or under construction across India. According to IBEF, the platform was the seventh-largest channel for foreign direct investment into India’s renewable energy sector as of June 2018.

Ostro’s success gave Actis an appetite to explore the space further, but its $230 million investment in the platform had already been committed. With Ostro on its way to an exit – the platform was sold to domestic peer ReNew Energy earlier this year – the firm decided to create another venture that would both replicate and outdo its predecessor.

“We realized this model of being 100% equity owners of the business, and therefore in control of our destiny, is a good model for India, and it works to our strengths,” says Sanjiv Aggarwal, a partner at Actis responsible for energy investments in Asia. “So, once Ostro was fully deployed, we went back to our investment committee and got approval to set up a new platform.”

With up to $450 million to deploy in Sprng, the firm set out to find a renewable industry veteran to helm toe project. Sood, who had previously helped set up the renewable energy strategy of domestic conglomerate Kalyani Group and was then running the Indian solar power division of multinational energy player Engie, was the clear front-runner for the job.

Engie was in many ways an ideal launchpad for Sood. As the first India-based employee of French-headquartered renewable energy firm Solairedirect, he had established the platform in 2010, overseeing the recruitment of a local team and the acquisition of its first power purchase agreement (PPA) – a process that brought out several unexpected issues for his Paris-headquartered colleagues.

“This was when the solar industry had just started opening up in India, and for a European company, setting up in the country was very difficult,” Sood remembers. “Unlike Europe, where you have long gestation periods for building a project, in India once you get a PPA you have to build the project within 12 months. That includes acquiring the land, building the transmission lines and plant, and getting the financing.”

By 2016 the solar industry was past its frontier days, and with Solairedirect having been absorbed into Engie, Sood was keen to move on. When Aggarwal approached him with the offer to run Sprng, he needed little prompting to accept. The new platform offered the energy and excitement of building a new platform from the ground up, with the benefit of his decade of experience and the financial and energy sector expertise of Actis.

Voice of experience

Though Sprng was intended to be more than a carbon copy of Ostro, Actis approached the platform with a commitment not to change what was already working well. Especially in the early stages, the firm focused on the lessons it had learned with Ostro to ensure that it would be the decisive voice in all of Sprng’s crucial decisions.

“We wanted to create a very strong alignment between the management team of Sprng and Actis,” Aggarwal says. “In India it is extremely important that we manage the execution risks very well, and in Ostro we had defined a very strong due diligence protocol, which we have also implemented in Sprng.”

Actis’ environmental, social, and governance (ESG) compliance procedures have also been carried over to the new platform, as has Ostro’s management incentive plan. The firm has found it useful in encouraging members of the leadership team to take initiative and look for measures that would benefit the platform and its owner. 

A key element of Actis’ platform approach is to strike a balance between trusting Sood’s team to do their best work without the GP hanging over their shoulders, while also ensuring that they do not stray too far from the parent’s goals. The firm has aimed for complete honesty with the CEO and his team in the interest of minimizing conflict.

“We told him about the due diligence process, the financial returns we look for in a project, which states have the highest execution risk and the places we want to avoid, and so on,” says Aggarwal. “The idea was to have a very open and transparent discussion on the way the company would be run, because the last thing you want is a dispute.”

Sood has found Actis’ clarity about its expectations refreshing, offering him and his team a well-defined framework to plot the best course of action for Sprng. The fact that Actis has an office in India helps: lines of communication are short, the investors don’t need to be educated about the needs of the local market, and decisions can be made without referring to the central office in the UK. 

The private equity firm’s local focus is also a relief for Sood. Having worked for two multinational conglomerates, he is keenly aware of how easy it is to get lost in the global portfolio of even the most well-intentioned parent. 

“When you are working for a global company, there are various markets that are fighting for the same share of capital, and a market like India may be seen as relatively riskier than those closer to home,” he says. “Actis was a substantial firm, with a clear commitment for deployment in India, so you know you will see a lot of action. That’s something that we as professionals always like to see.”

Sprng’s first asset, acquired soon after its launch in March 2017, was an early test of Actis’ ability to recapture the success of Ostro. The 250 MW solar project in Madhya Pradesh was in many ways a model transaction for India’s renewable energy industry, with the International Finance Corporation (IFC) serving as an advisor, a 25-year contract to provide power for the state energy company and the Delhi Metro, and an uncommon amount of security for developers.

“The project has a very bankable PPA, and there is a state government guarantee for committed off-take, which is almost never given,” says Sood. “It included the land for the solar park, and a lot of risks mitigated such as a guarantee of compensation if the grid is unavailable for more than 50 hours in a year, for example. So whichever way you look at it, it was an ideal PPA and we were very keen to win this project.”

The platform’s successful bid for the project was followed by several more wind and solar assets. Sprng currently has a portfolio of projects, either in development or under construction, with a total generating capacity of nearly 1.5 GW. Actis’ network in the global renewable energy industry has played a major role in helping the platform win auctions, with the firm connecting Sprng to manufacturers of crucial components. Chinese wind turbine producer Envision, for example, has become a major supplier to Sprng’s projects.

Actis has also taken an active role in deal sourcing, believing that the more informed eyes look at a potential project, the better. This is where the firm makes its voice clearest – while Sood and his team conduct the initial inquiries into potential projects, Actis carries out its own due diligence as well, and has not been shy to exercise its veto power on projects that it feels fall outside the desired risk-return framework.

“There are a number of solar assets that are available in India, but quality of construction at times is on the poorer side,” Aggarwal explains. “Even with a quality asset, you need to identify what the weaknesses are, and if the transaction meets the return threshold – only then will we look at acquiring the asset.”

Building out

With Actis’ assistance, Sprng has created strong foundations. Management believes the platform is well-positioned to achieve its goal of having more than 2,000 MW of capacity by 2020, given the size of its deal pipeline. This is the first step toward an eventual exit, which the private equity firm expects to begin exploring in three or four years. 

A trade sale to a domestic or international strategic player, as with Ostro, is considered the most likely course for the company, but Actis is also considering an IPO if public sentiment for renewable energy continues to strengthen. However, the firm emphasizes that despite Sprng’s enviable collection of contracts, much hard work remains to be done before the company is ready for new ownership.

“Right now, there’s a lot of construction activity in Sprng that still needs to be done – we’ve scaled up well in terms of winning PPAs, but now all these plants need to be built,” says Aggarwal. “For the next couple of years we are really focused on making sure we construct well, and once we’ve commissioned these projects and we’ve got a set of steady cash flows, then the exit scenario can start to play itself out.”   

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• Topics
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