
Q&A: Armstrong Asset Management's Andrew Affleck
Andrew Affleck, managing partner of Singapore’s Armstrong Asset Management, explains the role private equity investors can play in developing renewable energy assets in Southeast Asia
Q: What is the interest of government policymakers in promoting renewable energy in emerging markets?
A: In Southeast Asia, where many countries that historically were exporters of fuel have become importers, a key driver is energy security. The stress this places on the budget is something that has to be addressed, considering most of these emerging markets are still enjoying healthy growth rates and that leads to an increasing demand for power. So policymakers continue to be key in setting the framework for the development of renewable energy infrastructure. Just a couple of weeks ago Vietnam introduced a feed-in tariff for solar power, and in the last 12 months Indonesia has signed some bilateral wind power purchase agreements (PPA). And these two countries have been slightly behind Thailand, the Philippines, and even Malaysia in implementing policy to support renewable energy.
Q: What are the biggest challenges for developers in the sector?
A: The quality of the enabling infrastructure in these countries is a real challenge. Coming up with a scheme and a subsidy makes a great headline, but if the implementation details have not been thought through fully in terms of collaboration with utilities, then you get into a difficult situation where private capital starts building, but the grid is unable to offtake all the power. Over the last 12-18 months with our development partners in Indonesia, we have been working closely with [government-owned electricity distributor] PLN to evaluate the grid infrastructure and correctly size renewable energies for particular locations. We have also shared our experiences from other markets such as Thailand and the Philippines, and the lessons learned there.
Q: How does a renewable energy-focused fund such as Armstrong set itself apart from other PE investors?
A: The differentiation in this sector is the level of involvement in projects. This is certainly not passive investment; you need to be heavily involved in the development and construction of these assets and in all the key decisions. So the makeup of a GP could be quite different to traditional private equity. You need to have a greater emphasis on the technical and engineering capabilities in order to be involved in feasibility, permitting, design, and then ultimately the construction, tendering, selection and execution. These are specialist skills where value can quickly be created and lost. And this is where you can engender a lot of goodwill with policy makers, because you’re bringing knowledge to the domestic market to design their framework.
Q: How large a role does private equity play in Southeast Asian renewable energy compared to other investors?
A: There are a relatively limited number of funds dedicated to the sector, but the majority of the private capital that is going into renewables in this region is corporate money. These could be listed or unlisted companies that have been in the traditional power sector and are diversifying into renewables, mostly local utilities. But funds like ourselves have established some good precedents and benchmarks, which other domestic private capital has then followed. There’s one recent example of that where rather than investing directly into a project, we invested alongside IFC [the International Finance Corporation] in a corporate entity in Vietnam that historically has focused purely on hydro power in order to help it diversify into the solar and wind sectors.
Q: What is the biggest need that you see Armstrong meeting in this market?
A: Some of the risk that we might be more comfortable taking than domestic utilities would be greenfield risk, starting a project with a plain piece of paper. You could be working on a project for 12-24 months where there’s no revenue, and there’s certainly a heightened risk of whether a project will be feasible and ultimately will get built. So we certainly address a gap in the market for that early-stage risk capital, and taking those qualified earlier risks does translate into higher returns if done successfully. And then other public and private players may be happy to acquire assets once they’ve been de-risked and are regularly generating returns.
Q: What benefit do development finance institutions (DFI) such as IFC and CDC bring as LPs in funds such as yours?
A: By mandate DFIs are looking to support infrastructure, in which renewable energy plays a key part, and they are set up to be early investors. So they are critical to help funds like ourselves establish benchmarks and precedents in emerging markets, where sectors such as renewable energy are still in a very nascent stage. They are always going to be at the core of at least the initial few funds. We also see the impact investing sector and family offices as a growth area for sourcing capital for future funds. Ultimately, as the opportunities scale and a track record develops, pension funds, insurance companies and other large asset allocators who are looking to invest north of $100 million per party will start to deploy money as well. We’re already seeing the first signs of this in larger markets such as India and Japan.
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