Energy transition in Asia: a private capital lens

Speaker A: Foreign. Welcome to Money Multiple, the podcast where we explore trends, sectors and investment themes shaping the future of private capital in Asia. Today, we're turning our attention to one of the most significant investment opportunities of our generation, the energy transition in Asia. While much of the conversation has traditionally focused on renewable energy assets and large scale infrastructure, the reality is that the opportunity extends far beyond wind farms and solar parks. Across Asia, we're witnessing a broader transformation of the energy ecosystem from supply chains and industrial decarbonization to technology platforms, services, storage, grid solutions and new financing models. As capital flows into the sector, investors are increasingly asking where value is really being created, which markets offer the most attractive opportunities, how, uh, risks are evolving, and what it takes to generate superior returns. To help us unpack these questions, we're joined by Gilles Pascal ey Parthenon, ASEAN power and utilities leader, who will share his perspectives on where private capital is finding opportunities across the Asia's energy transition landscape. Gilles, welcome to the program.

Speaker B: Thank you, Luke.

Speaker A: When investors think about the energy transition in Asia, the discussion often starts with large infra assets. Uh, from a private capital perspective, how should investors think about the full opportunity set spanning both infrastructure and non infrastructure plays, supply chains, services and platforms?

Speaker B: Well, look, energy transition in Asia is not anymore about just a build out of assets. It's now reached a stage where it's fundamentally a system transformation. You started talking about renewable energy generation, which is the most obvious asset build out over the last couple of years and we still need ample renewable energy assets. Um, it's foundational, but it's increasingly crowded, um, commoditized and very competitive. But in many markets in Asia, you've reached a point of the penetration of renewables now requires the utility to massively invest in the grid. So developers who used to be asked to only build a solar plant or a wind plant, they are now asked to design a system that will provide, for example, green electricity during peak hours in the morning and peak hours in the evening. And developers now have to integrate multiple solutions such as solar, wind and battery in a single asset. So increasingly it's about transforming the system, providing a system solution and not simply a traditional infrastructure build out. Which means when we think about energy transition now, a greater share of value sits around the asset and not just the asset itself. Think supply chain. Um, there's an increasing trend of requiring the localization of manufacturing. Um, think about services, whether it's construction services, O and M services, services related to the grid, um, for example transformers. Transformers are very often bought and then maintained over 20, 25 years under long term contract so you have a sticky client that then requires a 20 year maintenance contract. Um think about digital platforms, um, software trading optimization. Again if we think about renewable energy, the optimization of dispatch, the optimization of the designing what's the optimum mix of solar, wind and battery. So you see the development of software that helps developer achieve exactly this and renewable energy is the obvious um build out of assets. But the other big piece of energy transition in Asia is about decarbonization of um industry. So the enablers of industrial decarbonizations those solutions are also where a lot of value sits. So all of these are uh fragmented areas. Um those companies are very much execution driven. They're generally under managed and this is why they're suited to private equity because there is a lot of value to unlock.

Speaker A: So clearly uh, there's a lot of different uh pieces in this ecosystem. And uh, uh when you look at risk uh and return uh you see a very different profile of risk and return Based on the various elements that you described. How should investors uh be thinking about risk and return? And uh, where do you think private capital is best positioned to play as well as maybe what types of uh capital play at what segments of the uh supply chain.

Speaker B: So if we park um the different themes that we just um talked about, infrastructure, lower risk, lower alpha, um competition is compressing returns so it's very much about execution, um tighten the execution. The management team needs to be extremely strong to maintain a positive risk adjusted return. Right Creating value. If you think about the supply chain and services this is experiencing higher growth. The velocity of capital is higher because it's not just about building an info infrastructure asset which take a couple of years before you generate revenues um on the supply chain on the services side it's higher growth. Um there's a lot more operational leverage that you can play with. Um and in my view quite a lot of buy and build opportunities growth to capture. We talked about platforms, um, recurring revenues, scalability, technology differentiation. As long as you have a competitive advantage you can maintain it for a couple of years and that's when you create your alpha. Um and this provides clear exit routes for private equity and infrastructure fund. Increasingly we see sophisticated capital that plays along all of these themes. Um of course everybody has a renewable energy developer, um, a very often digital infrastructure developer data center. But increasingly funds private equity players go beyond those two obvious and try to capture a greater share of the exposure to the energy transition.

Speaker A: And if I can just um, put another lens on this which is uh, uh markets and Geographies. Right. So uh, uh, how would you characterize the opportunity set across markets? Which markets are let's say more investable in the current environment? Which markets are more uh, structurally challenging? Could you help us unpack that?

Speaker B: I'll state the obvious but in Asia we don't have the benefit of a single currency like Europe. Every single market has a different currency, a very different credit rating. If you go from Japan all the way to India you have a very different um, intrinsic country risk exposure. So the markets are naturally tiered um, by maturity and complexity. So the more mature and bankable markets obviously Japan, Korea, Australia, you have some very high growth but complex market. I will put Vietnam, um, the Philippines and Indonesia, um, and I would put early stage markets, a few in Southeast Asia um, and beyond. So infra capital providers need um, to balance the bankability, the policy stability, the availability of debt capital in order to leverage um, the investments. Um, so you need to mix all this and you will have a different exposure to growth stability, um, availability of capital. And again it's about mixing this strategy to find the right exposure. Either an investment that will give you access to all these market because the solution is adapted to each market or you will grow a local champion. Um, and again we increasingly with the infrastructure fund and private equity player, some of the investors will be a region wide investment, some will be local champions. Um, and we really see both approach and sometime um, two at the same time. You will have a regional champion but you also help grow um, a local platform.

Speaker A: So from what you're saying it definitely pays to have ah, a flexible Asia strategy because value shifts, sometimes policy shifts and therefore it's a bit of a wide angle lens that investors should take as they raise capital and deploy capital. But then what you're also saying is you then have a choice as you build out your asset base to figure out what the strategy is for the asset itself or the platform. And you can actually use the platform um, as a means to uh, essentially expand into different markets and manage risk better.

Speaker B: Absolutely. I'll go back again to renewable energy because it's the most obvious. Vietnam was extremely active from 2017 to 2020 and everybody, every investor needed to have exposure to Vietnam. And then the market completely stops as a result of actually too fast a build out. Um, today it's all about the Philippines. They're experiencing a significant growth in um, the build out of megawatt and to some extent Malaysia as well. So as an investor either you have a regional platform that helps you maneuver when a market is more active or when a market becomes less active. But you will always have a disadvantage in terms of cost of capital, um because it's local currency, local risk, local leverage, or you grow a local company to try and get it to the top three players. Um, and once you've achieved that scalability you can exit. So we see two approaches being adopted by um, um, investors.

Speaker A: Okay, so with that let's talk a little bit about um, how capital gets deployed and capital structures. I mean it's a fairly uh, diverse and wide class of assets. On the one hand you have a uh, heavy infra flavor, uh so long term assets. On the other hand you have a lot of services businesses. As you mentioned, there's also product that sits in the middle. Uh, how are capital structures evolving across uh, this whole ecosystem? And, and how should investors be thinking to play, I guess all of these different uh, opportunities. How should investors be thinking about structuring their uh, capital?

Speaker B: Of course debt plays a significant role in terms of increasing return for investors. And generally across Asia, as we talked about the local currency debt, the most competitive source of funding will more often be the local currency. Um and in most of the markets credit is generally widely available with some exception. Vietnam is a bit more difficult and some frontier markets are a bit more difficult. Indonesia in local currency it's a little bit more difficult for infrastructure. But generally local debt will be the best source of um, capital. And interestingly debt is no longer limited to project finance. Um, again if we take the example of renewable energy, by now project financing is widely available um, in all of these markets. Um, but we see an increasing trend of because there's plenty of credit available of financial institutions being interested to deploy even more debt capital and moving into mezzanine type of structure, holding companies Type of structure 1 level above the asset. So we're seeing portfolio financing especially when you have contracted revenues. Um, lenders will always focus on the same fundamental the cash flow, visibility, the contract, the length, the tenor of the contracts, the quality of the counterparties. But once you have those building blocks, I would say as investors there's a lot of negotiation rooms that you have. And financial institutions, we find them increasingly receptive to try and do something a little bit more pushing the envelope, um, to benefit everyone. I would say credit is generally not the bottleneck. Um, we are seeing very large platform again in renewable energy that have ample access to project financing at the asset, portfolio financing one level up and even some quasi equity. Um, and you can scale platforms relatively aggressively. Um, so yeah, you need a very Strong finance director, cfo to really look at the local sources of financing but also the regional sources of financing. Um, we are seeing blended financing structures that are starting to apply for the more borderline investments that are a bit less bankable by financial institutions. So generally it's a very, it's not a complex world but it's a, you have multiple choices and you need to decide what is the best source of capital for what you're trying to achieve. Build out of assets, optimization of portfolio, preparing an exit, upstreaming dividends.

Speaker A: So it looks like there's no shortage of capital. Uh, on the lending side you're seeing uh, I guess the traditional lending institutions, banks and other such institutions. You're seeing development financing companies. Uh and from what you've described there's also a lot of private credit that is now playing in that space. Would that be a fair comment?

Speaker B: Hello? Private credit, yes, they are increasingly, you know, more and more outfits that tick the box. Private equity, private credit. But we are not quite, you see the controversy and the um, market jitters about private credit in Europe and North America in particular. I think we are insulated from that uh, in this region because there's been less capital tagged as private credit that has been provided and generally it's been a bit more conservative. Um, private credit, you know, I am not receiving term sheet that has just a pricing and a maturity date without any covenants. Um, the term sheet from private credit providers still have a fair element of structuring in there. So it's not a blank check. Um, see you in five years when the debt matures. Private credit providers are still looking into their investments, properly monitoring and adding covenants uh, that um, make sure that the borrower performs.

Speaker A: And on the equity side, uh, I would imagine as institutions are playing this ecosystem, they've also got to have a fair amount of flex in the uh, types of equity uh, pools that they hold. So all the way from pure play infra to I wouldn't say vc but definitely growth type growth capital. Uh, do you see again that whole variation of uh, equity capital playing in the space?

Speaker B: Yeah, we see very uh, different types of capital playing. Energy transition, the good old infrastructure funds, very long term investment, um, and that's typically for build out of assets. When it comes to services companies, um, local champions, very often those companies are founder led and founders have a difficulty handing control. So we see a lot of capital that's here to fund the growth of domestic champions where they would not require majority investment, not a full control, um, but a path to Such control, um so generally growth capital, significant minority stake with all the right governance. Um again when we one level lower a lot of the companies ah have a proprietary technology that has been proven that has a handful of core customers. Now you need to provide growth capital but in an amount that's lower than your typical private equity or infrastructure fund. So we see quite a lot of impact fund playing in that space. Promising technology, promising services that requires growth but less than 50 million US dollar for a series A, series B, series C and that's um suited to impact investment. So again we have examples in Asia now for all the different stacks of equity. It is diverse in terms of what are the needs um of the em, um the developers and the local champions.

Speaker A: And I just wanted to explore one other angle with you on that which is platform uh builds because I think increasingly we see that happening and I know you've been involved with some of the platforms in the space. Uh, how should uh, uh the builders be thinking about planning for their uh capital stack uh as they build out the business.

Speaker B: So we've seen um, when it comes to platform again let's go back to renewable energy that I think many of our listeners will be the most familiar with. Many um of the platforms have been backed by private equity um and it's either private equity have started platform from scratch, just gathering a team of seasoned professionals, provided capital, committed capital and put full dedication to the, to the management team to build out a platform from scratch. Um what we've seen generally is a slower start because infrastructure takes a long time to develop. It's not like I have capital and I can build a solar plant. No, you will have to identify the land, process all the permits, win an auction or if it's a government auction or find uh a corporate to buy your electricity. So it is not immediate, um but generally has been successful. The other approach has been to simply acquire either a regional team that has existed for some time, that has a proven track record that has a handful of assets either in operation or in construction, but some cash flows existing or soon to be existing and then providing the capital to multiply, just grow, go after more markets or last example again back to the local champions. Infrastructure is fundamentally a local play. You need people on the ground. You know it's not out of Singapore that we're going to build assets in the Philippines or Vietnam. We need local teams um, and uh, and um, you have the option to build a local champion um with the best management team in country and to focus on one single currency, one Single market and try to go faster. And uh, we've seen all this. Um, so once you grow your platform so it's an equity first play, right. When it comes to development expenses, early stage platform, it's an equity play. Once you have assets, you will have access to project finance. Um once you have a handful of assets you can start gearing up the platform with mezzanine financing, portfolio financing. So investors will always um, find the right balance between capital deployment. Every investment director or the fund needs to deploy capital and has target but it's also chasing returns. And to increase the return once your platform has achieved a certain size, go and raise a portfolio financing, you will increase your return. So it's always about playing the moic, the multiple on invested um, capital dirr. And again back to your early to our earlier discussion on the availability of credit. There's a lot of options available to achieve um, your um, target returns and target moic.

Speaker A: Thanks for that. So just to summarize what we've talked about, uh firstly from a investment uh thesis standpoint or uh, uh, an investment segmentation standpoint, there is a lot of different opportunities out there. Uh, there's many different ways to play that opportunity set. Whether it's at the very infra level or at the high growth level and certainly many options in between. Uh, you're saying that there's also a lot of uh, opportunities across markets and really the main uh, let's say the main factor for success is to be nimble and, and uh, then of course capital planning and making sure that you have the right capital uh targeting the right uh growth structure and assets uh is quite important. I wanted to turn the discussion a little bit to risks. So there's definitely a lot of opportunity. Uh, how should uh private capital investors and particularly growth capital investor in the space be thinking about uh, risks as they invest uh in the whole topic of energy transition.

Speaker B: Yeah, so risk is multifaceted. Um, it's rather obvious I would say

Speaker A: um,

Speaker B: when you look at Asia Transition as a whole, right. Um, we are seeing emerging technology, emerging services, um, that requires due diligence. Is it suited to the market? Does it have a competitive advantage? Is it going to be widely um, rolled out and accepted by the market. So traditional due diligence on the solution or the services or the technology, um, once you've cleared that it's really about execution risk, the capabilities of the team, um again that can be due diligence, um, background checks, what is the em, um, what is the track record, um then you have the country rigs, depending whether you are targeting multiple markets or whether you're targeting a single, um, country. The consistency of policy. I gave the example of Vietnam. Vietnam, a huge, huge boom on renewable energy. It lasted three years and then the market has been silent since because it's still dealing with too fast a build out. So again, balancing the risk. High growth is fantastic. What is the underlying reason? Are we going too fast at times? Um, so policy consistency. How do you deal with the margin compression as those solutions become commoditized? We've seen it on renewable energy. How do you make sure it's not a race to the bottom? The rooftop solar solution for commercial and industrial customers have been hugely successful for the past five to eight years with the emergence of multiple players. It's a market that used to be anchored out of Singapore by regional platforms. And very quickly, um, you started seeing the emergence of 5, 10, 15 platforms at the country level. Within that competitive tension, how do you maintain your irr? And that's really about the discipline, um, the discipline of the management team, the discipline of the investors to find the right balance between chasing growth and maintaining returns. Um, so market risk can be analyzed and checked off. Technology risk can be due diligence and you're left with an execution risk. Um, and I think it's one of the key aspects today the successful scale up of a platform is really about

Speaker A: execution risk and I just wanted to double click a little bit on that. So what constitutes success? I mean we have seen of course some builds and some investments that have been widely successful and others that have, let's say, struggled to generate the returns. I mean in your view what are the key factors, uh, for success as you invest in the space?

Speaker B: So in my view it's far more operational than financial. Um, we talked ample availability of credit. If you play your cards right and you know which source of capital to tap at the right time, you should do well financially. But it's really about execution risk to chase the growth, but not at any cost. Maintain the alpha, um, minimize execution risk. Again, renewable energy, um, execution risk is about finding the right land, it's about finding the right EPC contractor. Um, you're often tempted to optimize and optimize and optimize, but you're adding more risks into the system. And in the end when you are infrastructure type of return, one element of the entire puzzle goes wrong and your return becomes lower than your cost of capital. So execution, execution, execution, um, operational excellence, conservative assumptions, upfront due diligence, um, strong local partnerships, uh, in our experience has been an element of success either because you are backing a local champion. So technically you are in the market. But a regional platform, how does it deal with a particular market? Sometime it can go alone. Sometimes it can form the best partnership. Um, very often winning an infrastructure asset comes very early in the planning and preparation because you're finding the right partner that complements your capabilities. Um, clear value creation from day one. So lots of the acquisition by private equity player. A lot of investors have those, you know, 30 day plans, 100 day plans or full potential analysis when capital is not the constraint anymore. How do you as a CEO go beyond your current constraints and limits? What would you do? Luke, if I come with a lot of money to help you grow your business today you're operating your business within the constraints that you have tomorrow with the right investors backing you, what would you do? So those early planning, how do you grow when capital is not a constraint anymore? And for the investor early planning on um, well what is the exit strategy? Those infrastructure. Let's say you have built lots and lots of infrastructure. What is the right exit? At some point you might grow too big for the next buyer that you would have to split your platform into. Maybe I will divest country by country because in the Philippines a local investor will have an advantage on the cost of capital and will give me a better price. But only for the Philippine assets. I would have to look at the Vietnam assets in another way. So for the investors to think about when is the right time to exit. Not too late, that it has become too big or not at an Asia level because you're not going to optimize the um price for the company. So early thinking on growth, early thinking on um exit strategy.

Speaker A: And just on exit strategy, um, uh, do you see the public markets being very receptive to uh, uh especially the yield style assets? Uh, uh, that will come out I guess over the next few years.

Speaker B: Not quite yet to be honest. Um, I think there was a hope years ago that um Yield Public listed REITs. For example REITs in Singapore have always been extremely popular on commercial real estate. And initially as we were building up renewable energy in Asia, we thought that we could replicate the REITs for renewable energy assets which once they are operational, they're essentially yield investments. Um, but we found it, there were a few attempts which we found were a little difficult because those assets have an operational life which is shorter than um, your typical building. Um, very often you will have a portfolio with different currency. So it's difficult to do a REIT in Singapore where all your underlying ah assets you get a discount because your cash flows come from different currency. Um and the local markets. Um, in Asia not everyone has yield type of structure. Japan is a very, is a market with a very, very active um yield. The uh, TKGK structure that's extremely popular. So again it's as everything in Asia, it's market by market. Um, a few countries have an active yield type of exits. In others not yet, but maybe over the next few years. This is something to monitor to see what, what is the cost of capital that you could achieve on exit for a typical infrastructure asset.

Speaker A: So as asset owners, uh, while you need to maintain uh, flexibility and nimbleness and high operational focus in building up uh, equally as you exit the assets, there is optionality, uh, certain assets will play to certain types of thematics and from what you're saying, there is also a large ah, private capital market to absorb ah, growth assets uh, that may not be suited for the public markets.

Speaker B: Absolutely. Um, public markets, private markets. Um, a lot of the energy transition activities don't come from, you know, the transition doesn't come from the traditional players, right, the large established businesses. I mean I come from the power industry. I've been looking at it for 30 years. The biggest renewable energy developers today are not who were the biggest developer of power assets when it was gas power plant or coal power plant or thermal power plants. These are an entirely new set and that's just 15 years later. Um, so all the traditional players, the strategic investors have been less nimble, have been less um, fast in acting upon the transition. But they might be the right buyer of platforms once they have achieved size and scale. So as a private equity investor, exits will have a lot of optionality either at the country level, at the regional level, at uh, the public markets level, at the private market level. Is it another fund or is it a strategic investors aneel if you were

Speaker A: to look out five years, um, I guess where would you expect private capital to generate the most value? And um, how should investors uh, be positioning themselves today to tap those opportunities?

Speaker B: To me the most important at this stage in the last decade we've built assets, we have started asia. I remember 10 years ago being here working on the energy transition. Every day I would open the newspaper and I would be bombarded with headlines that were about record auctions in Europe, record tariffs for renewable energy in North America. And I was here in Asia working on small transactions, really wondering when are we going to see the gigawatts? When are we going to see the billion dollar investments. And ten years later we are very much advanced on the energy transition. We have billion dollar investments, um, very large transactions, gigawatts in the Philippines or hundreds of millions deployed on a single transaction. So it is happening. We have proven we can scale renewable energy. What we are only starting is can we transform the systems, um, take battery storage in Asia, we are only starting to implement battery and we're only using it for a fraction of what it could do. You have excellent examples in Australia or India where customers are asking for green electricity during peak hours. They don't care about getting solar at midday. What they want is peak hours in the morning, peak hours in the evening for those to be green. So developers are now asked to mix wind, solar and battery. And the battery, the sizing of the battery and the software, the underlying software needed to optimize the size of the system. Um, this is where we are providing a service. So that needs a shift in the mindset where we are not building assets. We are transforming the system. And I, uh, would say the platforms who integrate this earlier on will be the winners, um, in the next five years.

Speaker A: Shields, this has been very insightful. Thank you for joining us.

Speaker B: Thank you very much. Luke.

Speaker A: Thank you for joining us. You have been listening to Money Multiple. If you liked what you heard, subscribe to our show on Apple Podcasts, Spotify or wherever you listen.