Scion of Wall Street bringing light to Africa | Fin24
 
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Scion of Wall Street bringing light to Africa

Mar 16 2016 11:30
Ciaran Ryan

Herve Ime, the son of a Senegalese diplomat, is using his Wall Street cred to bring light to Africa – literally.

Born in Tunisia, educated in Paris and the US, Ime is the founder of UniCore Group Capital, a Wall Street hedge fund investing in African alternative energy projects – something most other funds find a little too exotic.

His endeavour to bring electricity to the failing power grids of Africa means he has to spend much of his time explaining the realities of Africa to US investors, many of whom still associate the continent with dictatorships and coups.

In the last two years he has put together renewable energy deals totalling 300 megawatts (MW) at a cost of about $600m (R9.6bn) – or $2m (R32m) a megawatt. This is enough to power about 200 000 homes.

UniCore Group’s pipeline of projects over the next five years will see this figure balloon to about 2 500MW. It already has solar and hydroelectric projects in Vietnam, Ghana and Kenya, but plans to expand into more than a dozen countries in the next five years, which makes it one of the most exciting companies to watch in this space.

Though based in New York, UniCore Group – founded by Ime and his partner Carmelo Cataudella – sees a bright future for energy in Africa. The company now has offices in New York, Vietnam and Brazil, and is about to set up satellites in Africa and India.

“The power grids of Africa are suffering from years of underinvestment. You see that already in South Africa, but also in most other countries across the continent. The power grids are starting to fail, and you cannot plug in extra generating capacity overnight. The lead time to bring on extra generating capacity is a decade or more,” he told finweek.

Ime believes former Senegalese President Abdoulaye Wade was booted out of office in 2012 by Macky Sall, the current president, because of power issues. “I’m not talking of political power but electricity,” says Ime.

“Wade allowed the power grid to degenerate to the point that companies relocated elsewhere in Africa. So jobs bled across the border and that contributed hugely to Wade’s falling popularity. If you look at South Africa, the underinvestment in the electricity grid has commercial as well as political consequences. People will blame the government if jobs are lost due to inadequate power. That’s the reality.”

It’s a sobering thought, and one that African political leaders would do well to heed. In choosing a business location, investors will look first at the state of the power grid, says Ime. If that fails the smell test, they will generally skip on to the next country.

The company is in the process of acquiring a broker-dealer operation that expands its fund-raising capacity, allowing it to accelerate its plans to roll out renewable energy plants across the globe.

This will allow it to create securities that give investors a bite of some of the choicest renewable energy projects around. The beauty of this market is that returns are certain and predictable, and investors are hedged against market turbulence.

“This is why we don’t invest in the stock market,” says Ime. “We like to be in control of our projects and the returns they generate. Stock markets go up and down and are heavily influenced by external sentiment. We only back projects where we are assured a predictable return.”

First-of-a-kind 

UniCore has two renewable energy projects in Vietnam generating a total of 52MW, with a further $1.2bn in Vietnamese solar, wind and hydroelectric projects in the pipeline. A unique aspect of these projects is that they earn variable tariffs depending on the season.

The company recently signed a joint venture with Idea Power in Kenya that involves a unique concept in the renewable energy space: UniCore will establish a marketplace connecting project developers with funders, contractors and suppliers.

“We are the first to put this kind of marketplace together,” says Ime. “This means we are taking away the initial risk so these projects can be fast-tracked in a way that was not possible before. Financial institutions can get matched with projects and Engineering Procurement and Construction (EPC) companies.”

While there are other hedge-fund managers tackling renewable energy, Ime is one of the first to take a venture capital approach to the sector, providing seed capital for project developers that would otherwise never get a look in.

Investors usually wait for all the regulatory compliances to be ticked before throwing money at renewable energy projects, but Ime says this means more than 70% of renewable energy projects never get off the ground.

Large investors will only look at a renewable energy project once the project developer has secured a Power Purchasing Agreement (PPA) from the national power utility, a process that can cost $1.5m – sufficient to cause most developers to fold before they are out of the starting blocks.

Most projects never get to this point for lack of development capital to complete all the regulatory compliance issues, such as environmental and grid interconnectivity studies.

“There are plenty renewable projects that come across my desk at various stages of development,” he says.

“Sometimes you have someone with an idea and a piece of land, but they never go beyond the idea stage because they lack the development capital. This is where we come in. We provide the capital needed to get the project to PPA stage – which is essential if you are going to attract serious investor capital.”

What UniCore does that differentiates it from the rest is that it gets involved in renewable projects at an early stage and nurses them all the way to completion.

These projects are costed at an internal rate of return of 13%, with roughly 10% going to the investor, the balance being used to hedge out risks of early project development, such as currency and energy cost risks.

Risky business or the future?

One of the biggest risks is certainty of payment from state-run power utilities. Ime says this risk is often overstated as African governments tapping the international bond markets will want to avoid any suspicion of being unable or unwilling to honour debt obligations.

This is especially true now that countries from Ghana to Zambia have started to tap the eurobond market on a scale never before seen. With that comes stronger fealty to the rules of borrowing on the international debt markets.

He sees a risk of late payment in some countries, but default is out of the question in all but one or two dysfunctional states.

“One of the biggest perceived risks in Africa is political. Large-scale investors will steer clear of any country where there is a fear a new government will come in and repudiate obligations and contracts underwritten by the previous government.

“I think this risk is overstated. Market disciplines and rule of law are far stronger in Africa than they were a decade ago, and I think we were among the first to recognise this. Look at what the Chinese are doing in Africa. They have invested massive amounts in resources and infrastructure across the continent. Clearly, they do not see political risk the same way Western investors do.”

There is a danger that some countries will over-regulate the energy sector in the belief that this serves the national interest.

Too much regulation stifles investor flows, and strangles economic growth. Most investors understand the need for indigenisation and affirmative action laws, provided these do not prejudice those who are providing the bulk of the capital.

Ime says African governments need to find a balance between social and investor equity, and some are leading the pack in this regard – Ghana, Ivory Coast, Kenya, Botswana and Rwanda being among the leaders.

“These countries have investor-friendly governments, and started to put rules in place to make investors feel safe. The rules and policies are clear and provide comfort to investors. They also have strong utility companies that have well-defined energy policies that lean heavily towards renewable energy, which is where the future lies,” explains Ime.

Ghana’s energy policy calls for 2 000MW of renewable energy by 2018, while Kenya is aiming for 5 000MW by 2017.

“Neither of these are realistic, but at least they have targets and clear regulations that investors can understand and support. These governments see the connection between energy and economic development. And that is a positive sign,” says Ime.

India is another country about to take a giant leap into a renewable energy future, and UniCore is at the forefront of that advance.

One project currently on the drawing board calls for 2 500MW of renewable energy and $4bn in investment funds – a whale-size bite that will be spread over several banks.

Ime has no doubt that renewable energy is the next big thing and he is carrying that message across Africa. Fossil fuels will eventually give way to solar, wind and hydroelectric power plants.

Nuclear is attractive from a cost point of view, but the social risks are simply too great to bet any country’s future on this. Renewable energy technologies are improving in leaps and bounds and efficiencies are improving each year.

This article originally appeared in the 10 March 2016 edition of finweek. Buy and download the magazine here.

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