Mr Rick Mayo-Smith, Managing Director of Indochina Capital, tells why the fund has decided to invest in renewable resource opportunities in the Lower Mekong region.
Some analysts believe that the Lower Mekong region has potential for renewable resource-related projects. Is this true?
The economies of the lower Mekong region (Vietnam, Cambodia and Laos) are among the fastest growing worldwide and experiencing sustained economic expansion fuelled by political reforms, market liberalisation, rising domestic consumption and rapid urbanisation. Generating average GDP growth of 7 per cent per annum between 2005 and 2010, the region has a combined population of nearly 109 million and GDP of $123 billion.
Against the backdrop of strong economic expansion, the region presents significant potential for investments into renewable resources, which we broadly categorise as environmental services, renewable energy, energy efficiency, and managed plantations.
Across these sectors, we see various demand drivers and note that in Vietnam alone the aggregate amount of infrastructure investments required through 2015 is approximately $60 billion. Narrowing down the need for investments into renewable resources in particular, we estimate that, in order to meet a fraction of the current demand, nearly $23 billion in capital investments into environmental services ($13 billion), renewable energy and energy efficiency ($8 billion) and managed plantations ($2 billion) will be required.
Is this why Indochina Capital launched the Mekong Renewable Resources Fund?
Mekong Renewable Resources Fund (MRRF) is a regional fund that will take a private equity approach towards investing into projects and companies focused on a broad spectrum of renewable resources. In addition to the financing that we’ve secured from the Overseas Private Investment Corporation (OPIC), we aim to raise $150 million among our global base of institutional investors and channel this capital into critically-needed environmental and renewable resources investments.
In addition to the demand-led incentives that make this fund a timely product, we also strongly believe that investing into renewable resources-related projects and companies is an imperative considering mounting environmental pressures caused by urbanisation, industrialisation and population growth.
What will MRRF focus on?
MRRF will specifically focus on three target sectors: environmental services, renewable energy and energy efficiency, and managed plantations. Environmental services encompass water supply management, wastewater treatment, solid waste management and recycling.
Investments into renewable energy will cover energy generation through natural resources (hydro, wind, and biomass), combined with energy efficiency solutions. Lastly, the forestry sector involves investments into managed plantations.
The fund’s investments will be comprised primarily of direct investments in unlisted renewable resources-related companies and projects. Preferred structures include joint ventures, co-investments, and wholly owned investments.
Each potential company or project must pass a certain set of environmental, social and corporate governance benchmarks to be eligible for investment. Our investment strategy thus prioritises projects that deliver not only financial returns but also measurable environmental benefits through the deployment of improved environmental infrastructure and “clean” technologies.
What are the implications of the financing facility provided by OPIC?
The $50 million financing facility provided by OPIC will be used as leverage alongside MRRF’s equity investments. OPIC is the US Government’s development finance institution, which mobilises private capital to address critical world challenges. OPIC achieves its mission by providing investors with financing, guarantees, political risk insurance, and support for private equity investment funds.
Late last year, OPIC announced a Global Resources Funds call for proposals, which received 56 applications, and MRRF is one of five funds awarded financing.
While we are not a first-time fund manager, MRRF will be Indochina Capital’s first foray into the renewable resources sector, and financing approval from OPIC brings a high-degree of credibility to Indochina Capital’s capability as a fund manager.
What worries you when investing in the Lower Mekong region?
We recognise that there will always be regulatory and market risks inherent in any investment, particularly in emerging and frontier markets. However, we believe that we can shore-up downside risks by thoroughly screening potential investments, engaging in secure deal structures, and applying comprehensive investment monitoring and added-value procedures.
In addition, Indochina Capital is represented by a diverse team of investment professionals, and our hard-earned local experience provides us with a significant advantage over other managers. For MRRF, the management team responsible for the fund has been working with one another for the past three years and is composed of internationally and regionally experienced investment professionals, with complementary backgrounds and specialised skills in renewable resources, private equity, fund management and public policy.