Due Diligence: Talking clean energy investment in Africa with Inspired Evolution managing partner
How we made it in Africa’s Due Diligence series asks top players in Africa’s private equity industry about how they are mastering the art and science of profitable dealmaking and fundraising. Doing the due diligence on those who do due diligence for a living.
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Inspired Evolution is a specialised investment management business based in Cape Town, and with regional offices in London, Mauritius and Nairobi. It focuses on clean energy investments. Michael Avery sat down with managing partner, Christopher Clarke, to find out how he does renewable power deals in Africa.
What is it you look for in an investment?
Besides being a clear fit within our two specialised investment themes – clean energy and resource efficiency – what we look for at a high level is the potential of an investment within these themes to deliver on our targeted commercial returns with a measurable net positive impact. This is our mission: to profit with purpose and impact. It’s our core DNA. We set out to demonstrate that we can deliver high impact and superior investment performance. And we have demonstrated this successfully under our Evolution One Fund where the fund is a top quartile performer globally for its 2008 vintage. This approach defines and differentiates us in the marketplace.
Then, we look for projects and companies using a much more detailed suite of investment criteria to guide our evaluation decisions, including but not limited to, the following considerations:
- Strong management teams with proven track records
- Proven technology at commercial scale with limited execution risk
- Demonstrable, clear and coherent business strategy and validation of product/service market adoption
- Scalability – we prefer platform applications (isolated single project investments only where justified)
- Options to take equity in the developer platform and/or pre-permitted projects (preferred)
- Demonstrated project conversion developer track record
- Capital efficiency and where cost control influence (overheads) can be effected
- Validation of pipeline with clear visibility of cash generation
- Project inputs (feedstock) and power purchase agreements (PPAs) are in place with creditworthy offtakers
- Technology provider guarantees to be available
- Country risk mitigation and government support
- EPC and O&M contracts on acceptable terms
- Senior long-term debt is available at the appropriate terms and tenor
- Compliance with all relevant national and international laws, regulations and treaties, and our own bespoke environmental and social management system
- Clear exit potential before the end of fund life
What is the greatest investment lesson you’ve learnt?
To always focus on relationships based on integrity and shared value, and never lose focus on the transaction fundamentals. Always having the hard negotiations upfront – entry valuation is key. Don’t delay key actions and/or management replacements to a later stage. Don’t get too clever on fancy deal structuring if it can be avoided – keep things simple. Be patient, but persistent. It will pay off in the end.
Identify an untapped opportunity for private equity investors in Africa.
In our specialised investment universe, I think distributed (and embedded) energy technology solutions and platforms – which increasingly will include energy storage components and disruptive financing business models such as pay-as-you-go mobile banking – is a compelling opportunity set across Africa. It responds to the current 635 million people who lack access to energy as well as a growing critical mass of businesses and industries looking for more affordable, reliable power.
What is the biggest misconception about your job?
Probably the misconception that private equity players behave like “barbarians at the gate”. And that making money for investors whilst doing good is easy. In contrast, we see ourselves as active agents of positive change. But there may be some rogue players out there that influence public perception. We also don’t sit behind computer algorithms and switch stocks in a passive manner with limited connection to the people driving underlying businesses and their shareholders. The active ‘hands-on’ investment management approach of private equity houses focusing on value creation is in deep contrast to this.
Name the one deal you wish you invested in.
We are quite philosophical about lost opportunities. We believe everything happens for a reason and at the time of execution, if a deal is lost, it’s usually that our rigorous assessment of valuation combined with our preferred investment terms and conditions simply could not be agreed. And sometimes there may be exogenous factors that influenced the outcome. But we try not look in our rear-view mirror and agonise over these. Good opportunities often recycle in a more palatable form.
What are the skills needed to succeed as a private equity investor in Africa?
Successful GPs are those that have created a high-performance culture with an institutionalised set of core competencies to underpin their investment approach. This often involves a flexible investment strategy, but tailored to investing within specific sectors and industry focus areas across African markets.
Other key attributes are deep market insights and sector experience, strong networks for proprietary deal origination, analytical rigour in evaluation, negotiation and innovative deal structuring, and active value creation. Importantly, the execution of this GP skills set with commitment and agility to forge alignment between all stakeholders.