Asian Venture Capital Journal - 20 Jan 2016 - Author: Holden Mann
Thanks to a strong relationship between their respective founders, Armstrong Asset Management has helped The Blue Circle become an influential player in Southeast Asia’s renewable energy sector
For Andrew Affleck, founder and managing partner of Armstrong Asset Management, the firm's relationship with its portfolio company The Blue Circle is defined, more than most, by his own bond with Oliver Duguet, founder and CEO of the Singapore-based wind energy development company.
"Our personal relationship started before the business was even founded," says Affleck. "We talked about a lot of the things that we see as key success factors and how we're implementing those elsewhere with our businesses. So as we've gone along, we've really been just implementing things that we talked about at the outset."
The pre-existing relationship has been a major factor driving the investment over the last two years, with Duguet's knowledge and experience with renewable energy production complementing Affleck's years spent doing business in Southeast Asia. Though the GP only holds a minority stake in the business, the trust established between both founders has allowed them to work with a high degree of partnership and flexibility. Both hope the trust will pay off with the creation of a new market leader.
The Blue Circle has its origins in Duguet's experience as an equity finance investor in France. He entered the world of finance as a retail investor in the 1990s, but by the end of the decade had decided to launch a fund of his own specializing in green energy investments.
Working on that fund, and interacting with green energy developers in Europe and beyond, inspired him to take his career change even further, and in 1999 he launched Societe Francaise d'Eoliennes (SFE). Duguet was no engineer, but he had learned to spot a commercial opportunity, and with France's wind industry in its infancy in contrast to more established markets like Germany and Spain, the time seemed right to get in on the ground floor and build a business.
SFE proved as successful as Duguet had hoped. Over the next seven years the start-up became France's largest independent power producer (IPP) in the wind space, with 125 megawatts in directly owned and operated projects, 20 MW under management for third parties, and another 1000 MW under development in France and its overseas islands. The management considered a public listing, but the global financial crisis changed their minds.
"In mid-2007 we were ready to go on the roadshow. But given the volatility in markets at that time, we decided to sell the company through a trade sale," Duguet remembers. In the end Sorgenia, the energy unit of an Italian conglomerate, acquired the company for €246 million (then $354 million) in December 2007.
With the previous venture wrapped up, Duguet began looking for new opportunities. But the market had changed in Europe and the US. Not only was the clean energy sector maturing, leaving fewer chances for start-ups to break in, but the financial crisis was drying up the funding opportunities for new projects in developed countries.
Southeast Asia seemed to offer the opening that the established markets denied. Though renewable energy production in the region was still low in 2010, a number of factors were in play that would drive interest in alternatives to traditional fuels. Concern over prices of coal and oil, along with desire to reduce dependence on foreign energy sources, and in some cases fears of the effects of climate change, led countries in the region to look for ways to utilize resources such as wind, solar, and hydroelectric power.
This interest in alternative energy has resulted in government policies encouraging its development, particularly in the Greater Mekong sub-region, where Blue Circle eventually decided to set up shop. Thailand's government, for instance, plans to raise renewable energy sources to 25% of the country's total energy mix by 2021, compared to 12% now. Vietnam has also set renewable energy goals, though more modest - raising the share from 3.5% in 2010 to 4.5% by 2020 and possibly to 6% by 2030.
Both governments have implemented development incentives, with feed-in tariffs subsidizing wind power specifically in Vietnam and grid-connected renewable energy projects in general in Thailand.
"Southeast Asia has a very large population, very high growth, huge demand for energy, and no nuclear power competition," says Duguet. "So a lot of countries are running on diesel or coal, with an energy mix that is going to be dramatically changed in the future. The macro picture was really appealing, and I think it continues to be one of the most appealing in the world of energy today."
That assessment of renewable energy's potential in the region is shared by other observers: in last year's BP Energy Outlook, renewable energy production in the Asia Pacific region was projected to climb to 194 million tons of oil equivalent (MTOE) by 2020, and to 462 MTOE by 2035.
However, even those who recognized this potential were frustrated by a lack of local expertise. Duguet's experience in planning and financing wind power projects on an international basis made him a very valuable commodity to those hoping to kick-start the sector. Affleck in particular set out to convince him to put down roots in Southeast Asia.
"I was able to share early on what I felt were key success factors for businesses generally in Asia, and some of the trials and tribulations that other developers were facing in these emerging markets," says Affleck. "And so what made it attractive is that he took a lot of things on board and came up with a plan and a strategy."
With the beginnings of a working relationship with a potential investor in place, Duguet decided to commit to the region, moving his family to Singapore in 2013 and forming Blue Circle. The following year Armstrong committed to invest up to $40 million in Blue Circle's wind projects in the Greater Mekong Subregion, along with taking a minority stake in the company itself.
This investment structure was a departure from Duguet's previous ventures, in which investors had not committed to finance the projects themselves. Armstrong's willingness to take on the risk of participating in development projects impressed the founder.
"They are one of the very few I met at that time, and still today, that are able to take some development risk in order to later have access to one part of the portfolio of projects. And it was the real key reason why we did this deal with Armstrong," says Duguet. "They were aligned, getting paid through this minority share investment into developers, and taking development risk, so it was fundamental for an interest in the common deal."
Finding a voice
Affleck's confidence in Duguet's experience and knowledge has been borne out by developments since the investment. In addition to building out its own projects, Blue Circle has taken on a leadership role in the region's renewable energy industry, introducing ideas already current in more established markets.
In one notable case, Blue Circle stepped in to help regulators in Thailand write the country's regulations concerning the siting of wind turbines. While such rules are common in Europe and the US, with the goal of reducing the impact of turbines on local animals and on the landscape, Thailand at the time had no such restrictions.
Blue Circle could have taken advantage of the lax restrictions to use land it would not have been able to access in other markets. However, as the company felt that the introduction of such rules was only a matter of time, it decided to participate proactively in the planning process. The approach was pursued partly on Armstrong's suggestion.
"We take the approach of engaging wherever possible with the regulators to give them constructive feedback, whether directly or indirectly, with our investee companies, on how we think things can be improved for everybody's benefit," says Affleck. "So I think it's an important part of the value add, as an investor, that we bring to the table as well."
In addition to its relationships with regulators, Armstrong has also contributed to the development of Blue Circle's network of business partners and investors. The firm has introduced new members to the company's board, and has also helped to arrange financing for specific projects.
Specific assistance on this front has come through Armstrong's membership in the Seed Capital Assistance Facility (SCAF), a consortium of investors managed by international organizations to target funding to early stage projects and businesses. One of the terms of the original investment was that SCAF would support 4-5 of the projects backed by Armstrong, providing $1 for every $5 committed by the GP.
Though this is a minor source of finance, having access to this capital has allowed Blue Circle a reserve to cover unforeseen costs in its projects. The company has used the SCAF funding to pay for equipment to collect wind data, along with paying for third-party evaluations when faced with construction issues.
However, the financial support is a relatively minor factor compared to the assistance Armstrong has been able to provide with its experience in the Southeast Asia market. The GP is already very familiar with the specific challenges of operating in this region, such as having to deal with multiple governments with different regulatory approaches, and prepares guidelines for all of its portfolio companies to help them deal with potential issues.
Armstrong also encourages its companies to maintain strong relationships with local stakeholders, beyond governments and regulators. In the case of Blue Circle, which often does business in rural locations, this means providing education and opportunities to the communities that are affected by their projects, and being respectful of local cultural sensitivities.
"That engenders not only good risk management practice, but engenders a lot of good will," says Affleck. "So community involvement is where Blue Circle has dedicated time, and just allowing people to get to know them, what their plans are, and how they do their business, and I think that's helped them a great deal."
Milestones in mind
Since Armstrong is still in the early stage of its investment, it is not thinking of exits at this time. However, there are a few milestones that the private equity firm would consider important steps along the road. One is the completion of Armstrong's first wind power assets, expected next year. Following this, the company will seek to scale up its operations through construction of additional assets - its pipeline includes projects in Thailand, Vietnam, Cambodia and Indonesia.
The key trigger is an operating portfolio above 30 MW; at this point the GP would consider Blue Circle mature enough to exit, most likely through a trade sale to another developer that can help it continue to scale up. However, this is not expected to come in the next few years.
When Armstrong does exit, the firm hopes the Blue Circle investment will serve as a strong case study of the influence that can be exercised by a minority shareholder. A number of factors have contributed to the firm's ability to push its agenda. Armstrong's experience with the local market is one factor, but perhaps the most important is the trust established between the two parties.
Armstrong's willingness to take the risk of investing directly in the company's development projects, while still holding only a minority stake and thus leaving the decisions in the hands of management, demonstrated its belief in Duguet's judgement. The founder considers this a significant marker of their relationship, which is unique among his past dealings with private equity investors.
"For me it's difficult to make the difference between Armstrong itself and Andrew as a board member of Blue Circle. Andrew is bringing to us everything we can expect from a board member: bringing advice, being always here, with a good pair of eyes on our everyday issues and challenges, giving us advice when he can, and bringing whatever resources he can to us," says Duguet. "I have previous experience with PE funds, which have been very hard. It's absolutely not the same as we have today with Armstrong."