China, energy and infrastructure – a potentially compelling combination of investment themes? Singapore-based Swiss-Asia Financial Services thinks so.
The firm recently hired an experienced head of infrastructure investment, Wang Pying-Huan, to oversee its first direct foray into that sector in the form of an infrastructure fund, which it hopes to see close at €500 million by January 2012.
That would explain Swiss-Asia's plans to shift its infrastructure team to Hong Kong from Singapore later this year. The company already has a licence to operate in the SAR and would only need to start with a few staff there, in light of the compliance and back-office functions already in place in its 20-strong office in the Lion City, says Wang.
Its new offering, the China District Energy Fund (CDEF), will invest in combined heat and power or 'co-generation' plants, with incentives from the authorities to supply cleaner energy to industrial parks on the mainland.
The fund is a partnership with Dalkia, whose major shareholders are French energy companies Veolia and EDF. Dalkia will help Swiss-Asia identify promising projects and operate most of the assets, while the Singapore firm will ultimately be the investment decision-maker.
“Dalkia has a track record of operating this type of plant, which makes it a preferred party for the Chinese authorities to work with,” says Wang. “It helps a lot having a presence on the ground. Veolia is present in 36 cities in China; such a deep network is useful in terms of both due diligence and having access to deals.”
She cites a couple of reasons for setting up the fund: the fact that the district energy market is a niche area, so competition for investments is limited; and China's support for cogeneration projects, in the form of $30 billion in annual capital expenditure in the sector.
In the past, says Wang, industrial parks had not been able to provide power and steam reliably, so many factories built their own boilers, which are run inefficiently and create a lot of pollution. “The Chinese government is now trying to concentrate the generation of this energy into one party,” she adds. “That's where we come into play, with controlled pollution levels.”
CDEF, which has already received $115 million in commitments, aims to post a 16–18% net annual IRR. It will be selling both heat and electricity generated by the plants to end-users, allowing it to distribute a small dividend in the first year, rising to as much as 10%-plus, once the plants reach full utilisation.
The fund will hold the assets for six-to-seven years until they reach their operational optimum. The firm will potentially exit the assets via a real estate investment trust, says Wang, because there is demand for these kinds of hard assets with a stable yield.
Insurance companies and pension funds are the target investors, due to their desire to have a current yield on investment, says Wang, with most interest coming from Europe and the US.
But Swiss-Asia is also seeing interest from foreign strategic investors with an interest in the Chinese power market but who cannot penetrate it easily.
“It's a good way for energy companies – such as Indian utilities looking to expand their reach beyond their borders – to start and move up the learning curve, with the ultimate aim of buying these types of assets themselves,” says Wang. Having a relationship with Dalkia will open doors for such firms in China, she adds.
CDEF is Swiss-Asia's third product. The firm also runs a fund of hedge funds focusing on emerging, promising Asian hedge funds (the Swiss-Asia Genghis Fund); and a single manager (the Swiss-Asia Marco Polo Fund), a theme-based pan-Asian investment vehicle focusing on infrastructure, consumption and the environment.
Wang joined in January from Deutsche Bank, where she was head of investment management in the private equity group in Zurich. She sees this as a very appropriate move, as she is Swiss with an Asian background and has spent much of her career in direct investments, at Excelsior Capital Asia and in project finance at Nomura and UBS.
Wang had wanted to return to the direct investment side and says: “This is almost like closing a loop I started when I came to Asia 16 years ago.”