What is your business model? We have set up four funds and are in the middle of a new fifth fund. The first four are development funds, involving obtaining all of the contracting approvals leading up to construction, including power purchase agreements, land rights, interconnection agreement and environmental assessments. Once a project reaches financial close, historically, we’ve brought in large infrastructure partners in order to capitalize project construction and operation. The purpose of the new fund is to be able to participate in the financing of both our own projects and third party projects at the construction phase.
So historically you have exited at the financial close? Historically our development funds would almost entirely own the project up until financial close, and then the fund would either exit completely or hold a carried interest, with the vast majority of control going over to a new infrastructure partner.
Do you work with partners in different countries? What’s important to us is that there’s a local team with a reasonable combination of solar generation development capability and also regulatory and governmental capabilities. We use both multinational companies to provide service and local ones. For example Trinity Law services are provided out of London and we are talking to EY (Ernst & Young) to provide tax services. But we also engage with local councils in the various countries and local expertise for specifically local issues – so a bit of both.
How do you get the projects? We receive a very high volume of potential development projects coming to the office and have a whole system to deal with them. We have an extensive network of developers, financiers, EPC companies, the whole gamut of what it takes to run a solar project. Those relationships are round the world, with global players that we originally met in Canada (where there are many), as well as those operating elsewhere. I think what’s critical is there is only a certain number of solar development companies that have the expertise, capitalization and shareholder appetite to go into developing countries and develop solar. We offer a fairly unique value proposition of enabling and going in and doing that in these markets, combined with our extensive network around the world, which means we receive a lot of deal flow. There is quite a bit of capital available out there at financial close, but not a lot out there for development works. The combination of early stage risk that we take on and the markets we operate in makes us quite unique.
How do you choose projects? We would screen the deal flow based on a variety of factors: marginal cost of new build, solar economics, if a local team is in place or not, extent of staff-up needed. We provide not only capital but development expertise. We would not pay a local developer for a construction-ready site. We are assessing the risk of getting it to financial close, depending on the number and scale of obstacles it faces. Conventional risk return analysis, with a whole bunch of factors: government position on renewables, how much do they need capacity, competing forms of generation, price points, regulatory and legal regime and so on.
How do you establish a local presence: through an equity stake in a local company or joint ventures, or in-house staff? It is a combination of these. Usually they come onto our payroll and we control the ownership of the project. There is always a local team, and on many projects we would add to that team.
Do you use geographical spread to mitigate political risk? The first project was in Ecuador – this was a one-project fund, but it was the first in developing markets. Developed markets have been challenging for renewable power development, so more business is going to developing markets and will increasingly do so. As we go into more and more developing countries, this diversifies and cuts the risk.
Are you varying renewable type to cut risk – for example the Lake Erie HVDC project? That was an opportunistic investment. When we are growing like this, expansion into new geographies requires development of new skill sets. For the time being we are focusing on solar because we are real experts in that. We will take that expertise into new geographies. We may move away from solar in the future, but one step at a time.
How does the new infrastructure fund vary from your earlier development funds? The new infrastructure fund will be much less risky, although there will still be debate over which projects are in and which are out. There is more competing capital. While at the development stage there may be five projects for every one that makes it, with the infrastructure fund once everything is in place these projects should all go ahead. There is an execution risk, but this is much lower and requires a different capital structure and a different type of investor as well. A good infrastructure fund will invest in projects where all the risk that can be has been transferred to the government or other entities. Ongoing operating and political risk can be structured away and still get emerging market returns.
Who are your main investors? For the development funds it has been largely high net worth and ultra-high net worth individuals mostly from North America and Europe and some from Asia. We are in the very early stages of raising the infrastructure fund. We have a $10 million fund from an Asian investor, plus a $25 million warehousing facility pending the fund being raised. We are talking to the institutional type investor that you would expect in order to raise the fund, but it’s too early yet to know who they will be.
How do you mitigate against risks? We offload any risk we are not happy taking. So we normally take on fully wrapped EPC and O&M contracts, warranties and guarantees and hedge currency risk. Political risk should be dealt with at the infrastructure stage within the PPA, along with sovereign guarantees and insurance. If I had to summarize JCM’s core strengths, one would be that we can pull together the appropriate team (over 70 projects already), and secondly we can structure the deals and contracts to ensure that risk is properly allocated. So JCM only ends up holding the risks that we can best manage and others get the risks that they can manage.
Any other key risks? The novelty of these projects means timing and deadlines can be uncertain, so we watch out for that. We must make sure projects are squeaky clean, and that there is nothing that goes anywhere near corruption, so you must be most careful in picking partners and countries.