Guest Editorial written by Doug Hewson, Managing Partner, Portland Private Equity
As we enter the 2018 hurricane season, we are beginning to understand how last year’s monumental storms have impacted private equity’s view on the Caribbean energy sector.
It’s no secret that the regional energy sector has many issues: reliance on fossil fuels, sub-scale markets, and geographical fragmentation – to name a few. By the same token, however, those same issues have provided private equity investors with an opportunity that can generate the returns necessary to attract institutional investors to their funds. This is especially true where the issues are counterbalanced by predictable regulatory environments, attractive offtake agreements, and creditworthy counterparties.
Irma and Maria underscored the fragility of the region’s energy infrastructure, spurring a new emphasis on resiliency. As countries rebuild (or reconsider) their energy infrastructure, new approaches are being explored: microgrids, renewables, smaller generation sets, off grid storage, and a host of other options which have both matured and become affordable. Implementation of these solutions will result in more agile and adaptable energy systems.
This changes the private equity paradigm. In the past, long term offtake agreements helped investors secure similarly tenored financing at low costs. A consequence of this relationship was that the risk of advancements in technology and other uncertainties were largely assumed by the offtaker and guarantor – often resulting in larger, static solutions. Many of today’s resilient-centric solutions, however, are far from static. The cycle for an investor is therefore compressed as the solution is more likely to becoming obsolete.
As last season’s hurricanes underscored, improving the agility and adaptability of the region’s energy framework must be a priority, even if doing so is more expensive in the short term. One view of the higher price tag is that it is a component of insurance and it will attract the capital of investors who are prepared to take on additional risk for higher returns. As an investor, our view is that as energy solutions become more technology-oriented those solutions have more risk of near or medium term obsolescence. The risk profile of investments in the regional energy sector is changing; returns on those investments will need to change too.