ESG Global Infrastructure Investing in Latin America and the Caribbean

MARC FRISHMAN:
Hi, Elana. Thanks for the opportunity to participate.

EMS:
Absolutely. So Marc, to kick off the conversation, tell us a little about the firm and how you got to where you are today.

MF:
Sure. Exagon Impact Capital is an emerging manager focused exclusively on sustainable investment in Latin America and Caribbean. This is a space and region that I've been focused on for over 20 years. I started directly out of business school joining a firm that was known as Scudder Latin American Power Funds, which was the first private equity funds focused on Latin America and the Caribbean, and within that specifically on power generation.

And over the years, over 16 years at Conduit, we invested in both conventional and we were pioneering investors in renewable energy. And eventually I joined Barings. And from Barings, two years ago I left to execute on the opportunities for renewable energy and sustainable infrastructure in Latin America and the Caribbean.

EMS:
Great. So Marc, that is a nice segue into the first question I have for you. Love to hear your outlook for your investment strategy.

MF:
Sure. So ESG and sustainable investing in Latin America is really a significant opportunity. I think there's a perception around the world that the emerging markets are far, far behind in addressing ESG and sustainable infrastructure.

Arguably, there's more of an importance for a focus on the region because years ago it was behind, but many people that visit the region and interact with counterparties and projects quickly realize that it's much more advanced than they had been expecting.

Additionally, there's a perception that there's a sacrifice on return for a focus on responsible ESG and sustainable investing. And there's plenty of empirical evidence at this point, research that's been done by big bulge firms that show that skilled investors that are focused on this space, and specifically on the middle market we see enormous opportunity, returns, again, to the skillful investor, premiums that far exceed the risk that you're taking for participating in the emerging markets.

EMS:
Great. And Marc, more specifically, what are some of the greatest opportunities you see in this space and why?

MF:
So years ago, back in 1998 when I started, there was a lot of investment in conventional energy. It was a lot of fossil fuel, fire generation, for example. But that was really what these economies and these markets required. They were a bit behind. They needed capacity. Many of the countries in the region didn't have the renewable resources, they just needed energy. And the cheapest way to create that energy was using fossil fuels.

As technology evolved, costs came down and it became more commercially and financially achievable to hit the returns required by investors. So today, renewable energy in the region is absolutely an attractive space. And within renewable energy and within Latin America, we believe that the middle market offers the greatest opportunity.

Historically, what we used to do is we and other players could sit back and, for example, get a long-term contract to sell energy to either government or a commercial or industrial offtaker, 15 or a 20-year contract for let's say a 30 megawatt solar project. You would build the project, you would maintain and operate it, you would harvest the dividends, and at some future date you would sell to a bigger player or a strategic, for example.

Today, we're seeing a lot more opportunity in distributed energy, which means rooftop energy to, in our case, we focus on commercial and industrial, so larger users for large industrial manufacturing facilities, department stores, grocery stores. And what that means for us and for investors is a lot more work. You really have to roll up your sleeves a lot more to really get these smaller individual projects going, and then the idea is to roll them up into a critical mass where it's more attractive for a future offtaker.

So we believe that distributed energy globally is a great opportunity. And as you see not only in emerging markets where the quality and reliability of energy is important, we're seeing that in the developed markets as well. You can see Texas over the last few years had big issues and other places in the world where if you have distributed energy there's a lot more reliability if you do it in the right way.

EMS:
Great, Marc. And on the other hand, what are some of the greatest challenges you face and why?

MF:
I believe that the challenges that we are dealing with really have to do with the region. If you build a solar power plant, for example, or a wind project or a smaller run-of-the-river hydroelectric project, well, we're only investing in proven technologies. It's important to add. It's the same technical asset, the same solar power plant. Whether it's in New York or it's in Mexico, or it's somewhere in Asia or Africa, it's the same.

The challenge is in the emerging markets. There's a perception that when you're entering some of these markets, that there's this enormous risk. And our approach is with the skillsets we've developed over the years is our job is to mitigate risks. So our challenge is to come up with, at the end of the day, a project that has a similar risk profile is something that you might find in a developed world in Europe or the states, but yet sits in the emerging markets where you can achieve a premium for a return. So that premium could be 800 basis points for a solar project. The same physical asset with a long-term contract, proven technology that just happens to sit in the emerging markets.

And while there's plenty of conversation today, plenty of press about interest in ESG investing, sustainable investing, the reality is when you get down to it and you talk face to face with investors, most of the allocators are compensated for returns. And if they start out with this perception for real risk and also misperception for risk, it is very challenging to raise capital to really execute on the most attractive segment of the market in emerging regions.

EMS:
So Marc, to shift gears a bit, DEI has obviously been top of mind for the alternative investment community, so I wanted to see how your firm is addressing this timely and important topic.

MF:
Yeah, sure. So as I've mentioned several times, I've started a long time ago in the business and our founding investors at the initial fund I was at were the IFC and CAF. The IFC have the World Bank, and CAF, which is a multilateral from Latin America. And as you can imagine, ESG, sustainability, DEI were at top of the conversation before it became so fashionable to talk about. So in our practice, it was always part of our investment philosophy. So that includes participation with different parts of the local populations that previously had not participated, in companies, in management, different types of community projects and work.

Specifically, what we're doing today, and one of my partners, Claudia Arango, has come out of working in the region in private equity and infrastructure for over 20 years. And we first started this, we were sitting having conversations and she said, "Over 20 years, I can't tell you how many times and how many investments I was the only woman in the room, especially for infrastructure." It was very difficult for her to find other counterparties and other colleagues that were female.

So she made it a point and we agreed that for diversity, an important reason and part of our conversation is why is this? And part of it is it was hard to find senior women, women in senior positions because they never had the opportunity to start as analysts because they weren't attracted to it, there wasn't the opportunities.

So we've made a commitment on our fund level. So there's two levels. There's the fund level and then there's a portfolio asset level. So on the fund level, our intention is as we grow our business, we hire analysts, we're looking specifically for female, women that have the skillsets in order to grow and to promote the diversity. Additionally, we are, I'm probably not the most diverse face that you'll see or here, but within our partnership, we have representation for both women and minorities as part of the partnership. We intend to include that as our business grows. And we also include that with our portfolio investments in the region.

Again, typically over the years, I would show up in Latin America and you didn't see a lot of diversity in terms of certain segments. Indigenous populations that we were participating in the communities, they weren't representative of the partners that we had. And were making it a big objective to hire representatives from these communities, of course, that are qualified, to promote this diversity within our investments.

EMS:
Great. Marc, we've covered a lot of great ground today and wanted to see if you have any final thoughts you'd like to share with us.

MF:
Overall, I appreciate the interest in this conversation you have and anyone out there listening. I think it's a really important topic. It's one that's generated a lot of press. There's a lot of interest. I think overall in the investment community, there's a lot of work and energy being put in to figure out how to do it right. And we're not perfect. It's an evolution. I think we're really on the right road. We're working with a lot of multilaterals that have been putting a lot of energy into it, specifically for the region. So there's a lot of great expectation for continuing to grow in the marketplace.

EMS:
Well, Marc, I wanted to thank you so much for joining me.

MF:
Thank you. It's been a pleasure.

EMS:
And thank you for listening to the EisnerAmper Podcast Series. Visit eisneramper.com for more information on this and a host of other topics. And join us for our next EisnerAmper podcast when we get down to business.

Transcript by Rev.com