Data & Intelligence

Views from the Field: Denham Capital’s Scott Mackin on Africa’s Energy Landscape and PE Opportunity

Scott Mackin is a Managing Partner and Co-President of Denham Capital, where he heads the firm’s Power team. Denham is an energy- and commodities-focused private investment firm with more than US$7.9 billion in invested and committed funds in the oil and gas, power and mining industries. Scott also serves as Chair of EMPEA’s Energy Council.

Africa’s energy and private equity landscapes

The energy landscape in Africa is largely, both by necessity and opportunity, poised for growth. With a growing and young population, significant under-electrification, tremendous natural resources and growing GDPs, the macro conditions for Africa are screaming growth in energy. Economic output has nearly quadrupled since 2000, and a third of African countries are expected to continue annual GDP growth over six percent. To meet this growth, energy infrastructure will require tens of billions of dollars of annual investment over the next several decades. This growth, of course, is uneven in different countries for a variety of factors, including access to indigenous hydrocarbons, stability of governments and the will of governments to enable necessary infrastructure through clear commercial thought and regulation.

The change we have seen in the past five or so years is that more and more private equity deals are getting done. When deals are closed, the track record of Africa is very good. This is being recognized: in 2013, there were 108 private equity investments completed in Africa and more than US$1.8 billion invested, according to EMPEA.  Reaching financial close is where deals have fallen off historically, but we see this changing.

Over the next decade, we see a series of minor and then major changes occurring, which will transform much of the continent. In the first phase, more and more power plants will get built, both conventional and renewable. Then, the major offshore discoveries will become commercial. Finally, offshore associated and primary gas will begin to reduce the cost of power across many parts of the continent, and significantly lower cost electrification will alter the economy significantly.

Opportunity for investors

Investors in the African energy sector will have very significant opportunities across the entire value chain. For oil and gas, there will be multiple, large investments required upstream, midstream, in distribution and in related services. For power, there will be tremendous needs for investment in new solar, wind, gas-fired, coal-fired, biomass and geothermal generation, plus emergency and distributed power. As such, generation capacity is expected to nearly double over the next 20 years. There will also be significant transmission and distribution investments required. The sheer size of each opportunity will be compelling in and of itself. Put together, it is clear that Africa will be a focal point in international energy investing for many.

More specifically, investors in African energy have the opportunity to “do well by doing good.” Private equity investment in this sector helps businesses meet the demand for affordable power in Africa. The continent has some of the world’s highest power tariffs and the lowest generation capacity per capita (0.1 kilowatt per thousand people versus 0.5 kilowatt in non-OECD countries and 3.4 kilowatt in the United States, according to the U.S. Energy Information Administration’s International Energy Outlook 2013 report). Delivering this unmet need creates both business and social value—values which have a transformative impact on local economies. Power is critical to a thriving middle class. Without it, schooling, hospitals, preventative care, provision of food and other necessary goods and many facets of commerce are all negatively impacted. Non-resource economies are already a central driver of growth, with services accounting for more than 50 percent of GDP growth from 2001 to 2011.  And, once inhibitive electricity costs are reduced, the consumer base and middle class will begin to flourish.

Private equity energy investment in Africa

Broadly speaking, there are two types of private equity, buyout and growth capital. Growth capital-focused private equity is well situated to thrive in Africa, and Africa is widely considered by limited partners to be the most attractive among emerging markets for new investments. Particularly as one looks at energy, there are an increasing number of infrastructure investors with keen appetite for operating, and even “shovel ready,” infrastructure projects. However, the biggest obstacle to those investments is all of the development work, which is not only time consuming but also capital intensive. For oil and gas, the obstacle is clear exploration and production risk, where infrastructure investors are waiting to play in the necessary midstream infrastructure once developed. For much, if not all of the remaining value chain, the obstacle is doing all of the work that is required to get projects to the point where international investors and development finance institutions are willing to invest, being cognizant of both local sensibilities and international norms. Knowledgeable private equity can fill that gap and earn returns commensurate with taking those risks.

EMPEA has served as a useful reference platform for CDPQ by helping to define the eligible universe of fund managers in growth markets. Membership provides background data and a...

Rashad Kaldany | Executive Vice-President and Growth Markets, CDPQ

The developed markets have no equivalent to the role EMPEA is playing as a convener and source of trusted information in the emerging markets.

David Rubenstein | Co-Founder and Managing Director, The Carlyle Group