Revego listing to give investors access to growing renewable sector

 

Renewable energy is an obvious area for investors looking to get exposure to one of the most important investment themes of our times. Yet the local landscape for investing in renewables is limited at the moment.

That is set to change as Revego Africa Energy Limited makes its debut on the JSE this year, the first yieldco to go public in South Africa.

A yieldco owns operating assets that produce a predictable cash flow, primarily through long term contracts. Globally, many yieldcos focus on renewable energy contracts.

In this episode, the Revego team explains the investment structure of the fund and the type of investor likely to invest.

Our panel is made up of:

  •        Reyburn Hendricks, chief executive officer of Revego Africa Energy Limited
  •        Mike Meeser, chief investment officer, Revego Fund Managers
  •        Chris Yelland, managing director EE Business Intelligence (moderator)

Hendricks and Meeser say the idea behind Revego arose from identifying a gap in the sector, due to the difference in requirements between long term investors and those who initiate and develop renewable assets.

“These developers are not naturally long-term shareholders, but rather want to take their money from one deal and put it into further deals,” says Meeser. The Revego Africa Energy Fund therefore plays a role in providing a means for developers to exit, while giving long-term investors access to this important asset class.

The Fund also fulfils a role for developers and long-term investors alike, by ensuring compliance with South African ownership and black economic empowerment codes.

“The fund qualifies as a black-owned fund under Department of Trade and Industry guidelines, with the fund manager being majority black-owned,” says Meeser, “That’s why we think it’s a great opportunity in the market for investors and developers.”

Hendricks explains the structure of the Fund and listed vehicle: Revego Africa Energy Limited, will be the entity listed on the mainboard of JSE, which in turn will hold a 99.99% stake, as a limited partner, in the Fund. 

“The Fund will hold the equity stakes in the various renewable energy investments, as selected by the fund manager. So this is a direct and indirect investment that both institutional and retail investors will be able to make in the sector.”

Revego Fund Managers in turn manages the Fund, including administration, the sourcing investments, due diligence and the ongoing management of the different assets. Revego Fund Managers is a majority black-owned and managed fund manager, and the Fund is hence regarded as a BEE entity according to the BEE codes. 

Cornerstone shareholders in the entity to be listed on an equal basis are Investec Bank Limited and UK Climate Investments, and the latter has the UK government and Macquarie as stakeholders,
concentrating on clean energy in India and Africa. A third shareholder is the Eskom Pension and Provident Fund.

Hendricks says there are a number of governance processes in place. “The fund manager has a deep, experienced and independent investment committee, so any recommendations which the fund manager makes, need to pass through and be approved by the investment committee.  There is also an advisory board made up of the independent directors of Revego, who oversee the relationship between the fund manager and the fund, and particularly any potential conflicts of interest,” he explains.

Meeser explains that the fund manager will predominantly look at acquiring equity, post-construction. “If you look at the risk profile of a renewable energy project, the risk profile decreases over time with the highest risk being at concept phase,” he points out. “What we’re looking for are cash flows that start post construction and when they start generating electricity.”

As a yieldco, Revego seeks stability around future earnings, Meeser says.

“So when we look at Revego, there’s the life cycle that a project goes through, from conceptual phase, to securing a contractor, securing an operator and securing other investors. Not all these investors are natural long-term holders of the equity. They took the development risks, but once that asset stabilises, they potentially want to sell the equity and reinvest the equity in the next project or other projects. That’s where we come in as an investor,” says Meeser.

Hendricks points out that Revego will differ from other listed vehicles, in that it will already have an initial portfolio, thanks to an acquisition facility extended by Investec. Proceeds of the listing will then be used to pay down the facility and to acquire assets that the fund managers have been assessing.

Scale and diversification are the goals of the Fund, says Hendricks. “I think we are going to be quite acquisitive, expanding and diversifying the portfolio.  So Revego will be diversifying across technologies, across sponsors and across geographies.”

“At the moment the initial portfolio is all based in South Africa. But over time as the other countries in sub-Saharan Africa also develop their own renewable programmes and as those projects go through their life cycle, they will become investment candidates. We expect to see some diversification across currency as well, because typically, sub-Saharan (ex-South Africa) government programmes are typically US dollar-denominated,” he adds.

“There would be some diversification across some of the regulatory aspects. Typically the sub-Saharan government programmes include a foreign development finance institution who gives credit enhancement into the scheme.”

Hendricks says he expects to see some exciting developments in South Africa. “The integrated resource plan (IRP) calls for like approximately 20,000 megawatts of renewables, either on the grid, or
contracted for by 2030. That’s quite a large multiple relative to the existing six thousand megawatts, so what’s going to be needed is a lot of capital from the private sector, particularly on the equity side in order to bring those 20,000 megawatts onto the grid,” he explains.

“So a vehicle such as Revego will assist in the development of a future rounds of the IRP and it and by doing so it will ‘crowd in’ the institutional investors who are looking to get direct and indirect exposure to the sector,” he expands further.

Revego will aim to fulfil the needs of pension funds and individual investors looking to get  reliable returns. “Over the life of the investments, the cash flow will be in the form of dividends. The intention is to pass through almost all of distributions to shareholders,” he says.

He adds that the yield on the investment is expected to grow over time as the senior debt in the underlying projects gets repaid. Revego will be targeting a yield of 9% to 10%, with some growth over the long term.

“The yield is also after-tax in nature, which makes it different from a real estate investment trust (REIT), where the nature of the distributions is effectively a rental income and it forms part of the pre-tax income.”

The views expressed in this podcast or not necessarily those of Revego Africa Energy Fund or a Revego Africa Energy Limited and do not constitute financial or other advice. Revego Fund Managers (Pty) Ltd. is an authorised financial service provider (FSP number 47561).