July 17, 2012
Interviewed by: David Snow
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Climate Change Capital

The growth of the biggest emerging markets has caused many to worry about the environmental impact of greenhouse-gas emissions. For its part, the World Bank’s International Finance Corporation (IFC) has created a new investment mandate that it hopes will help battle climate change via the private markets.

In an in-depth interview, Chenggang Jerry Wu, Principal Investment Officer and Lead for Climate Change Funds in the Global Private Equity Funds Group of the IFC, describes the goals of his mandate.

The growth of the biggest emerging markets has caused many to worry about the environmental impact of greenhouse-gas emissions. For its part, the World Bank’s International Finance Corporation (IFC) has created a new investment mandate that it hopes will help battle climate change via the private markets.

In an in-depth interview, Chenggang Jerry Wu, Principal Investment Officer and Lead for Climate Change Funds in the Global Private Equity Funds Group of the IFC, describes the goals of his mandate.

David Snow, Privcap: So I’m very interested in hearing a bit more about your group The Climate Change Funds Group. How recently was it added to the IFC platform and what is its mandate?

Jerry Wu, The Climate Change Funds Group: Sure. Actually, I’m in charge of the IFC’s overall global advancement and climate change fund, so PE fund focusing on climate change business will be under my responsibility. And to answer your question maybe we should start with, what is the Climate Change Fund and what is climate business? Because this is a term loosely used.

And from the IFC’s point of view they are essentially, any private equity funds focusing on investing in climate business. We call it climate fund. When we say climate business there are broadly two kinds of categories. One is investment related to bringing the reduction of the greenhouse gas emissions.

And that would be, for example, the renewable energy generation, wind, solar, geothermal, small hydro, biomass businesses. So that includes the SS generation for example, booking a renewable energy generation plant. That’s a kind of business. Also including any business, including its upstream and manufacturing of components. Those are also included in the renewable kind of business.

The second category is more broad. The second category would include anything that relates to the resource efficiency. So that includes energy efficiency, water efficiency, the sustainable agriculture forestry, and also ways to recycle. I mentioned sustainable agriculture. So those are all one characteristic of those things because they all related to reducing the usage of resources. And which, indirectly, contribute to the reduction of the greenhouse gas emissions. That’s what we do.

Snow: The IFC is very focused on emerging markets, specifically. So what is unique about the emerging markets with regard to climate change issues and energy efficiency? Are there specific needs that are being addressed by the creation of your platform?

Wu: Of course, when we talk about the climate change people think about the largest emitter globally, China, and also we are talking about large countries such as, India and Brazil, those are very big emitters so if we want to address climate issues, of course, emerging markets is the key. And there is also a lack of investment in those countries. And so we think this is a big priority, or highest priority for IFC.

Snow: Well, that’s interesting. The IFC has been a major builder of the private equity business in the emerging markets. And in fact, some of the BRIC countries are now their private equity markets are so developed the IFC is now fanning out to secondary countries. You’re saying that actually, as far as developing climate change types of funds in some of the bigger countries, China, India, there still is not enough development?

Wu: Exactly, yeah. That’s also showing IFCs current investment portfolio in climate change and private equity fund. And we have totally 12 funds, up until now we have in this– in the climate area and a majority of them are focusing on those big countries. Because if you want a greater impact you better go to the root of the issues.

Snow: So I’m really interested– You back GPs, and so what are you looking for in a GP group that would draw your support for their next fund?

Wu: For IFC, the criteria for us to select climate change funds is no different from selecting a generalist fund in terms of the major aspects we’re looking at. But they are also special situations, special characteristics, for the climate funds. And to start with, I mentioned earlier, I mentioned the scope of the climate business.

There are a lot of industries, a lot of them are very nacient, so there are not that many– if I say, there are not that many managers having experience in this. So climate change funds proposal coming to my desk, you can say that nine out of ten are first time fund managers. And so we will need to find a way to get comfortable with the managers, given that there’s no track record as a team in the domain area.

So what we’re looking at is we put a lot emphasis on the individual key member’s experience. And we want to find a team with different members with complimentary skills. They may not have all the skills needed but if you put them together then they can cover all the major aspects.

For example, we may see a fund manager team with somebody having very deep, very broad experience in private equity investment in emerging markets. But he may not have the necessary skill in the domain, say the wind assets development or solar asset development. But if they have private equity investment experience and a track record, that’s very good.

And then we look at other team members who may have done wind project in a developed country, Europe, who can bring those experiences to emerging markets. So that combination is important. You would need to have people with very deep domain experience in climate industries.

And the other aspect is related to the pipeline generation and the pipeline potential. And in this regard, we look very carefully to see whether the team has on the ground local experience in bringing the preparatory pipeline instead of some– We think that a team that flies out does not work for this business, especially on the climate side. And we need the people who has the on the ground knowledge and who has the maximum potential to bring good transactions.

Snow: What countries are you seeing managers coming to you from? What are some of the top countries that are producing hopeful GPs that hope to partner with you?

Wu: As you may guess that the majority of the proposals are from the countries that I– or the regions that I just mentioned. So Asia we have seen the majority of the proposals coming to us, and that’s not surprising.

Snow: China, in particular?

Wu: In particular, China and India. And we have seen quite a few proposals from Latin America and focusing on Brazil, Mexico, and we would love to see more proposals coming from Africa. And we have seen things are getting better. And this is directly related to a lot of factors, including the macro situation, such as the government regulation incentives and legislation for renewable, all those things put together. Then you can see that the funds coming from the regions with the most friendly environment for the climate investment. But up until now, Africa and, I would say, the Middle East and East Europe, we have less proposals, but we would love to see more GPs coming from them.

Snow: And are you going to consider proposals from frontier markets? You know, Cambodia?

Wu: Sure. We are looking at several proposals with components that may not be a single country fund focused on Cambodia. That’s too small for the fund to focus on a single industry.

Snow: And have you seen any recurring themes by way of the kinds of assets that these groups are going to be investing in? You mentioned wind. Are you seeing a lot of wind investment themes or is it more diverse than that?

Wu: I think there are mainly two kinds of managers because they need different sets of knowledge. One is more on we can say the clean tech side, so those are the fund managers focusing on the mostly late venture side and to make the technology improvements on the things that can service the renewable energy. Such as do the advanced battery, companies that do the storage and also other the clean tech side.

That’s one side and the other is on the renewable generation and this depends on the country that you focus on. Because, in general, the renewable energy, they are, a lot of them SS already, have commercial viability. Quite good, such as the wind power generation. That’s almost like it’s reached greater parity. But a lot of other aspects, such as solar, you need a government subsidy and in some areas they need quite a big government subsidy.

And also, in terms of the policy, you need government support to get the feed-in tariff setup and a lot of places you cannot do the long-term BPA. So it really depends on your preferred location but we have seen fund managers focusing on the renewable generation. The issue is those managers– those assets are long-term assets, you take several years to build and then running that and then to show the track record, up until now there isn’t that many with established track records.

Snow: So Jerry, going forward what would you say your mandate is going to be? How is that going to evolve?

Wu: Yes. I see that really can play a lot of important role in this sector, and in particular, in the private equity funds supporting the climate business. There are several aspects I think is important. One is that given that there’s not that many GPs focusing on this area, we think by supporting those who we believe are most likely to be successful, we are encouraging more GPs to form new funds. So that for funds formation, we provide support for them. So that’s one thing.

Second way is we think we can play an important role in mobilizing other funding sources to support the business through the PE fund. And I can give you examples of what we have on the existing fund. For example, we have made 12 fund investments in this area, and it was a total only of $250 million in those 12 funds. But if you look at the total size of the fund that’s about $2.5 billion. And with this kind of money and the majority of them goes to equity of company, you’re talking about supporting up to 200 companies focusing on this area.

So there is a great leverage mobilization effect and that’s the thing that I see IFC can play a big role in that. And we also are trying to use IFCs SS management company. A lot of people may not be aware that we are in the process of setting up a fund of funds to be managed by the IFCs SS management company to focus– to co-invest with IFC in climate change funds.

So going forward, instead of doing two to five or three to five funds per year with investing $100 million and if we have the fund of funds up and running we will have more money to invest in more funds in this area and try to address the issue of scarcity of fund managing in this area, the funding need, and also encourage underlying assets development.

Snow: Sounds like you’re going to be a very popular person among the sustainable and renewable energy fund managers in the emerging markets as you gather more and more capital to invest in their funds.

Wu: I  will be very happy to see more and more fund managers coming to me with proposals on this area.

Snow: Well, great Jerry. Thanks very much for joining Privcap today.

Wu: Thank you.

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