Clarity Needed to Invest in Energy Sector

Q: What is the history of Balam Fund and what issue does it aim to solve?

A: Balam was created in 2013 before the Energy Reform was ratified. We participated in a competitive process, which the National Infrastructure Fund (FONADIN) launched in order to identify potential managers globally. This occurred with the goal of managing green funding in Mexico. At the time, there were not many foreign infrastructure-focused funds of this type looking at our market. The fund was established with the objective of becoming an important player in the energy sector, which it succeeded in doing. Other development banks participated as limited partnerships (LPs) in the first vehicle. After that, we launched a Capital Development Certificate (CKD) vehicle in order to co-invest with Balam Fund I. A third private trust vehicle was later created to enable another LP to co-invest in other projects because Balam Fund I was limited by very strict environmental and social criteria.

Q: How has the fund adapted its approach, considering the changes that have occurred in Mexico’s energy sector?

A: Balam Fund has faced challenges from its very start, especially as a result of the reform’s new regulatory framework, its approval and implementation. We survived an era where investment was difficult because of this ratification. We re-oriented our focus on low-leverage projects and merchant projects, which was a unique strategy at that time. We completed the largest solar project in 2016, which was a full merchant and with full equity investment. We adapted to the situation and projects began to evolve very well. Later, we focused on self-supply projects, which we thought had an interesting approach and could provide value. We did all this with the same differential approach: all our solar projects were financed on a full equity basis. We have been successful in the implementation of this strategy, with three solar projects operating and one of the largest wind farms in Latin America: Eolica del Sur, which owned together with Mitsubishi Corporation. Having been able to invest all our funds with our plants under operation and providing attractive yields is proof that our strategy has been successful.

Q: What factors does Balam Fund consider in its decision to invest in a specific project?

A: Balam does not enter during the development phase and does not assume development risk. It enters once a project once has reached ready-to-build status. Nonetheless, we have been working worldwide with a number of developers before Balam was founded, so we have plenty of experience in this area. Also, we have been monitoring the Mexican energy sector for a long time. We have managed and invested in thousands of MWs globally, so we know which criteria we are interested in on a deep technical basis. In terms of regulation, it is a bit more difficult to determine because this area has been shifting for a while now. We have excellent relationships with different developers and a clear picture of what is happening in the markets we participate in. We are very active in both wind and solar associations, which helps us to secure both the relationships and the pipeline required to make those investments. We have also focused on the offtaker side and cultivated good relationships with relevant players in the market.

Q: How would you assess the impact of recent regulatory changes on the fund’s approach and outlook for the energy sector?

A: As you can imagine, it has not been very positive. There has been a big shift in the sector’s day-to-day outlook and strategy. We were all looking at new projects, business opportunities and funds. However, over a year ago, we shifted into a more defensive mode. It is publicly known that a number of amparo claims have been presented by most of the sector’s participants. Most of these are operating, with some still under development. All the large players are working on a legal defensive front, which should not be their daily objective. Nonetheless, this is what is happening at the moment. The government has a different view of the past. We feel very comfortable with the existing contracts as it has been an extremely transparent market. I think the government is comfortable knowing that issues have been handled properly from our side. They think regulation should have been different, regardless. We are not looking to get involved on this front. Mexico is a democracy and the government can pursue any agenda. If its objective is to have a more dominant position for CFE, we are okay with that. However, huge investments have been made on a very clear framework. We have to continue working on how to defend those investments.

In terms of how business should proceed, we need to wait for the government to shed light on how it wants the private sector to participate. Once we have a clear picture, we could perhaps make decisions toward the future. It is difficult to make investment decisions now, knowing one has to defend legally existing projects and is dependent on how the regulation is being interpreted. 

Q: The fund has analyzed the potential to invest in energy efficiency projects. In what other areas are you planning to invest?

A: Our main expertise is utility-scale generation. We have analyzed a number of energy efficiency projects but most do not have the required scale or security of payment. Furthermore, many are related to public institutions, which are facing budget cutbacks. The renewables sector in Mexico is now more focused on communities, small-scale industrial or the residential sector. It is difficult to achieve scale in those areas. Nonetheless, we are looking for opportunities and also examining new opportunities outside Mexico. Our shareholders are Spanish, for instance, which is a market in which we have been very active. We also manage other vehicles investing in other sectors in Mexico and Spain, such residential real estate and hotel / tourism. Over the long term, the Mexican market should remain very attractive. It will be attractive again but we need some time before the path forward becomes visible and regulatory issues come to an end.

Q: What are the main goals Balam Fund is focusing on for 2020-21?
A: We have grown a great deal in the past few years. We now own four projects under operation and are working to optimize and stabilize them. We will continue to monitor the market. Given the uncertainty, it is difficult to match pricing in M&A deals but as always, time will tell. Sellers will be more inclined to sell and prices might adjust to the current circumstances. For new, ready-to-build projects, construction and interconnection could be difficult. The secondary market, however, could provide us with an interesting opportunity to find assets at good prices. Nevertheless, we would still need some more clarity as far as the market is concerned.

Balam Fund is an investment fund focused on equity investments in renewable power generation and energy efficiency projects exclusively in Mexico. Balam owns four renewable assets in the market.