Cesar Urrea
China-Mexico Fund
Andres Millan
Chief Investment Officer and Co-Head
China-Mexico Fund
View from the Top

Mezzanine Expertise Against Merchant Risk

Mon, 02/25/2019 - 16:39

Q: Why should project developers rely on IFC’s China-Mexico fund as a go-to financing source?
AM: We bring several factors to the table. Our team’s capacity to diligently anticipate and follow Mexico’s infant energy market is a fundamental element. The IFC actually supported the implementation of the country’s Energy Reform, providing feedback on the drafted regulation and highlighting the critical aspects that would make it work. The fund was primarily structured to inject capital into infrastructure projects for periods of 12 years, making us a long-term partner. Our fund always invests jointly with the IFC, using international best practices and making social and environmental issues a priority. Also, the fund always acts as an active minority shareholder but without influencing the decision-making process inherent to the project.
CU: As a global investor in emerging markets and industries such as energy, IFC knows what works and what does not because it has already experienced similar cases in other countries. We can provide this feedback and expertise to the companies we are looking to invest in. The fund’s size and access to IFC capital provide interesting investment opportunities, placing us in an ideal position to be Mexico’s development banking partners.
Q: What is the context behind the fund’s creation?
CU: The fund was implemented in 2014 after an official meeting between former President Enrique Peña Nieto and his Chinese counterpart, Xi Jinping. They were looking at different ways to attract capital to Mexico’s reformed industries: oil and gas, energy and telecommunications. The approved capital to be allocated to these efforts required a specialized, neutral third-party to manage it. An IFC subsidiary, the Asset Management Company (AMC), was entrusted with this task. This subsidiary was selected due to the rigorous transparency the IFC operates under to avoid misinterpretations of the fund’s objectives. Despite its recent creation, our US$1.2 billion fund has already placed investments in the three core industries it focuses on.
AM: The idea of entrusting this fund to the AMC is to separate the investors from the decision-making process, granting the AMC autonomous manager status. As such, we can evaluate projects based exclusively on their technical, financial, environmental and social aspects.
Q: What is your assessment of Mexico’s renewable energy project finance practices?
AM: Financing in Mexico’s renewable energy industry can be divided into two main prongs: long-term electricity auction projects and merchant risk. The former’s operations are easier to grasp and navigate for the financial sector given the long-term conditions of the coverage contracts and CFE being the off-taker of these projects. The issue with long-term electricity auction projects is the level of equity returns and debt costs, which reduce the number of players willing and able to develop projects under these conditions. The upcoming challenge will be to finance merchant risk-based projects. Using its global network of operations, IFC is thoroughly analyzing the possibility of financing merchant projects and assessing suitable structures, both for PV, wind and solar thermal energy. Merchant projects are paving the way for equity-based and mezzanine financing. The main issue of merchant projects lies in yielding attractive margins and returns in the short term, which become uncertain in the long term based on the unpredictability of energy-related commodities, like natural gas, or electricity price variations. We are looking for the appropriate partners to detonate and standardize merchant projects, leveraged by appropriate debt structures.
CU: Mexico’s pension funds and infrastructure funds are well-positioned to take on energy project finance. We are looking for integral projects, with attractive growth components such as scalability in installed capacity or with the possibility of adding other business lines, such as energy trading. Our fund is better positioned to provide these elements, well beyond simple project finance.