JCM Capital: raising funds for solar projects in emerging markets

Tom Heintzman is the managing director of Canadian-based solar developer JCM Capital, which focuses primarily on the development of green-field utility-scale solar projects in emerging solar markets.

The company takes projects from concept to construction before bringing in partners to help finance, construct and operate the installations. JCM has already realized more than 400 MW of projects in Africa, Latin America and North America and currently has a further 500 MW of solar capacity under development in Africa and Latin America, according to the company. This includes a 62.5 MW fixed ground-mounted solar project in Ecuador, with a 20-year power purchase agreement. JCM is also eyeing Japan with great interest.

Heintzman recently spoke with Jeremy Bowden about JCM’s projects and plans.

How do you market yourselves to investors and development opportunities – what is your business model?

On the deals side, to explain our business — we have set up four funds and are in the middle of a new fifth fund. The first four are development funds, involving obtaining all of the contracting approvals leading up to project construction, including power purchase agreements, land rights, interconnection agreement and environmental assessments. Once a project reaches financial close, historically, we’ve brought in large infrastructure partners in order to capitalize project construction and operation. The purpose of the new fund is to be able to participate in the financing of both our own projects and third party projects at the construction phase.

So historically you have exited at the financial close?

Historically our development funds would almost entirely own the project up until financial close, and then at financial close the fund would either exit completely or hold a carried interest, with the vast majority of control going over to a new infrastructure partner.

Do you work with partners on the ground in different countries, or use in-house expertise?

What’s important to us is that there’s a local team with a reasonable combination of solar generation development capability and also the regulatory and governmental capabilities or order to move it through the [development] process – so a function of those two things. We use both multinational companies to provide service and local ones. For example Trinity Law services are provided out of London and we are talking to EY to provide tax services. But we also engage with local councils in the various countries and local expertise for specifically local issues — so a bit of both.

How do you get the projects?

We receive a very high volume of potential development projects coming to the office and have a whole system to deal with them. We have an extensive network of developers, financiers, EPC companies the whole gamut of what it takes to run a solar project. Those relationships are round the world, with global players that we originally met in Canada (where there are many), as well as those operating elsewhere.

I think what’s critical is there is only a certain number of solar development companies that have the expertise, capitalization and shareholder appetite to go into developing countries and develop solar. So we offer a fairly unique value proposition of enabling and going in and doing that in these markets, combined with our extensive network around the world means we receive a lot of deal flow. There is quite a bit of capital available out there at financial close, but not a lot out there for development works. The combination of early stage risk that we take on and the markets we operate in makes us quite unique.

So how do you choose which projects?

We would screen the deal flow based on a variety of factors: marginal cost of new build, solar economics, is a local team in place or not, extent of staff-up needed. We provide not only capital but development expertise. We would not pay a local developer for a construction-ready site. Ultimately we are assessing the risk of getting it to financial close, depending on the number and scale of obstacles it faces. Conventional risk return analysis, with a whole bunch of factors – government position on renewables, how much do they need capacity, competing forms of generation, price points, regulatory and legal regime and so on.

How do you establish a local presence – is it through an equity stake in a local company or joint ventures, in house staff?

It is a combination of these. Usually they come onto our payroll and we control the ownership of the project. There is always a local team, and on many projects we would add to that local team.

Do you use geographical spread to mitigate political risk?

The first project was in Ecuador – this was a one-project fund, but it was the first in developing markets. Developed markets have been challenging for renewable power development so more business is going to developing markets and will increasingly do so. As we go into more and more developing countries, this diversifies and cuts the risk.

Are you varying renewable type to cut risk – for example the Lake Erie HVDC project?

That was an opportunistic investment. When we are growing like this, expansion into new geographies requires development of new skill sets. So for the time being we are focusing on solar because we are real experts in that. We will take that expertise into new geographies. We may move away from solar in the future, but one step at a time I think.

How does the new infrastructure fund vary from your earlier development funds?

The new infrastructure fund will be much less risky, although there will still be debate over which projects are in and which out. There is more competing capital. While at the development stage there may be five projects for everyone that makes it, with the infrastructure fund once everything is in place these projects should all go ahead.

There is an execution risk but this is much lower and requires a different capital structure and different type of investors as well. A good infrastructure fund will invest in projects where all the risk that can be has been transferred to the government or other entities. Ongoing operating and political risk can be structured away and still get emerging market returns.

Who are your main investors?

For the development funds it has been largely high net worth and ultra-high net worth individuals mostly from North America and Europe and some from Asia. We are in the very early stages of raising the infrastructure fund; we have a $10 million fund from an Asian investor, plus a $25 million warehousing facility pending the fund being raised. We are talking to the institutional type investor that you would expect in order to raise the fund, but it’s too early yet to know who they will be.

How do you mitigate against technology and construction risks?

We will offload any risk we are not happy taking. So we would normally take on fully wrapped EPC and O&M contracts, warranties and guarantees and hedge currency risk. Political risk should be dealt at the infrastructure stage within the PPA, along with sovereign guarantees and insurance. If I had to summarize JCM’s core strengths, one would be that we can pull together the appropriate team (over 70 projects already), and secondly we can structure the deals and contracts to ensure that risk is properly allocated — so JCM only ends up holding the risks that we can best manage and others get the risks that they can manage.

Are you teaming up with panel manufacturer?

A lot has to do with lenders and how they feel. In today’s tough climate for panel manufacturers, they often want large diversified manufacturers to keep risk down, such as Panasonic or Toshiba.

Any other key risks?

The novelty of these projects means timing and deadlines can be uncertain, so we watch out for that. We must make sure projects are squeaky clean, and that there is nothing that goes anywhere near corruption, so you must be most careful in picking partners and countries.

Do you offer Clean Development Mechanism (CDM) funding at all?

Not to date, but we are contemplating now with some of our PPAs and whether we do joint funding with governments.