GRAYSMAKER ADVISORY
GRAYSMAKER ADVISORY
Boutique Investment Advisory Firm
Drives African Development PRODUCTION: Karl Pietersen
A specific focus on energy infrastructure, water and innovation has allowed Sandton-based investment advisory firm, Graysmaker, to develop a unique project portfolio which is attracting the attention of local listed and international investors.
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When Peter Oldacre returned to his homeland, South Africa, after a spell working in London, his vision was clear. The investment space surrounding energy infrastructure was underserved and an anticipatory investor looking for returns over the long term could be rewarded. There were pockets of the market which had been ignored, or not yet explored. Particularly with renewable energy and low carbon energy generation. Like all successful entrepreneurs, he saw a gap in the market and quickly went about exploring the opportunities. Oldacre’s strategy took 10 years to mature and Graysmaker Advisory was established in 2016 as a boutique investment and advisory firm in Africa,
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with a focus on infrastructure and development in the water, food and energy sectors. With Oldacre and an established leadership team at the helm, Graysmaker discovered a unique opening for investors looking for chances in Africa and has exploited those chances for realised returns. “In 2006, I had just returned to South Africa from the UK as a hedge fund trader,” explains Oldacre. “I managed to build a fund for a family office over the previous nine years and I got an opportunity to return to South Africa into a part of the economic sector that was in its infancy in South Africa and arguably developed into a world-class investment opportunity. It was the low-carbon energy generation environment. My first degree was
in science and I completed that but realised that I wasn’t ever going to be the next Stephen Hawkins or even the next Jim Hawkins, without understanding the financial and commercial aspects of where science is applied. “The low carbon environment and the potential for repeatable and sustainable investment struck me in 2006, like I’m sure it has stuck thousands of people, and I realised there was something going on that was academic in nature, and therefore able to understood, with no select few controlling the information, that was potentially on the way to becoming commercially exploited. “In 2006, we saw that the low carbon environment wasn’t suitable
INDUSTRY FOCUS: INVESTMENT
for African characteristics. Africa at the time, and even today, is largely already theoretically a low carbon environment and much that was “western” in terms of approach and technology was simply not applicable to our needs, and at the risk of being considered as conspiracy driven, was sometimes absolutely illconsidered as an investment approach. “Locally in South Africa, after working on over a Billion US Dollars of plant and technology, and as returns started to narrow to very close to the cost of capital, we started to investigate the value chain and realised that there was an infrastructural investment play that was available in the renewable energy sector that was absolutely under-exploited, and as all good hedge
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fund managers are prone to do, we analysed it from all angles, to determine the risks and the potential for returns to our clients.” Graysmaker spotted that an opportunity lay in among the complicated, intricate and intertwined value chains that make up an investment prospect. LAND LEASE Oldacre was well-versed in the African renewable and IPP (Independent Power Producer) environment following spells with Deloitte SA and SkyPower Global. He had been through the process of project origination, project development, investment development, construction and commissioning and
longer-term asset management of large scale infrastructure projects, and specifically various renewable energy projects. Along with his team, Oldacre identified the land leases that underpin the entirety of any energy project as an investment opportunity which follow an investment structure very similar to the actual investment into the renewable project itself, but with less upfront risk to money. Essentially, a land owner will be approached by an energy company and offered money for a lease on the land to build a solar or wind energy plant. Graysmaker saw the value in these land leases and weighed that value with the level of risk involved. A positive outcome means that Graysmaker is now acquiring for
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// WE IDENTIFIED ONE OF THOSE ELEMENTS – THE LONG-TERM LEASE THAT UNDERLIES THE IPP – AND THESE LAND LEASES RUN FOR 20 YEARS AND THEY ARE JUST AS CREDIT WORTHY AS THE POWER PURCHASE AGREEMENT // its client, the Umhlabal Land Lease Company, as many as possible on a discounted cash flow basis, creating an exciting portfolio, for which investors have shown tremendous appetite. “Our clients and partners have projects that have been commissioned in the energy space and are looking for return enhancement in those projects,” says Oldacre. “There are elements in the renewable value chain that offer higher returns than owning the energy plant, for a lower risk profile. We
identified one of those elements – the long-term lease that underlies the IPP – and these land leases run for 20 years and they are just as credit worthy as the power purchase agreement.” The next battle was helping investors to understand the value of the land leases – not an easy task. The Graysmaker team went out to the market and talked the idea through with many potential moneymen with little success. But then they met with the leadership team from Hulisani, a
JSE-listed investment company focussed on energy – the perfect fit. “We managed to raise R450 million from public investors and we are around half of that already in in terms of disbursements, which is very productive in terms of having to compete against other investment opportunities our clients would have knocking on their doors all day,” says Oldacre. “Our business is to find the individual opportunities that we understand thanks to our exposure in
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those market segments. We then put in our own equity and attract a larger, better-funded partner who is ‘short’ the knowledge and specific information and with whom we can build that long-term relationship with by understanding their own strategies and supporting those. It really needs to be an open win-win approach to Africa.” In South Africa, Graysmaker has identified around 175 landowners, usually farmers, who have suitable assets. The company is now well underway with its approach to all of these potential partners and the winwin attitude and behaviour is clearly working. Land owners get financed for their lease up-front and Graysmaker and its client get the right to the lease, energy companies get fantastic sites and a highly bankable land owner, who is focussed on adding value and further developing the investment potential, and South Africa gets improved energy infrastructure potential. Graysmaker is also always keen to promote existing activities on land; so, for example, if a
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land lease becomes available on a site where there is potential for vineyard operation to bolster the investment prospect, Graysmaker will pursue that activity, both as an investment and also in response to the call by the SA Government to empower and develop the next generation of our people. “We raise funds, we disperse those funds into our own investments with the idea that because we are not the largest investor, all we can ever do is take a small equity position in a project but, because we have spent the last decade figuring out what the characteristics are that modern investors look for in making infrastructure investments, we make for a very strong execution agent. We drive our own projects to a point where they attract investors from the wealthier parts of the world naturally, and our projects have been selected for their fundamentals of the risk return relationships. “We originate our own investments throughout the continent and develop them to a point that our peer group outside the country respond or not
they have an appetite for that kind of investment. What we generally find is, because we are project development and investment specialists, when we push an idea people quickly realise that our approach and pre-development work is of as high a standard as anywhere in the Western World and that what we bring them is more than just an idea, it’s a well-considered and bankable opportunity,” says Oldacre. After success in its local market over the past two years, the Graysmaker team is already making moves on the continent and into Europe. To date, Graysmaker has invested in wind energy projects, solar PV projects, water generation and sanitisation projects, agricultural holdings, residential property, and a coal technology supply company. “There are opportunities that can be exploited using our wellestablished models in Africa as well as in traditionally much more mature markets such as then UK and Europe,” says Oldacre. “We accept that we are always going to be opportunity rich,
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// OUR SPECIFIC FOCUS IS INFRASTRUCTURE. FIVE YEARS AGO, THAT MEANT ONLY ENERGY AND NOW IT MEANS ENERGY AND WATER // capital poor and will always have to prioritise and behave like we are playing the game of ‘The Red Queen’ by running in order just to stand still. As long as we continue to attract capital and can deploy it, we are being of benefit to Africa. While every day is exciting, it is not always easy,” admits Oldacre. CONTINENTAL INVESTOR Africa will be home to 50% of the world’s population growth until 2050, and will see 12 megacities developed. The continent is home to the fastest growing middle class and more people are migrating to urban centres which is pushing demand for energy infrastructure. “We have an understanding of each country’s attributes, we understand the external environment, and we understand firm-specific attributes of the utilities and the potential
participants in the low carbon energy sector,” says Oldacre. “Today we are in a situation where Graysmaker tries to bring an understanding of the difference between what needs to go on in Africa, what goes on in the rest of the world, and where the business opportunities are in that juncture.” One business opportunity that has been identified as complementary to Graysmaker’s existing portfolio is water. Already recognised as a precious and scarce resource, water is highlighted by Oldacre as a promising investment area, which is also technology rich. The company is particularly interested in the creation and supply of demineralised water for industrial use. For this reason, Graysmaker recently entered into a partnership with Prosep Chemicals (Pty) Ltd, a 35-year-old water company in South Africa focussed on sanitation,
water purification and commercial and industrial water applications, where an agreement has been reached to fund R50 million in working capital to build the joint venture’s market offering. “It’s commonly accepted that by 2030, South Africa as a standalone example, will be 22-25% short of its water requirements. That is just 12 years away. We started in the energy sector in SA in 2006, that’s also 12 years in the past and the time went so quickly that we sometimes look back in awe and shock at how much has been done. Looking forward with the same mindset that we must be of benefit to South Africa, and that the next 12 years will pass in a flash, we have invested into a specific technology and a specific water company that has its focus on sanitation and water generation. We have brought to them the idea of atmospheric water generation for commercial and
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industrial applications and are funding a pilot application for the technology. It’s not for drinking water as municipalities will always work to ensure their constituents have drinking water. “The continent has a lot of development around the coastal areas and there are big opportunities in these coastal areas for harvesting humidity and that technology already exists. A plant owner can collect and store that water in a form that is potable or de-mineralised which many companies prefer. Depending on your appetite for risk, this technology already exists from Israel, India, Germany, USA or elsewhere.” Demand for de-mineralised water comes from the mining, science, engineering, automotive, pharmaceutical, and many more industry sectors. It is not recommended for drinking, but current practice is to use municipality sourced water and demineralising that – which has cost implications and also is a use of water that can be better used for drinking.
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While water and renewable energy are key technological components of the Graysmaker business, Oldacre is keen to point out that low carbon energy generation is where he sees the future of strategic infrastructure investment for the continent. “We don’t think that renewables as a sector will ever be more than one of the technologies contributing to distributing generation on the continent,” he says. “We believe the market is about low carbon energy generation, which includes gas, possibly as LNG. From a technology point of view, we’ve started to notice that there are some major global organisations developing footprints in Africa, that are low carbon in form. It’s about technologies that are not considered to be renewables but offer the potential for the energy sector to be much larger and much more relevant to the countries in Africa. What we see, strategically, is that there is a low carbon energy opportunity rather than a renewable
opportunity on the continent.” For this reason, Graysmaker will be increasing its interest in those countries where significant natural gas reserves have been discovered, in addition to its analytical work developing renewables. As an example, Mozambique is working hard to improve its standing with international investors and Graysmaker has experts on the ground who can advise on the legislative environment, guiding partners towards success. Generally, for some African investment houses, 2016 and 2017 were not easy years, and investment opportunities were volatile in many cases and outright dangerous in others. As a result, many institutional investors turned to the staple property type investments as safe havens. The South African economy was unstable throughout that period and certainty from government was unachievable. Following the appointment of the new President in January, opportunity pricing has stabilised and business
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confidence is on the up, with the focus on developmental frameworks signalling Government’s intentions. “Things have been good recently,” says Oldacre. “We haven’t complained about what we’ve had to do for a number of years. This is because we have rubber on the road and some of our projects are generating revenue for us. If we were in an environment where we were green fielding with no support and no portfolio, things would be tough.” The very purpose of this exciting young company is to make investing clearer. The very name of the company elects a constant reminder of the complicated grey in investing is what needs to be unpacked. That grey will never go away and the ability to bring out the nuances of opportunity and risk is what will differentiate the winners in the future. “Our competitive advantage is not that we have more money than anyone else, because we don’t. It is not the fact that we have better engineers or investment managers either, because we don’t,” states Oldacre. “What we have is understanding of firstly that we work internally in a system that requires a theory of systems to identify the interplays between levers. We also strive to understand the strategy of the organisations that we deal with from a partner point of view better than anyone else who is working just to attract money. We are not selling a product; we are selling our ability to manage complex systems of knowledge, focussed around technology and commercially finance. We are saying to our partners and potential partners, we understand what your drivers are, let us show you how our investment and business model can bring value to your own desired outcomes in Africa.” In the future, Graysmaker will expand its reach further, to include agriculture. Graysmaker currently manages six individual agricultural land parcels in South Africa and believes that its understanding of water and energy give it a cost advantage in production
Hulisani nurtures investments in energy and our hands-on approach ensures sustainability, consistency and growth.
over its traditional competitors. This portfolio is growing as new and specific opportunities are introduced. “Now, our specific focus is infrastructure. Five years ago, that meant only energy and now it means energy and water. In five years’ time, that may well mean energy, water and agriculture. Already this alignment is referred to by academics as THE NEXUS.” Long-term, the company is targeting the build of a major asset base with constant reliable dividends - following the spirit of adventure on which the company was founded. “We would like to build ourselves a wealth creation opportunity and we’d like to do that by having enough diversified, high moral standing of interesting asset under management so that we can maintain our constant investigations and interplay into the growing value chains that energy, water
and agriculture represent for us. Once the portfolio is of a size, we will in effect become farmers in suits with ties of that value chain, forever discovering and improving upon new opportunities out of that same value chain – just like the land lease business came out of the renewable energy ownership business. We are looking for a breadth of investment size that rivals the property funds, who we think are overplayed, over-invested and not overly exciting to institutional investors. We intend doing this openly, transparently, with a strong sense of social justice and with absolute integrity – that is how we want to be remembered,” Oldacre concludes.
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July 2018
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