Q&A: Ralph Cho and Michael Pantelogianis, Investec
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Q&A: Ralph Cho and Michael Pantelogianis, Investec

Michael Pantelogianis

Michael
Pantelogianis

Ralph Cho

Ralph Cho

Ralph Cho and Michael Pantelogianis started as co-heads of power in North America at Investec earlier this year after nine years working together at WestLB. Founded in Johannesburg, South Africa, in 1974, Investec is listed on the Johannesburg and London Stock Exchanges. It is looking to build out its business in North American power by developing a platform of flexibility. Cho and Pantelogianis sat down with Senior Reporter Nicholas Stone to discuss their first few months with the bank, where they are seeing opportunities in the market and what they are looking to achieve. You guys started a couple of months ago with Investec, can you tell us a bit about the bank and what types of things you’re doing?

Ralph Cho: Mike and I joined a couple of months ago and are co-heading the North American power business for Investec out of New York. We have been tasked to expand Investec’s North American presence. The bank is dual-headquartered in South Africa and London. It is dual-listed on the Johannesburg and London stock exchanges. We are focused on helping private equity sponsors, developers and, to a certain extent, mid-cap strategics with their asset-based financing needs by delivering capital across a project’s capital structure – whether that is senior or mezzanine debt or equity.

Michael Pantelogianis: The bank is rated BBB-, so we have a higher cost of funds compared to traditional project finance commercial banks making it harder for us to be an efficient source of capital as a senior lender. However, the bank becomes a more efficient lender at sub-debt or holdco levels. In certain cases, when the senior debt has some kind of wrinkle to it or an element of commodity risk where commercial banks typically drop off, we become an ideal lender.

RC: The bank also has appetite to provide equity or equity-like instruments. It isn’t unusual for us to take late-stage development risk or to even co-invest alongside private equity. We’ve offered products to help finance construction loans; offered to bridge equity through construction; finance equipment supply contracts; and offered to back-lever equity. The bank is willing to be creative and work with sponsors to provide tailored solutions that optimize everyone’s interests in a project.

So we won’t see you pop up as participants in senior debt deals?

RC: It’s not our goal to sit here and write checks. But if you are a client that we’re banking and you say, ‘Hey, I know we are going to be talking about leading other deals but can you help us out on this transaction, which another bank is leading,’ then yes, you may see us pop up. The bank isn’t interested in simply participating in transactions, they want us to originate and lead transactions.

Is the area you are looking to play in competitive or are you really looking to develop something new?

MP: As a bank, we are a somewhat atypical. Our products are broad by virtue of us needing to be diverse given our cost of capital. We operate in project finance very much like a merchant bank. There are some banks that may overlap with us for certain parts of the capital structure, but as we trend toward equity, we start to look like a debt fund or finance companies.

RC: There are a lot of debt funds that have emerged recently, which provide mezzanine financing and overlap with us. But I don’t necessarily see them as competitors, but more as potential partners. Everyone is very different in what they can do. I have spent the first couple of months trying to get a good read of the different types of mezzanine players out there, because we have an interest in collaborating with them. For example, on a $100 million facility, we are not going to take down the whole $100 million. So we would look to find other players that are similar to us that can take the balance. We are learning that not everyone is willing to do the whole puzzle. Everyone has different constraints. There are some investors that don’t like long tenors. Others won’t take construction risk, while others need certain types of pricing - it’s very fragmented.

Is there a certain amount of capital that you have available or certain regions that you’re looking at?

MP: We don’t have any defined limits. I think the bank is very open at this juncture and it’s looking at the North American market from the perspective of seeing an opportunity to grow its global business lines. To date, Investec has focused on smaller developers and tougher credits in North America, so from that perspective there are a lot of areas for us to grow in. This particular platform is attractive because it enables us to work with sponsors with great flexibility. We don’t have to look at an asset from one perspective of capital. We ask: What is your financing issue at the project and how can we help you? You see this across the globe. In addition to North America, our footprint covers South Africa, Australia, Europe and Asia.

RC: The bank is working on development and construction projects where it’s funding equity to build such projects. In other examples, it’s looking at opportunities to co-invest with private equity sponsors. I think what we’re trying to do in North America is to build on the platform that has been established globally and we think that is going to be very powerful to market players in North America in the long run.

Did the bank approach you to do that or did you bring that idea to the bank?

MP: The discussions with us have dated back for about a year. As WestLB shuttered its doors, it naturally led guys like ourselves to talk with other institutions. This discussion started with Ralph and when Jamie Manson left and went to Brookfield it opened up the opportunity for me to jump in. Investec’s platform provides exactly where we wanted our career paths to go. The head of project and infrastructure finance for North America , John Casola, resides in Toronto. However, given that its energy portfolio is substantially based out of the U.S., it made sense for the bank to have a couple of guys sitting in New York.

Are their plans to add to the team?

MP: The bank’s goal is to grow the global businesses organically. We are going to have to put some wins on the board to be able to expand the team. We presently have good resources and they are integral to growing our business. If our deal flow is so great that we need more people, then that’s a good problem.

Where are you seeing opportunities in the project finance markets to play in the space?

MP: We look at the business in terms of three buckets. There is M&A, greenfield development and refinancing/recapitalization. With each of those buckets there are plenty of deals to unearth. Our reach is pretty broad with sponsors. We’re talking with private equity guys, developers and, to a lesser extent, strategics because they typically have their corporate revolver banks that are helping them with their capital needs. Our focus is to really find opportunities in renewable energy and conventional thermal energy but we are open to looking at, on a case-by-case basis, midstream infrastructure. I think we are pretty pleased with how our pipeline is building up.

RC: When we go out and tell sponsors our story, what we find is that our marketing resonates pretty well with them. The fact that we can be a one-stop solution is attractive. Whether it is first lien, second lien, holdco or mezzanine – we can help structure around a clients’ need. Our backgrounds as sell-side bankers, combined with the bank’s appetite for mezzanine capital, positions us to effectively structure and syndicate on a one-stop basis.

Is that one stop shop idea something you are looking to develop?

MP: The one-stop is definitely an approach we would like to integrate. You’ve seen it around the space in different forms. I would say that with the investment banks, typically you see them offering a hedge from their commodity desk in order to run the book on a B loan. Or you see tax equity investors also arranging the senior debt associated with a project financing. We see our capital at the mezzanine or equity level to be valuable enough to be able to arrange the senior debt as well. Let’s not forget Ralph’s historical work as a project finance syndicator. We continue to maintain our lending relationships.

RC: We are a very attractive option in today’s M&A market. With markets so competitive, we can help buyers with higher thresholds by providing them with a critical piece of capital that helps them become more competitive. Because we are a bank and we fund through the LIBOR markets, we’re able to do a transaction at a more cost-effective level than many other mezzanine players, which ultimately positions us to deliver enterprise value to our clients.

Check back next week for the second installment of this Q&A, when Cho and Pantelogianis discuss the competition, trends in pricing and innovations in deal structures.

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