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Q&A Marathon Capital Part IV

Power industry players are increasingly looking south of the border for projects and deals, as a booming middle class drives up demand under a compelling regulatory regime.

“Frankly, after the Caribbean islands, I don’t know if we’ve ever seen a market that’s quite as compelling,” says Ted Brandt, principle and ceo of Marathon Capital of Mexico. PFR Managing Editor Sara Rosner sat down with Brandt, Gregg Elesh, principal and chief investment officer and managing directors Terry Grant and Wendy Carlson to discuss opportunities in Latin America and Marathon’s plans for growth.

PFR: What’s your take on the asset-based M&A market outside of the U.S., specifically Latin America?


Brandt: It is a really, really fascinating market. The macro story on Mexico, briefly, is 115 million people and today the market is about 80 GW. Contrast that with Canada, which has about 30 million people and a 100 GW market. Mexico is three times the size and has 20% less capacity. It’s not an accident, as the Mexican population is moving from lower class to middle class and buying washing machines, refrigerators and microwaves. While the GDP is going up about 3%, the use of electricity is going up about 7%.


Furthermore, a huge portion of Mexican electricity is generated from oil. Oil today, with the instability in the world as a global product, is selling for more than $100 per barrel against a very high heat rate generation down there. Renewables make massive sense.


Frankly, after the Caribbean islands, I don’t know if we’ve ever seen a market that’s quite as compelling. You’re competing with very high tariffs, labor rates in Mexico are low and electricity rates are high so big auto manufacturers, big chemical manufacturers that use a lot of electricity are just complaining about the monopoly of electrical supply.


At the same time, Mexico has liberalized the laws over the last couple of years and there are a whole group of self-supply laws that allow both municipalities and large industrials to go direct to the market and procure electricity for the long term, cheaper than buying through the monopoly supplier.


We’re representing a group that’s got about 1,000 MW under development in wind and four late stage projects that we’re hoping to bring to financial close late this year. We’re finding the same liquidity that’s floating after the U.S. very much available in Mexico. The peso financing is surprisingly available, not just from the multilaterals, but various commercial banks. Peso-denominated equity we’ve found available at leveraged returns that are approaching the leveraged returns that are available in the U.S.

Elesh: Why is it interesting to Marathon Capital? We’ve been very North America-focused because that’s where the assets are that have been developed and have been trading that we’ve been working on. As Mexico, Central America and South America have become more active places, we have an interest in growing into those markets and sectors. We believe we have the expertise, because the same expertise largely applies to what makes good projects and how you finance them.


But it goes a little further because frequently the companies that we represent or companies we transact with on the other side, whether they’re U.S.-based or they’re based in Europe or Asia, are investors that invest all over the globe. So, we were routinely doing business with people in the U.S. and North America that, on their own, were buying assets in South America or buying assets in Europe. It is in no way a stretch for us to take the Mexico wind project for instance, to investors that we knew would be interested and use it also to expand our target base. We’re working with people we knew would have an interest in investing in that market if the projects and assets are good.

For us, it’s a natural expansion and we’re encouraged by it. We like the activity and it’s a place we’re hoping we can grow.


Brandt: We’re planning on continuing to focus on the hiring and penetrating the market. We’re looking at a couple of other Latin America markets that we think are really interesting.


Bottom line is that renewables in most of these countries are well into the money. I think you’re smart to be following the region. I wouldn’t be surprised if Mexico isn’t an incredibly booming market. There are some fundamentals in that country that are really pretty exciting. We’ve got a young, very bright Brazilian on our team that has worked mostly in Mexico and he’s convinced that Mexico is the next Brazil.


Grant: I was attending Intersolar in Munich this past summer to listen to the European market, which is of course where so many of these trends come from. There is a well-accepted view that in 2015 in the solar market, we will see equilibrium where global supply equals demand and there is busy talk about further investment in expansion of capacity. That’s not coming because the market is dying. Mexico is one of the top two or three markets worldwide that people are looking at. Latin America; it has gotten attention in the market.

PFR: It seems like people have been talking about the arrival of the Latin America power market for years. Is there anything in particular that makes you think the industry activity in this region will finally come to fruition in the near-term?


Brandt: I’ve heard both cynics and optimists speak. Even the optimists say that you had better pay attention to how slow things happen in Mexico. You’ve probably read recently that there are all kinds of talk from the new president about liberalizing the oil and gas industry there. There is talk, for the first time in 85 years, of allowing joint ventures of American or multilateral, multinational oil and gas experts to help Mexico explore its offshore potential or a bunch of the shale infrastructure they have across Central Mexico. Most of the people, and most of the stuff I’ve read, says that’s five, seven, 10 years away and deeply unpopular with the population.


In the near-term, I would be flabbergasted, based on what we’re seeing in the current regime, if you won’t see 5,000 to 6,000 MW of new wind and solar installed in the market to help deal with the expansion. They really don’t have very much coal there at all. It will mostly be the retirement of oil and more natural gas and more renewables.


For example, we have a client where Volkswagen is the anchor tenant. We’re financing 144 MW around that contract. That deal will get announced toward year-end.


PFR: What’s next for Marathon Capital in the next 12 months? Are there any specific areas that the company is focusing on for growth?


Brandt: Fundamental to Marathon Capital has always been to keep our basic focus on what’s working. I don’t know that we’re going to move too far away from our formula thus far. But I would touch on three areas that we’re trying to selectively move into.


We’re very much focusing on private placement as a product area. Tim Meyer was hired to do this and Wendy Carlson and Gregg Elesh have both been very active in private placement. It’s a product that the big Wall Street houses do, but they do it reluctantly because it doesn’t move the needle the way public offerings and large public debt deals do for them. We think it’s a place where a boutique like Marathon Capital can really increase the leadership. We already have the distribution and, frankly, there are a lot of M&A deals where you can’t tell the difference between a private placement and an M&A until you actually see what the market comes back with on execution. We do want to continue getting stronger there.

Mexico and, more broadly, Latin America is an area where we’re going to take on additional assignments. I think it will be several years before Latin America rivals North America for us, but it’s absolutely a place we’re committed to and we bring competitive advantages to.


Lastly, in addition to the fossil fuel generation and transmission, we continue to work hard on and try to print deals around shale plays. You’d have to be completely tone deaf to miss, in North America, the emergence of shale plays and how shale has changed the power market and the entire energy market in the U.S.


What’s really interesting is that it’s no longer just a southwestern U.S. geography. We are, on a selective basis, looking at upstream and midstream deals largely in places like Ohio and Pennsylvania and North Dakota as opposed to outside of the Houston area. We’re getting some traction and we’re pretty excited about that as a growth area.


Finally, Marathon Capital has continually been looking to recruit at all levels of the company. We have a very simple formula: if we can find the “A players,” we try to hire them. You try to do it around a theme, or around an area of influence. We don’t have a balance sheet; we don’t have a massive amount of equity, etc. All we have to sell is our advice, our reputations and our track record. What we learn is that if your hire “A players,” they figure out a way to pay for themselves and help the firm grow. We’re going to continue trying to do that at all levels of the company.