Temasek-backed Pentagreen eyes zero-carbon infra projects
Pentagreen Capital is setting its sights on zero-carbon infrastructure projects in renewable energy, energy storage, sustainable transportation, water, waste treatment, and the circular economy, according to CEO Marat Zapparov.
“We are also exploring other types of assets, such as green data centers, nature-based solutions, and adaptation capex. We are also interested in electric vehicle (EV) projects and the broader EV ecosystem. This entails assessing deals that promote the adoption of low-carbon transportation solutions such as EVs, public transit systems, and alternative fuels," he said.
Pentagreen Capital is backed by two shareholders,Temasek and HSBC, in a 50:50 venture.
The Singapore-based lender was launched in 2022 with the ambition to make $1 billion in loans to projects that aren’t being banked. It sealed its first deal in September 2023 with Citicore Renewables, with $100 million in financing to accelerate the rollout of solar projects in the Philippines.
“By engaging with Citicore, we aim to promote the development of clean energy sources such as solar, wind, and hydropower. Through this partnership, we are also looking at energy storage technologies that can help to improve the reliability and efficiency of renewable energy systems," said Zapparov.
ATTRACTING MORE INVESTMENTS
The entity looks to “crowd-in” financing by providing financing where traditional debt providers are unable to step in.
Besides Temasek and HSBC, Pentagreen Capital has two more strategic partners, The Asian Development Bank (ADB) and Clifford Capital Holdings, although they are not shareholders in Pentagreen.
Pentagreen Capital
“We are happy to work with like-minded partners from the market who share our view on the problem statement in Asia infrastructure and our vision of how to use blended finance to channel capital to parts of the market where it is not flowing”, said Zapparov.
The Asian Development Bank (ADB) estimates Asia would need to invest $26 trillion from 2016 to 2030, or $1.7 trillion per year in infrastructure to maintain its growth momentum, eradicate poverty, and respond to climate change.
Of the amount, $9.5 trillion, or $633 billion per year pertains to the needs of South and Southeast Asia. The public sector currently dominates infrastructure financing, accounting for between 62% and 92% of the investments.
Blended finance is a prevalent financing instrument in this space where a combination of commercial and concessionary capital is used in a single financing product. The objective of using concessionary capital is to unlock the flow of commercial capital, in areas where commercial capital may not flow by itself.
DUE DILIGENCE PROCESS
“The due diligence project for these marginally bankable projects is more intense as Pentagreen besides looking at the usual technical, financial, and operational aspects also assesses the assets and the likelihood of market acceptance and environmental considerations, ” noted Zapparov.
“Pentagreen applies an ESG framework to every transaction and this framework is based on international project finance standards including the Equator Principles, IFC Performance Standards and ADB Safeguard Policy Statement”, he added.
Pentagreen also, as needed, requires borrowers to “implement an environmental and social action plan with set milestones that are then monitored”.
Going back to the example of the Citcore deal Zapparov added, “The loan facility was structured under Citicore’s Green Financing Framework. Such frameworks are typically set up according to accepted market principles and validated by a third party so that any issuance under the framework can be labeled as green. The loans are use-of-proceeds driven, meaning the proceeds of a green loan must be used for eligible green assets – in this case, solar power plants.”.
PUBLIC-PRIVATE PARTNERSHIPS
Blended finance is another area of interest. It is often highly bespoke and takes place at the project level making it a fragmented, time-consuming, and non-replicable process.
“Pentagreen is looking to make it scalable using a dual approach. Firstly, combining concessional and commercial capital strategically and allowing it to assume risk across multiple projects, thereby attracting private institutional capital for those projects. Secondly, by working on the projects themselves and de-risking them to ensure they are more bankable, ” said Zapparov.
The Singapore government is also exploring a new vehicle to catalyse blended finance in Asia by working with partners around the region including multilateral development banks (MDBs) like the Asian Infrastructure Investment Bank (AIIB), the Asian Development Bank (ADB) and the World Bank.
MDBs are often well placed to provide credit enhancement by taking the first loss capital in critical projects.
Pentagreen Capital is also looking to provide subordinated or mezzanine debt financing to such projects, which institutional capital largely shuns.
"In Asia, there are few mezzanine debt providers specializing in infrastructure. Banks are generally comfortable with the idea of financing individual projects or assets that involve greenfield risk. However, when it comes to adding subordinated debt to the mix, especially within a portfolio of primarily greenfield projects, it becomes more challenging,” noted Zapparov.
Subordinated debt financing is a form of financing that ranks below senior debt in terms of repayment priority and typically carries higher interest rates due to its increased risk.
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