The solar system

01 May 2009

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Of the various technologies that make up the renewable energy sector, it is solar that absorbs the most capital. European and government incentives make it an attractive investment for both GPs and banks despite the economic slowdown. By Francinia Protti-Alvarez

In recent weeks, two solar infrastructure deals have been closed in Spain totalling EUR434m. Acquired from AIG Financial Products Corp and investment banking firm 360 Corporate, HgCapital closed a EUR300m deal in mid March. Just weeks later, Paris-based Platina Partners closed the financing for the three solar energy projects it acquired in September last year (October 2008, page 28) via its Mistral Energy II fund and through its Madrid-based portfolio platform Anemoi Renovables; a EUR134m investment.

"We are quite bullish about the Spanish market as the high quality of the resources (solar and wind) present low risk investments. The Spanish market is very mature when it comes to renewables, it ranks first in the world for annual installed capacity and third behind the US and Germany in power generation," says HgCapital's Jens Thomassen.

Renewable energy generation deals have been on the up over the last decade. According to unquote" proprietary database Private Equity Insight, the volume and value of solar-related private equity deals in Europe has been increasing, reaching a staggering EUR3.3bn across 35 transactions completed last year (see graph).

Light investing

The solar sector has won the hearts of investors and lenders alike. EU directives encouraging the diversification of the energy and the inclusion of alternative sources have helped, as has the requirement for national utilities providers to acquire renewable energy produced (by alternative sources) at rates above the average market value.

For investors, in particular pension funds and insurance companies, the solar projects offer a low resource variance and portfolio diversification, as well as predictable cash yields as feed-in tariffs have little to no correlation with fluctuations in power prices.

"The risk profile of solar infrastructure deals, the high leverage levels they can obtain and the returns for investors suit investment expectations, especially in the current environment. The high levels of expected growth in new capacity - even in the current climate - also contribute to the high profile enjoyed by the sector," explains Simon Page from Platina.

With legislative and commercial guarantees, the risk involved in this type of deal is minimal; thus it is unsurprising that despite their aversion to most other buyouts, banks are more willing to provide the (project) financing required. Lenders remain mainly active at the national level and tend to consider project finance for deals above 5MW. Depending on the nature of the scheme and technology employed, they can provide between 75-85% in financing. Here again, cash flow predictability tends to play a major part in favour of the sector.

"Even if project finance for this type of investmens tends to be more easily available than leverage for a buyout deal, the price of liquidity circles around the 300 basis points - the market is therefore a difficult one! Bank syndicates will go with those top tier investors with a proven track record in the sector," adds Thomassen.

With such hype around the renewable energy sector it is natural to wonder if a bubble is developing. Already Q1 2009 figures show a considerable decrease in the deal value, down to EUR65m from the EUR467 registered in the same period last year, although it is across the same number of deals. It is doubtful that 2009 will see the same investment value as 2008, the biggest year for the sector over the last decade (see table). But the overall prospects for the sector seem bright.

"Investments in the renewable energy sector are far from having peaked. At a legislative level, the EU targets set for 2020 are ambitious and represent just another step in the ongoing greening of European energy consumption. Politicians are already talking about the setting of even more ambitious targets beyond 2020. For the industry, this means that new investments in the sector are likely to continue for at least 10-15 years," concludes Page.