Renewable energy: When will activity match the spin?

Sure enough, if you believe the polls and research that periodically pop up in the industry, there appears to be no shortage of interest in the sector among the private equity community - especially in the later stage and infrastructure area. But the interesting thing is that this is not translating into any significant acceleration in deal completions.

In 2010 to date, there have only been a handful of larger renewable energy transactions, the most recent of which was Mid-Europa's investment of growth capital in Czech solar power operator, Energy 21. Other significant examples include HgCapital's €150m investment in the Spanish solar energy operator Mercurio Solar in February and Platina Partners' €71m+ project funding of French wind farm operator Fruges in April.

So why are we not inundated by deals in this area? With the amount of dry powder available in the industry and persisting economic doubts affecting dealflow in other major sectors, is it not reasonable to expect activity in the renewables area to be boosted?

The reality is more complex and there are a number of good reasons why the renewable energy sector is not more effervescent. To begin with, as HgCapital's Tom Murley points out, is the issue of returns: "You have to remember that the returns profile of something like a renewables infrastructure project is very different to classical private equity. They are low volatility, lower returning investments. At the best they may generate returns comparable with the lower end of the buyout market.  Specialist investors are geared to this and will take those returns all day, but it might put others off."

It is also important to bear in mind that the industry is really in its early stages of development: this means that it lacks the sort of scale that might attract the larger players, but more crucially, perhaps, this also means it lacks a number of truly experienced participants, both at investor and investee level. "There is precious little relevant experience in the market, so many of the private equity groups keen to get into the area just can't build the teams", says Murley. 

If you add to these factors, the persistent scarcity of debt funding (essential in long-term infrastructure projects) and the caution being demonstrated by large institutional investors towards new investments, it is easy to see why the segment is not so straightforward as it might appear.

However, on the positive side, the specialist investors in the market confirm that there are opportunities out there, especially for those with the experience, knowledge and capital to deploy. So it's not all hot air.

An extended feature looking at activity in the renewables/cleantech segment will be published in the June edition of unquote" Private Equity Europe

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