Aug 13, 2021 - Economy

Private equity crowds renewables deals, with investors willing to pay the price

Illustration of hands holding money up towards Earth

Illustration: Annelise Capossela/Axios

Private equity is pouring billions into renewable energy assets — it’s what LPs want, it’s what society demands and it’s what the world needs. But the classic private equity dilemma has surfaced: too much money chasing too few deals.

Why it matters: With heated competition for deals, prices for prime wind and solar power assets are getting bid up — and return expectations, in many cases, are coming down.

Zoom out: Private equity raised $52 billion to invest in renewable energy in 2020, a record — and this year is on pace to top that, according to Preqin.

  • Since 2010, these funds have generated a median net internal rate of return of 8%.

State of play: “Now you have every LP, ranging from true LPs to people on the street, wanting what they invest in to be green," says Kaam Sahely, partner in Vinson & Elkins' energy transactions and projects practice.

  • Corporates, especially those in the legacy energy space that are angling to transition, are increasingly throwing their weight around in clean energy-related auctions.
  • The influx of investor interest at the project level has "changed the economics and made it tough for [an auction] winner to really pencil in that return," says Michael Joyce, also a partner in Vinson's energy practice.

Case in point: For a strong portfolio of wind assets, the list of bidders in an auction might include “10 insurance companies, 20 infrastructure funds, 27 sovereign wealth funds and 20 strategics,” Sahely says.

Between the lines: Many LPs nowadays get that the returns generated in renewables may not be what they typically expect from a PE investment, he adds.

  • They take the view that "'I need to invest in this area. Everybody's demanding it. I demand it. And I'm okay with a lower return profile,'" Sahely says.
  • On the plus side, the booming marketplace also means there are exit opportunities aplenty.

The big picture: Funds that can cast a wider net for assets are doing just that.

  • This money goes to earlier stage projects, or the parts makers that feed into renewable projects, or the electric vehicle ecosystem, Carl Fleming, partner at McDermott, Will & Emery, tells Axios.
  • Investors are stretching into looking for companies "that make the screw, that holds the battery, that goes in the EV car," he says.

The bottom line: The onslaught of investor interest has undoubtedly made some assets more expensive.

  • But it's also helped create a more sophisticated market for companies and projects that need funding — from early-stage venture capital to private equity investors willing to step in at different points in a company's growth, says Rob Day, co-founder at Spring Lane Capital.
Go deeper