March of the renewables

Something funny is happening with renewables: once thought of as a sub-sector within the larger infrastructure investment landscape, it has recently taken on a life of its own, attracting attention from players in different asset classes with traditionally divergent risk/return profiles.

This week’s news that superstar private equity investor Guy Hands is in talks with the China Development Bank to set up a $5 billion global renewable energy fund is the latest example of this. Hands’ Terra Firma is usually associated with flashier investments, like – dare we say it – its troubled acquisition of music company EMI. Next to this, subsidised wind farms and solar parks seem like yawn-inducing stuff, but none the worse for that. 

Sources close to Terra Firma argue that the company’s success in the space – it already owns three renewable investments – has encouraged it to go large on it (large is our word, but it’s hard to view a $3 billion to $5 billion global fund as dipping your toes).

Nor is Terra Firma the only big-name private equity outfit to show interest in renewables. 

Both Blackstone and KKR – through Blackstone Energy Partners and KKR Global Infrastructure Investors – manage funds which are actively targeting the space. And then you have firms like HgCapital, which bills itself as Europe’s leading dedicated renewable energy investor with more than €900 million in capital from over 30 global pension funds, insurance companies and other investors.

It should be noted that private equity has always been active in the renewables space, although, arguably, more from the services and technology sides of the business, as opposed to investing directly in the assets themselves, which is what is happening now.

But private equity investors are not the only ones finding overlap between their traditional businesses and renewable energy; real estate investors are coming to much the same conclusion. 

Recently, German asset manager Union Investment, traditionally known for its real estate portfolio, chose renewables as the target of its first infrastructure vehicle. Christoph Schumacher, who is heading the effort, said that Union wants “to gradually open up the infrastructure segment for our investors by means of this product”. 

Fellow German real estate outfit IVG Immobilien also showed enthusiasm for the German wind and solar sectors. And over in the UK, fund manager Palmer Capital decided to launch a £52 million UK-focused solar fund last September. At the time, chief executive Alex Price remarked there were many similarities between real estate investing and renewable energy, and that he expected more real estate managers to make inroads into the space.

Institutional investors investing directly in infrastructure have often chosen renewable projects as their preferred deals. 

Aviva Investors recently bought a Spanish wind farm to help counter low government bond yields, while PensionDanmark clinched its first US wind farm deal earlier this week, highlighting wind investments offer the pension similar returns to equities, without the corresponding risk and market volatility.

In a way, it seems like you can make of renewables pretty much what you want of it. 

You can argue that private equity investors are using renewable investments to manage return expectations in the industry downwards, capitalising on their business-enhancing skill to deliver decent, but below 20 percent returns. For real estate investors, you can argue renewables represent more of a parallel investment whereas for institutional investors going direct, renewables are a step up from falling fixed income returns and volatile equities.

In a way, this is not new. Alain Rauscher, chief executive of French fund manager Antin Infrastructure Partners, told Infrastructure Investor in May that “you can buy the same asset and basically get radically different returns,” depending on a plethora of factors, not least of which is what constitutes an acceptable infrastructure return.

Regardless of the motives, though, players with distinct risk/return profiles seem to have selected renewables – and not toll roads or schools – as their way into the infrastructure space. In its recent third-quarter figures, placement agent Probitas Partners noted that renewable funds accounted for 15 percent of the $16.9 billion raised, up from 4 percent compared with the second quarter of the year.

If these investments prove successful, a bigger group of investors could be encouraged to try their hand at a wider range of infrastructure assets. Renewables would then act as a gateway drug, but with healthy consequences for investors and the infrastructure industry.

* Join the biggest names in renewable energy investment at the Infrastructure Investor Renewable Energy Forum 2012 as they discuss the drivers behind this maturing asset class. Click here for more information.