With more than 15 years’ experience and having invested in 350 utility-scale solar plants, NextEnergy Capital has launched its fifth solar fund, which has a target of $1.5 billion, a hard-cap of $2 billion and a focus on OECD. The fund follows on from NextPower III, which exceeded its $750 million target to close on $896 million in 2022.

“Many investors like the bigger funds; large institutional investors need to invest larger tickets”

Michael Bonte-Friedheim

“NextPower V ESG is the continuation of our successful strategy around NextPower III,” Michael Bonte-Friedheim, chief executive and founding partner of NextEnergy Group, tells Infrastructure Investor.

“We’ve been so successful with NextPower III and we see many further opportunities in the market, so we are raising the next fund to piggyback and follow on everything we’ve done with NextPower III.

“Because Fund V is significantly larger than Fund III, we are expecting to include both old and new investors in the new fund,” Bonte-Friedheim says.

According to Shane Swords, managing director at NextEnergy Capital, the outlook for the new fund is positive. “Based on the kind of demand we see from our existing clients and people we have been speaking to, we should be off to a good start. First close is targeted for the summer, and we are offering good returns for a solar strategy by targeting 13-15 percent.

“We have outperformed our targets before, which will be really important for investors. In our second fund, NextPower II, we targeted gross returns of 10-12 percent and delivered net returns of over 25 percent.

“I think it is fair to say we are seeing strong interest from existing investors and potential investors,” Swords adds. The new fund will have a term of 10 years and qualify as an Article 9 fund under the EU SFDR.

Solar’s stellar appeal to GPs and LPs

In a crowded market, with ever-bigger funds chasing LPs weighed down by the denominator effect, NextEnergy is trusting that bigger is better.

“The predecessor fund was focused on small-to-medium sized projects, whereas the next fund will also be looking at larger projects, and platforms too”

Shane Swords

“There are two reasons for going bigger on this fifth fund. One is the opportunity; the solar targets across many OECD geographies are significant, and we have proven our ability to go into markets and expand. Two, there is the actual investor interest. We see a strong interest from pension funds and institutional investors in investing in renewable energy ESG strategies,” says Swords.

With more money to allocate comes new opportunities, he adds: “The predecessor fund was focused on small-to-medium sized projects, whereas the next fund will also be looking at larger projects, and platforms too. And this fund will also invest into battery storage, which we have done in some of our other funds as well.”

In addition, a larger fund size provides an attraction of its own: “Many investors like the bigger funds; large institutional investors need to invest larger tickets. And, increasingly, very large investors are looking at funds for transition in energy, so we have to give them a fund that suits their objective,” says Bonte-Friedheim.

NextEnergy has a pipeline with close to 13GW worth of projects and expects Fund V to have 3.5GW of capacity when fully allocated. And for LPs keen to engage with solar energy, Bonte-Friedheim is confident that NextEnergy has the edge: “The objective for us is not to drive the market returns of solar investments, because we do not drive the market. Instead, we strive to be the most efficient operator in the market, and because we are a specialist, we will be better than the rest. We will outperform our peers in the market.”

Investing in an ever-growing solar market

According to the IEA’s monitoring of stated policies, yearly PV capacity additions will rise from 151GW in 2021 to 370GW in 2030 and nearly 600GW in 2050. More solar capacity will be added between now and 2050 than any other technology, though the capacity factor for solar is well below that of other renewable technologies.

Solar, however, has two significant advantages: “The principal thing driving the growth in new-built solar is that solar is the cheapest form of new-build power generation. It is also faster to construct and connect to the grid than any other technology,” Bonte-Friedheim says.

Despite the increasing amount of PV energy available in the targeted OECD geographies, Bonte-Friedheim is bullish on solar’s ability to perform. “We continue to secure a premium over the baseload price in the UK for power generated by our portfolio. Power prices may come down and prices are forecast to come down quite significantly. But because solar takes a short time to build, you have a sector that is self-regulating. If power prices were to fall so much that solar wouldn’t be profitable, no more will be built.

“We can sustain power prices that are a lot lower than what is currently forecast. The opex for solar is often around $25-$30/MWh, and because there is a floor for power production, then solar, as the lowest-cost generator, will have the lowest risk in the market. And energy storage is going to become increasingly important, which is why we have allowed for investments in storage in Fund V,” Bonte-Friedheim says.

Fund V’s strategy is to have long-term offtake agreements in place and use 10- to 20-year PPAs using power coming exclusively from the solar arrays. And while debt may be an issue for some technologies, the NextPower V fund will be levered.

“There’s still debt out there. If you’re lending to a non-recourse solar project, compared with a road or school or hospital, it’s generally pretty straightforward. Obviously, the greatest risk is the power price risk, but we use PPAs to mitigate that risk,” says Swords.

The specialist’s potential advantage 

With the launch of the fifth pure-play solar fund, investments in more than 2.4GW of solar capacity and a PV track record going back to 2007, Bonte-Friedheim doesn’t know of any other fund manager or investor with a similar level of experience.

“The solar sector has matured to such an extent that our investors can compare solar portfolios managed by non-specialists compared to portfolios managed by us,” he adds.

Specialisation is the fund’s unique selling point and one that Swords is keen to emphasise too: “A lot of people would think solar is a fairly straightforward infrastructure asset class, and maybe it is. But we specialise in it, and we take a lot of pride in doing that, and we have an excellent track record based on that specialisation.”

Swords adds: “We are quite a cautious manager. We stick to solar and to ground-mounted, utility-scale projects. We will have an energy transition sleeve, for solutions associated with solar, but mainly, we are sticking to our knitting, to solar.”