Here comes the sun (again)

Spring is in the air – and along with it, a stronger share of European electricity generated by renewable assets. As the sun shines more strongly and for longer, the output generated by solar power plants rises by the day. The season is also associated with powerful winds, and you could even argue that March’s eclipse, credited for having caused the “tide of the century”, did its bit for the budding prospects of tidal energy.

Yet institutional investors haven’t waited for more clement weather to set their sights on renewable opportunities – and in particular, for plugging capital into the UK listed renewable space.

The Renewables Infrastructure Group (TRIG), a vehicle managed by InfraRed Capital Partners, in March beefed up its original 67.5 million share issue by adding a further 32.5 million. The company decided to upscale the placing, through which it raised more than £102 million (€146 million; $151 million), to meet unexpectedly strong investor demand.

Tailwinds

Rival funds seem to be riding similar tailwinds. NextEnergy Solar Fund, another listed vehicle, in February secured £61.4 million through a secondary share issue. That came after an earlier £95.5 million fundraise in November, significantly in excess of its original target. The equity has since been entirely deployed; in April, Bluefield Solar Income Fund also announced that it had already used up the £131 million it collected last autumn.

This uptick in investor appetite contrasts with the lull observed in the UK listed renewables market about a year ago. Back then, TRIG missed its £85 million to £120 million target range when it collected £66.2 million through a secondary share issue; Greencoat UK Wind, also listed on the London Stock Exchange, fell short of its £135 million aim by more than £50 million. NextEnergy then garnered £85.6 million – the bottom of its IPO range – after revising its ambitions down from its initial objective of £150 million.

There are good reasons for the mood change. The last 12 months have seen interest rates fall even further, and institutional investors’ hunt for yield has only intensified. As the industry celebrates its two-year anniversary, there is also a better idea of how UK listed renewable funds are performing: often dubbed ‘yieldcos’ for their ability to deliver stable, predictable yield, these have largely fulfilled their dividend, capital deployment and financial targets.

Their attractiveness is unlikely to abate. With a target internal rate of return (IRR) typically in the mid-to-high single digits, the asset class compares well relative to low-risk securities across the globe. As forthcoming sets of results are published, a sounder track record will emerge. Investors’ preference for backing fewer, bigger listed funds – as hinted at by the precedent of the older, more mature UK social infrastructure market – should further entrench the position of established players.

Furthermore, the market could be set for even faster growth than it has already experienced. Most institutions that committed to the secondary share issues of UK listed funds were already present when they launched their IPOs – meaning that there is a big opportunity to recruit new ones.

Importantly, UK yieldco shareholders are now almost entirely domestic. But as listed vehicles grow bigger and become more liquid, overseas investors could also be enticed. The UK’s six listed renewables funds have raised nearly £2 billion since inception; several market players we spoke to reckon the market could double in size within the next one to two years.

Not everyone has something to gain from the growing popularity of renewables yieldcos. Unlisted funds chasing the same deals will have to justify their higher fees and lack of liquidity by focusing on riskier jurisdictions, newer technologies or assets at an earlier development stage. But as the clamour for yield remains unsatiated – and as greenfield capital invested in renewables looks to be recycled – their rise will likely be welcomed by many.