Private capital strikes back

The tables have turned with infrastructure funds, once edged out of deals by yieldcos, now buying these vehicles.

An old adage says a coincidence is something that occurs twice, and three times is a trend. Based on recent market activity, publicly traded yieldcos are trending toward private capital acquisitions.

Over the span of a week in early February, two fund managers committed over $3 billion to acquire yieldcos operating a combined 5.8GW of clean energy assets, while a third offered to pay $1.2 billion for another such vehicle.

If one thing is clear, it’s that publicly traded yieldcos as we knew them are a thing of the past.

Created around 2013, yieldcos have mostly functioned as growth engines for clean energy developers, sending sale proceeds from operating solar and wind assets back to their parents to fund the building of new projects. Investors were given high growth expectations for the vehicles, raising stock prices, with the steady inflow of investor capital allowing yieldcos to outbid private capital for the acquisition of new projects.

For a few years, everyone was happy: investors got a healthy dividend in a low-interest rate environment and clean energy developers got the cash they needed to keep growing. Well, almost everyone – private capital, after all, kept getting edged out of deals at the height of the yieldco boom.

In March 2016, when SunEdison filed for bankruptcy, its stock had dropped 90 percent and the vulnerability of yieldcos’ business model was fully exposed. The bankruptcy hit a waning market hard. Since then, most of the eight main North American publicly traded yieldcos have seen their stock decrease in value. As of last June, they had only raised $1 billion after raising $7.9 billion in 2014 and 2015, according to Bloomberg New Energy Finance.

“[Their] cost of capital is a little bit too high [now],” John Breckenridge, head of Capital Dynamics’ clean energy infrastructure group, told us recently. “The yieldco, at its pinnacle, was buying assets at such high prices that it was squeezing private equity out of the market. That’s now flipped completely the other way.”

That brings us to where we are today, which could neatly be summed up as private capital striking back. In February, Global Infrastructure Partners paid $1.375 billion for a 46 percent stake in NRG Yield, plus some other assets, as its parent company seeks to liquidate $13 billion of debt. First Solar and SunPower also decided to sell their yieldco – 8point3 Energy Partners – to Capital Dynamics, for an enterprise value of $1.7 billion, after what they described as “very limited” growth. More transactions will almost certainly materialise.

What happens to yieldcos next will depend on the acquirer. Some managers will choose to keep their newly acquired yieldcos listed, some will absorb those assets into their private portfolios, others may even choose to sell assets bit by bit.

So, is this the ‘Death of the Yieldco Model’? It’s certainly the death of the hyper ‘growthco’ model some of these vehicles turned into. And it appears to vindicate all the naysayers who grumbled about alignment of interests at the height of the boom.

Ultimately, the public-private divide might matter less compared with what kind of yield and growth investors want from these assets. Patient capital looking for the former need not be scared.