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Ardian’s Spanish wind play points to sustainable PE sector interest

The course of true love never did run smooth, and neither has the on-again, off-again interest of private equity in the renewable energy space.

Earlier this month, Ardian reportedly closed the acquisition of Renovalia Reserve for EUR 550m, a wind portfolio owned by Cerberus-backed Renovalia and BlackRock, based in Spain. This is neither an extraordinarily large deal for the space, nor is it peanuts, but it is an indication of renewed private-equity interest in the space.

On a fundamental basis, investment into the renewables sector should suit the model of private equity well – the long-term growth prospects are never in doubt.

However, political and regulatory interference, alongside competition from PEs' closed-end infra fund cousins, makes for a lumpier investment landscape than first meets the eye.

Exits too can prove tricky. This is the second attempt by Cerberus to exit Renovalia in as many years, with an auction last year running into price consensus hurdles.

Investment into renewable power generation assets is a project-based business model, much like oil and gas and mining, which means that the value is realised by acquiring interest during the risky development stages and investing to bring those projects into operation and cash flow.

However, there isn’t a liquid international marketplace to sell into like other commodities – instead owners must rely on either government defined regulated returns, on selling to the grid on fluctuating market prices, or on securing long-term power purchase agreements with consumers.

Terra Firma’s RTR solar business in Italy, which it sold last year to F2i [BIT:F2i] for an enterprise value north of EUR 1bn, was a prime example of the rocky road a PE walks when investing in renewables. This news service first reported on the sale process in 2016, but valuation and corporate governance concerns stymied the sale for another 18 months.

Macquarie Infrastructure and Real Estate (MIRA) and KKR have now embarked on a similar sale of their Franco-Italian portfolio company Renvico.

Private equity is challenged in the space by the overflowing cup of infrastructure fund capital that needs to be deployed. Traditionally, these would target assets with regulated returns in stable and transparent geographies, but the weight of capital to deploy has stretched the mandate into riskier postcodes, and into earlier stage projects, thus competing with private equity.

Often, the same investor has both private equity and infrastructure funds, such as KKR, and the decision as to which bids is as internally competitive as the wider auction.

However, PE remains the more entrepreneurial of the two investment forms.

Denham Capital, for example, shuns developed markets in favour of fast-growing geographies with perceived country risk. What’s more, it cuts down regulatory and political risk by targeting projects where the economics are not based on state subsidies.

This strategy has seemed to pay off. The sponsor sold its BioTherm Energy portfolio company last month, for an undisclosed sum, to larger PE-player Actis Capital, which itself has deployed over USD 3.6bn in 34 energy transactions since 2002 and has invested USD 1.1bn through 5.2GW in the African energy sector.

That said, there are relatively few ways for generalist midmarket PE houses to gain exposure to the renewables market given its high capex requirement and need for sector expertise. In oil and gas, this middle tier of sponsor can review a plethora of oilfield service companies that operate between the energy and industrials spaces.

The middle market likewise wants to gain indirect exposure to renewables through acquiring service and equipment companies focused on the space.

However, there is a dearth of targets in the space, which creates intense competition when such businesses come to the market.

GEV Group, a UK-based renewable services company, was acquired by Bridges Fund Management from Maven Capital Partners for an undisclosed sum in July. This auction process was hotly followed by Mergermarket, which, despite having a reported enterprise value of only GBP 30m, garnered the interest of dozens of midmarket funds including Magnesium Capital, Graphite, NorthEdge Capital, LDC, Platinum and Inflexion.

Windhoist, a UK wind turbine installation company bought out by Star Capital last month, is another example of midmarket PE tapping into the space. Star Capital intends to bolt other acquisitions onto Windhoist.

However, it’s up to the big boys like Blackstone, Terra Firma and KKR to actually invest in the underlying renewable power generation assets, as these have the firepower and expertise to build diversified portfolios, balancing project and geographic risk, that can be sold on to long term investors.

These portfolio businesses need to achieve scale in order to attract the high-multiple paying field-focused financial investors that would be ideal buyers.

Partnering with strategics is one potential model that seems to be gaining ground, such as KKR’s co-investment into wind and solar focused joint venture Acciona Energia, alongside Spain’s Acciona [BME:ANA].

A Selection of Sponsor-Backed European Renewbale Energy Portfolio Companies

Announced DateTarget CompanyPrivate Equity InvestorDeal Value (EURm)
24-Jun-14Acciona Energia International
(33.33% stake)
(Spain)
Kohlberg Kravis Roberts & Co LP417
03-Nov-14Renvico Srl
(Italy)
Kohlberg Kravis Roberts & Co LP (50% stake in Sorgenia France); Macquarie Infrastructure and Real Assets240
28-Nov-14Viesgo Espana SL
(Spain)
Macquarie Infrastructure and Real Assets; Wren House Infrastructure Management Limited2500
30-Jun-15Nordic Power AS
(Norway)
SL Capital Partners LLP 
13-Nov-15Hydro Dolomiti Enel Srl
(49% stake)
(Italy)
Macquarie Infrastructure and Real Assets335
14-Jul-16VALOREM SAS
(28.5% stake)
(France)
3i Infrastructure plc69

The momentum behind renewables is relentless, with improvements in technology morphing the sector into an investment class that is economically viable without state support. However, this attracts other pools of investors with lower costs of capital.

The ongoing sale by EDP [ELI:EDP] of its hydropower assets is a clear example where strategic buyers, such as Iberdrola [BME: IBE], Norway’s Statkraft, Austria’s Verbund [VIE:VER] and Endesa [SME:ELE], have dominated the competitive auction, as reported by Mergermarket.

It remains to be seen whether this squeezes out private equity from the investor mix, in favour of the large strategic owners in the development stage, followed by passive investors taking ownership of operational assets.

Outflanked by infra funds and LPs on the one hand and braver strategics on the other, a PE nonetheless has record dry powder to deploy for an asset class with a solid yield profile.

Ardian’s Spanish deal certainly renews interest in sponsors’ intentions for the sector.

by Patrick Harris, with analytics by Mate Taczman

Patrick Harris Head of Energy & Natural Resources, EMEA Mergermarket
Patrick Harris Head of Energy & Natural Resources, EMEA Mergermarket

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