Solar deals heat up; more sizzle ahead for private equity

The deal marks the second for the three firms in a two-year period after a 2011 agreement to invest in solar facilities serving the Sacramento Municipal Utility District. As part of that deal, KKR committed a $95 million line of equity to SunTap Energy RE LLC, a venture formed to invest in solar projects.

KKR made the latest investment in the Recurrent Energy solar project from its Infrastructure Fund, which had $1 billion in commitments as of Sept. 30. “The investment offers an attractive risk-return through stable, long-term cash flows in a market with high barriers to entry,” Ravi Gupta, KKR’s director of energy and infrastructure, told Buyouts through a spokeswoman for the firm.  

Indeed, investments in solar power infrastructure projects, often involving power purchase agreements that deliver steady income, offer returns in the high single digits, outpacing many fixed income offerings.

“In the last few years, we’ve clearly seen solar projects get established as an acceptable asset class,” said Recurrent Energy CEO Arno Harris, who is also chair of the Solar Energy Industry Association, the major trade group of the industry. Other high-profile investors in solar deals include Warren Buffett, Blackstone Group, Riverstone LLC and mid-market firm NewWorld Capital Group LLC.

Solar deals may be getting a boost from the broad energy sector, which has seen an uptick in the dollar value of mergers and acquisitions: For the year through Nov. 15, there were 20 deals with proceeds totaling $3.9 billion, compared to 29 deals with a combined value of $3.4 billion in the year-ago period, according to data from T-1 Banker.

Photovoltaic projects also fall into the larger bucket of infrastructure financing deals, which are on an upswing. Total project finance for all infrastructure deals in the U.S. rose to $23.8 billion via 49 deals in the first nine months of 2013, up from $14.3 billion in proceeds via 46 deals in the year-ago period, according to the Thomson Reuters Global Project Finance Review.

Power ranks as the single largest category of investment in the Americas, with $19.3 billion in proceeds in the first nine months of the year, up from $14.2 billion last year. Power drew a 55 percent market share, a bigger piece of the total project financing pie than oil and gas, transportation, mining, telecommunications and petrochemicals.

Among solar deals by sponsors, Blackstone Group’s investment in Vivint Solar Inc—part of its overall investment in Vivint’s security business—falls into a different category than project finance, that of taking stakes in a rapidly-growing business. 

Vivint Solar said it raised $540 million in financing on Oct. 17, following a period of quick expansion to become the second-largest player in the solar power installation space after SolarCity Corp, which was backed by Elon Musk. SolarCity held its IPO in December, 2012, at $8 a share. Shares have climbed to nearly $60 a share since then.

Also on the solar front, NewWorld Capital Group in a deal announced Nov. 7 teamed up with CCM US LLC and Exelon Corp’s Constellation unit to invest in Astrum Solar, a residential solar-panel installer based on the East Coast.  On the commercial side, NewWorld Capital has invested through its NewWorld Environmental Infrastructure LP fund in commercial solar projects being developed in partnership with Soltage, LLC.

Bill Hallisey and Sasha Novograd, both executives of NewWorld Capital Group, said the New York-based firm expects to make more investments in residential and commercial solar power. Demand is expected to rise as the cost of solar remains low, or drops even further.

“The megatrend in residential solar is the continuing decrease in the cost of generating electricity using solar compared to retail power prices, which allows an increasing proportion of the population to save money by installing solar,” said Novograd, a vice president at NewWorld. “This trend has created and will continue to create a number of viable economic properties.”

The firm has been careful to avoid any parts of the business that could rapidly commoditize, which is what happened to solar panel manufacturing, she said.

Hallisey, a managing partner at the firm, sees “enormous room for growth” in solar, in part because distributed generation can reduce consumers’ electricity costs. It also draws political support both from the environmentalists on the left and activists on the right who oppose centralized power controlled by government-regulated utilities.

To be sure, while the cost of solar panels has made them more competitive, the industry does receive at least one key subsidy from the U.S. in the form of federal investment tax credits for commercial solar energy. Thirty percent of the total project cost, including supporting structure and other expenses, is eligible for a tax break, which appeals to extremely wealthy investors looking to reduce their payments to the federal government. Currently, that program is due to expire at the end of 2016.

Although the tax credits appeal to a relatively small collection of tax-equity investors, more private equity dollars could flow into the space if master limited partnerships and real estate investment trusts were set up around alternative energy projects, according to some industry players.

“The scarcity of tax equity investors, the relative illiquidity of the deals, and on-again off-again nature of tax credits means that the cost of capital for renewable projects remains higher than oil, gas and coal infrastructure projects,” said Dan Reicher, executive director of Stanford University’s Center for Energy Policy and Finance.