Private equity targets renewables developers for growth potential, right prices

Private capital is on a buying spree for renewable energy developers, substituting equity-based take-private deals for leveraged buyouts as interest rates remain high and electricity demand surges.

So far this year, investment giants KKR & Co. Inc., Brookfield Asset Management Ltd., EQT AB and Energy Capital Partners LLC have all lodged bids for listed renewables platforms, pledging to fast-track the companies' installed capacity in coming years.

"There's a real appetite to buy development platforms," including the expertise of the staff at those businesses, as opposed to "buying operating assets that require a lot of acquisition finance," Jonathan Melmed, an attorney at King & Spalding LLP who specializes in power and infrastructure private equity and M&A, said in an interview.

"Infrastructure funds and buyout funds still want to make investments, but they want to wait for the debt markets to improve before they do big leveraged buyouts like before," Melmed said.

After a long period of subdued dealmaking activity, asset managers and infrastructure funds are putting project development skills to work as they become increasingly comfortable in the space. Brookfield, through subsidiary Brookfield Renewable Partners LP, has a lengthy history of acquiring developers with substantial pipelines in the US.

"With equity returns for renewables adjusting favorably in today's higher interest rate environment, we find ourselves in perhaps one of the most attractive windows of opportunity to invest in leading renewables platforms," Peter Zhu, managing director at Macquarie Group Ltd.'s Green Investment Group, wrote in an email to S&P Global Commodity Insights.

'The price is right'

Renewables developers in both the US and Europe have faced significant hurdles in recent years, including project delays, trade restrictions, supply chain disruption and rising interest rates.

Those headwinds have hit the valuation of those players that trade publicly. Within Bloomberg Intelligence's renewables peer group, which includes Brookfield target Neoen SA and KKR target Encavis AG, the enterprise-value-to-capacity multiple stood at 1.5x in January 2023 but is now at 1.1x.

Sweden's OX2 AB, meanwhile, saw its stock price plummet 24% in 2024 before EQT AB launched its $1.5 billion offer on May 13.

"The price is right at this point for a lot of these publicly traded renewable power developers," Commodity Insights Climate and Cleantech Executive Director Peter Gardett said in an interview. "There was a period when the combination of rapid growth in renewable power plus low interest rates made them seem like growth stocks rather than infrastructure companies. As interest rates have gone up, that's really corroded the business model."

Industry analysts noted that other listed companies with a relatively smaller footprint and solid geographical exposure, including Italy's ERG SpA, Spain's Solaria Energía y Medio Ambiente SA and Norway's Scatec ASA, could be next.

The logical next step after swallowing up developers would be to take on full utilities, according to Gardett.

"They largely haven't done that over the last couple of years, but they have the deep pockets to do it if they think that there's money to be made there," he said.

Datacenters drive growth

KKR's $3 billion bid for Germany's Encavis includes a commitment to grow the company's installed capacity to 7 GW by the end of 2027, a boost from the previous target of 5.8 GW. Meanwhile, Brookfield said it aims to "accelerate [Neoen's] growth."

Atlantica Sustainable Infrastructure PLC should also be able to grow following its acquisition by Energy Capital Partners, which values the developer at $2.56 billion.

"The board was reckoning with maintaining an 80% dividend payout whilst fulfilling growth objectives amid a tougher capital markets backdrop for sector," analysts at Bank of America wrote in a May 28 report about Atlantica. "AY believe they now have more optionality to grow in a private capacity."

The Nordic market could be a poised for growth given the region's suitability for datacenters, and the significant potential power demand that comes along with that development.

Neoen has wind, solar and battery assets in Sweden and Finland, and has signed power purchase agreements with tech giants and datacenter operators such as Alphabet Inc.'s Google LLC and Equinix Inc.

Brookfield recently sealed a global 10.5-GW framework agreement with Microsoft Corp., which the companies said is almost eight times larger than the largest single corporate PPA.

"With the seemingly insatiable demand from the hyperscale datacenters and industrial facilities, one may argue there has not been a better time to be a developer and generator of green electricity," Macquarie's Zhu said.

Analysts at Morningstar agreed, writing in a June 4 note that the renewables development subsector represents "among the most relatively attractive areas within clean energy and view the recent mergers and acquisitions activity as validating."