Private equity clean energy and renewables dealmaking in the US should begin to recover in 2024 after a year of high interest rates and a challenging fundraising environment dampened appetites for traditional takeovers, industry experts said.
During the past year, large asset managers like Blackstone Inc. and Ares Management Corp. established private debt clean energy funds to take advantage of higher-for-longer rates in 2023, while the broader clean energy selloff threatened private equity valuations, capital costs rose and fundraising slowed.
Private equity firms and funds still bought renewables but on a smaller scale.
"We are seeing less leveraged buyouts and more structured-preferred transactions, more joint ventures," King & Spalding LLP attorney Jonathan Melmed, who specializes in power and infrastructure private equity and M&A, said in an interview. "And more transactions in which infrastructure and renewables funds we work with are buying substantial minority interests without using leverage or debt.
"They're hoping to creep up to simple majority and control positions in the coming months or year or two, and layer on debt that may be too expensive to enable them to buy out the whole project or asset now."
Deal flows slow
Ankit Vanjara, a managing director in the power, renewables and energy transition advisory group of Macquarie Capital, Macquarie Group Ltd.'s investment arm, said deal volumes also dropped off as the sector waited for tax credit guidance from the Internal Revenue Service and as the debt market partially dislocated due to the collapse of Silicon Valley Bank.
"It took longer and more dollars to bring the same megawatts online in 2023 than it did in 2021 or 2022," Vanjara said.
Vanjara expects private equity M&A activity in stand-alone battery storage and renewable natural gas to pick up in the US in 2024 as capital costs recede across the renewables sector.
Macquarie Capital's infrastructure and energy financing arm, meanwhile, has walked away from some transactions due to the challenging macroeconomic landscape.
"Higher interest rates led to a pretty significant bid-ask spread in terms of discount rates wanted by developers and sellers relative to investors," Macquarie Capital Senior Managing Director Nicholas Gole said in an email. "We saw several deals that we found interesting but had trouble coming to terms on due to the counterparty's expectations anchored in the previous rate environment."
In addition to decreasing transaction flows and smaller assets changing hands, private equity firms faced increasing common equity risk-adjusted returns.
"They do need to, at some point, address any gaps between their own internal valuations and what the market is saying, and so you've seen some firms look at their valuations again and in some cases bring those down," S&P Global Commodity Insights Climate and Clean Tech Executive Director Peter Gardett said in an interview.
Still, some assets did fetch billion-dollar valuations.
Duke Energy Corp. sold its commercial renewables business to Brookfield Renewable Partners LP for $2.8 billion while Apollo Global Management Inc., EnCap Investments LP and Yorktown Partners LLC offloaded Broad Reach Power LLC to Engie SA for more than $1 billion. A partnership owned by Blackstone, Invenergy LLC and pension fund manager Caisse de dépôt et placement du Québec also acquired American Electric Power Co. Inc.'s unregulated renewables portfolio for $1.5 billion.
Pension plans and sovereign wealth funds "have continued to be very active and in challenging fundraising environments those that don't have to raise money from third-party limited partners have been a wonderful continued source of activity," King & Spalding's Melmed emphasized.
Development landscape changes
Midmarket funds also remained active in the US, with Denham Capital Management LP buying solar developer Solops LLC for an undisclosed amount.
Managing Partner Scott Mackin, who heads the firm's international power team, noted in an interview that there remains a great deal of broader interest in acquiring distributed solar platforms.
But unlike larger asset managers that typically buy and sell developed platforms and assets, Denham Capital focuses on building businesses it can eventually exit.
"What we're not doing is buying large renewables companies with massive amounts of operating projects that already have long-term debt in place," Mackin said.
Development and construction in a higher power purchase agreement price environment, meanwhile, "puts on a bit more pressure that you'll either have to relieve by taking out margins or avoiding transmission costs ... or you have to increase your offtake price commensurately," Mackin added.
More of the big private equity firms are also "increasingly comfortable" not only as builders but also as owners and operators of renewable energy infrastructure in order to qualify for Inflation Reduction Act tax credits, S&P Global's Gardett said.
"The real growth is in project development and ownership directly," Gardett added. Although that endeavor was not easy in 2023 either. An August 2023 report from LevelTen Energy Inc. described developers struggling to unload preconstruction projects during the first half of 2023 as potential buyers were deterred by clogged interconnection queues, limited tax equity financing availability and higher debt expenses.
Potential fundraising rebound ahead
Private equity fundraising for US clean energy and renewables also declined sharply in 2023 as a prolonged exit slump across industries slowed the flow of distributions to private equity investors, leaving them with less cash on hand to reinvest in new funds.
"Even into the middle of the year you were seeing double-digit billions fundraises close for clean energy," Gardett said. "Those numbers have fallen really dramatically. Now when you see a fund close it's often below $1 billion and that would have been tiny a year and a half ago."
While he does not "see any catalyst for the resurgence in large fundraising trends on the private side right now," he sees some signs the crunch may be easing.
In December 2023, Brookfield Renewable Partners parent Brookfield Asset Management Ltd. said its global Brookfield Infrastructure Fund V, which will focus in part on decarbonization and has already invested in renewables, closed at a record $28 billion, up from its $25 billion target.
Sandbrook Capital Management LP just weeks later said its Sandbrook Climate Infrastructure Fund I closed at $1.5 billion. The fund will invest primarily in North American and European clean power generation, transmission, storage, energy efficiency and industrial decarbonization sectors, as well as associated services and supply chain businesses.
If interest rates do go down in 2024, the private credit funds that competed with infrastructure equity funds in 2023 will also become less attractive, King & Spalding's Melmed said.
Jehangir Vevaina, a managing partner in Brookfield's renewable power and transition group, said in an interview that 2024 "looks quite positive" for firms investing in the US as interest rates and capex show indications of coming down and new manufacturing facilities come online.
There has also been "a lot of movement" in commercial contracts for industrial decarbonization, a focus of Brookfield's Brookfield Global Transition Fund I, Vevaina added.
"Compared to when we were getting into 2023, it does look like a lot of those headwinds will dissipate," Vevaina said.