Private equity group Terra Firma is no stranger to investing in renewable energy. The firm first entered the space when it acquired UK-waste management business WRG in 2003. In doing so, it took on WRG’s renewable energy division, which formed a small part of the business at the time. When Terra Firma sold WRG in 2006 – netting it a tidy GBP500m profit – the firm opted to spin out the renewable energy division, which had grown to account for a third of WRG’s business, into a stand-alone company called Infinis.
“We decided it merited having its own management, its own strategy, and its own impetus,” Terra Firma financial managing director Damian Darragh told InfraNews. “With that experience we got going on renewable energy relatively early compared to a lot of our peer group.”
Darragh added that renewables fits his company’s skills base, which includes taking on strategic change and driving management. He commented: “A lot of renewable energy companies out there tend to be small, and the management rather weak. It’s a very capital intensive business so you need managing capital and investment skills.”
The firm clearly sees an opportunity in the sector. It made an estimated USD350m equity investment in US-based wind developer, Everpower, in August 2009, before following this up with the EUR641m (EUR234m equity) acquisition of Rete Rinnovabile, a 144MW portfolio of solar PV assets from Italian grid operator Terna in October 2010.
And more renewable energy deals could be on the way.
“First and foremost we are aiming to do follow-on investments for Everpower and Rete Rinnovabile. There’s a considerable amount of capital to go into those consolidation plays. Then if we could find one or two new business platforms in different geographies of the same kind of quality then that’s quite high on our agenda of things we’d like to do.”
He added: “Renewable energy is still a relatively young industry that is growing in times of relatively low economic growth. There are a lot of opportunities, it’s just about finding the right ones.”
The firm certainly has no shortage of capital. While both the Everpower and Rete investments came out of Terra Firma’s third buyout fund, the EUR5.4bn TFCP III, there is still an estimated EUR1.5bn of dry powder left in the vehicle.
Major utilities in Europe and the US could certainly do with some of that equity, as many such entities are currently faced with the acute challenge of finding the capital to invest in new renewable energy assets.
Independent developers are also in the market for cash. Market rival KKR, through its infrastructure practice, announced the formation of a 50:50 JV with mid-sized Italian developer Sorgenia for a 248MW portfolio of operational and development wind farm assets in France in June. However, Terra Firma is unlikely to follow suit with a similar transaction.
“For us it’s challenging, we’re a controlling investor,” Darragh says. “The lion’s share of renewable energy is always going to be about development. Not having control is quite difficult territory to be in. There’ a whole bunch of decisions that you make around development. It’s a relatively high risk activity, and trying to agree all that up front in a JV structure is quite hard. For operating assets it’s much easier.”
Private Equity Returns?
Terra Firma’s investment in the Italian solar sector has raised some eyebrows in the infrastructure community. This is not necessarily because the assets are bad ones to invest in, rather it’s because there are questions marks over how an investor makes the anticipated 20% to 25% private equity return from operational assets which don’t offer returns of much more than 15%.
To Terra Firma’s Darragh, it’s all about insourcing the contracts and managing assets as a centralised company.
“Our view is that if you do the heavy lifting, the business growth experience, try to build best in class companies and take a bit of development risk on the way, you can make private equity style returns. If you’re outsourcing the development to someone else, and you’re providing relatively cheap infra type capital to someone else you’re going to make an infra type return.”
Forming a scalable renewable energy company out of faceless assets is also key.
“We didn’t buy a company from Terna, we bought assets. The private equity task is to build the company around those assets – the management, the corporate identity, the accountancy system, the performance measurement, and the O&M systems to make sure we’re getting the best in class performance for what we’ve bought. Once we’ve got that platform we can consolidate other assets in the market.”
Indeed, Terra Firm’s Italian PV play has already begun the consolidation process. It acquired an 18MW operational portfolio from Italian developer Sorgenia in May. Further bolt-ons could be on the cards this year.
“I would expect that we will be very active trying to do further consolidation because we think that can drive our returns quite a bit higher,” said Darragh.
Again, with a EUR5.4bn fund behind it, Terra Firma certainly has significant firepower to drive such a consolidation.
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