Photographer: Alessia Pierdomenico/Bloomberg

Private Equity Smells Money in Europe's Renewables Subsidy Cuts

  • Firms see opportunities in distressed clean-power projects
  • Five EU countries have scrapped subsidies, 12 have reduced

A handful of private equity firms are buying up troubled clean-energy assets, restructuring debts and whole projects in an effort to gain rich rewards from some of the industry’s riskier investments.

The efforts -- by funds including Cerberus Capital Management LP in New York, Oaktree Capital Management LP in Los Angeles and Zouk Capital LLP in London -- run against the trend in the private equity industry, which has scaled back work with renewables in the last year. While much of private equity has been crowded out of clean energy by more mainstream investors, those funds are quietly scavenging attractive returns.

The three are feasting on the industry’s misfortune after Spain, Croatia, Greece, Romania and Bulgaria scaled back support for renewables. Seeking to contain ballooning subsidy bills, another 12 countries have capped programs for clean energy, including the U.K., Portugal, Italy and Austria.

“These projects can be made economically viable with different tools,” said Erich Becker, head of the infrastructure team at London-based Zouk Capital, which is actively seeking distressed assets in western Europe. “Private equity funds have a big advantage in the renewables space, we can be much more creative with structuring and de-risking.”

Private equity specializes in building corporate structures into emerging industries and was a big backer of renewables as the industry blossomed in the last decade. As wind- and solar-power producers expanded into safer investments, pension funds and traditional investors replaced the specialists. Investment by PE funds in the industry fell 53 percent last year to $1.3 billion, the lowest in a decade, according to data compiled by Bloomberg.

“I’m not sure if it’s still a good investment for private equity,” said Thomas Rottner, managing partner at Platina Partners LLP, which has developed more than 200 gigawatts of clean energy in the past decade. “The time scale and return level is more like infrastructure. Venture capital and private equity funds are targeting much higher returns that renewable energy cannot deliver in Europe today.”

Where the risks are high, rewards can follow. That’s where the funds like Zouk are investing. Their targets are in places where projects are tipping into bankruptcy either because of mistakes made by inexperienced developers, or, where government support has evaporated.

Becker said the industry “got too spoiled by mechanisms like feed-in tariffs, guaranteed offtakes, subsidies and grants over the last 15 years.”

Cerberus bought Spanish clean-power developer Renovalia Energy SA for more than $1 billion in October. Oaktree was reported to have snapped up Madrid-based Eolia Renovables SA in November, according to Spanish newspaper Expansion. The private equity firms declined to be interviewed.

“Spain’s retroactive subsidy cuts have caused significant distress, particularly to smaller clean-energy players,” said Janis Hoberg, an analyst at Bloomberg New Energy Finance, in an e-mail. “It’s therefore no surprise that specialized funds such as Cerberus are actively scavenging the market to buy up renewable portfolios on the cheap.”

While functioning renewable projects may not offer the sort of returns PE funds seek, the ones that get into trouble can, said Andreas Angelopoulos, executive director of the Private Equity Institute at the University of Oxford in England. Buying distressed projects can reap returns from 8 percent to 12 percent, he said.

“It is more difficult and competitive in a maturing market, but good fund managers can still make money not only in growth, but in distressed finance,” Angelopoulos said. “I think that PE funds will continue to play a big role in alternative energy.”

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