Speaker 1: This is Dana Perkins and you're listening to Switched on
Speaker 1: the BNF podcast. A trend is emerging. Publicly listed clean
Speaker 1: energy companies are moving to private markets. While ESG as
Speaker 1: a term may be falling out of favor, clean energy
Speaker 1: companies are still working hard to meet ever growing energy demand.
Speaker 1: When public market valuations have fallen, some private market players
Speaker 1: have stepped in, seeing their potential risks like price cannibalization
Speaker 1: are considered alongside growing demand from AI and data centers,
Speaker 1: giving public and private market investors a lot to think
Speaker 1: about and leading investors to refocus on fundamentals. On today's show,
Speaker 1: I'm joined by solar specialist Pietro Rodoya and from BNF's
Speaker 1: Sustainable Finance team, Ryan Lockhead. We discuss findings from the
Speaker 1: report listed clean energy firms moving back into private hands,
Speaker 1: which BNAF clients can find at BNF go, on the
Speaker 1: Bloomberg Terminal and at BNF dot com. So what are
Speaker 1: clean energy companies considering as they navigate this shift. Let's
Speaker 1: jump into the conversation. Pietro, thank you very much for
Speaker 1: joining today.
Speaker 2: Hi, Thanks Dina and Ryan.
Speaker 1: Great having you here.
Speaker 3: Thanks Diana, good to be here.
Speaker 1: So we had switched on. Are talking about the energy transition,
Speaker 1: and we're here to talk about really the financing end
Speaker 1: of things. How do things get done for clean energy companies?
Speaker 1: For those that are publicly listed, it's been a wild
Speaker 1: ride over the course of the past five years, and
Speaker 1: we have seen valuations of these companies go up and
Speaker 1: go down for some factors that from the outside looking
Speaker 1: in look like maybe very much connected to public sentiment
Speaker 1: on ESG. But let's talk about what's happened to these
Speaker 1: clean energy companies specifically, and we want to talk about
Speaker 1: private markets, but before we get there, let's put some
Speaker 1: context around what's been happening with publicly listed clean energy
Speaker 1: companies as of late.
Speaker 3: It's a really interesting question because anyone who's following the
Speaker 3: line graphs of the prices of some of the well
Speaker 3: cited clean energy indicies stock indices, it was a very
Speaker 3: big hype cycle up to about the start of the
Speaker 3: twenty twenties the end of twenty twenty one, where clean
Speaker 3: energy companies broadly were doing extraordinarily well from evaluations perspective.
Speaker 3: So if you were holding them up to that point,
Speaker 3: you saw them at that point, you would have done
Speaker 3: extremely well. So those graphs look very steep and to
Speaker 3: the right, like a very typical BENF chart and energy
Speaker 3: transition chart up until twenty twenty one, and then I
Speaker 3: think suddenly investors started to realize that the clean energy
Speaker 3: stock market slightly overheating, and once the sell off started,
Speaker 3: it continued and has continued. It would be a very
Speaker 3: easy thing to say from somebody who works in the
Speaker 3: space to just blame this on the net outflues, but
Speaker 3: there are some genuine fundamental economic factors at play here.
Speaker 3: When it comes to the new higher interest rate environment,
Speaker 3: I think people have become a little bit more cognizant
Speaker 3: as well of supply chain. So it's not for us
Speaker 3: to say whether or not these price movements are fair,
Speaker 3: but I think we can spot the reasons behind these
Speaker 3: movements and the different factors that are driving them as well.
Speaker 1: So often when you see equities are up, credit is
Speaker 1: down and vice versa. So if we have established now
Speaker 1: that clean energy companies are actually at a low point
Speaker 1: at least compared to recent history when it comes to
Speaker 1: their equity prices, and what's happening then in private markets,
Speaker 1: and has private equity essentially taken interest in creating the
Speaker 1: financing for a lot of these important energy infrastructure companies.
Speaker 3: Might help to have a little bit of context about
Speaker 3: what private markets in general have been doing outside of
Speaker 3: the clean energy space, and then linking it to clean
Speaker 3: energy a little bit, just because they've become a very
Speaker 3: popular asset class for institutional investors a high networth individuals
Speaker 3: over the last two decades or so, particularly since the
Speaker 3: turn of the global financial crisis in two thousand and eight,
Speaker 3: those large, sophisticated, well diversifieds have started looking to diversify
Speaker 3: their portfolios when interest rates and bond yields were at
Speaker 3: rock bottom into things that would either generate equity like
Speaker 3: returns or cash FREW type returns that weren't from your
Speaker 3: traditional conventional assets like stocks and bonds. So if we
Speaker 3: looked at a global market portfolio but twenty years ago,
Speaker 3: the sort of broader landscape of alternatives where private markets
Speaker 3: fit into and includes other things like hedge funds and commodities,
Speaker 3: they would have maybe made up under five percent of
Speaker 3: their total allocation. Today that's probably closer to twenty to
Speaker 3: twenty five percent. So that's across the board. Now, there
Speaker 3: is a clean energy element to this, where the nature
Speaker 3: of these types of funds that raise the money and
Speaker 3: invest it into private companies or infrastructure assets that they
Speaker 3: lend it out in private credit mandate, they perhaps marie
Speaker 3: a little bit better to clean energy than public markets
Speaker 3: might because a they have typically set to find time
Speaker 3: horizons and lock up periods perhaps for the investors where
Speaker 3: they can afford to be a little bit more patient.
Speaker 3: And as anyonef will tell you, clean energy, particularly the
Speaker 3: power generating assets, the big physical infrastructure type assets, they
Speaker 3: require a bit of patients because there's a lot of
Speaker 3: upfront capital that's required to build either the physical infrastructure,
Speaker 3: and it might take a little bit of time before
Speaker 3: they start seeing it return generated from those assets. So
Speaker 3: when it comes to the stock market and a listed company,
Speaker 3: there's a lot more pressure to get things done today.
Speaker 3: And if you are a developer and you're in a
Speaker 3: developer of a listed company, you're potentially stressing on a
Speaker 3: day by day are by r basis about what the
Speaker 3: market to market valuation of your company is doing. You
Speaker 3: don't want to see that ticker and you don't want
Speaker 3: to see it colored red on the Bloomberg terminal, So
Speaker 3: you have to kind of think about that whereas with
Speaker 3: the private markets, it's well, we're going to raise money,
Speaker 3: we're going to invest it in the companies, and we're
Speaker 3: going to either make our returns ten years down the
Speaker 3: line in the exit process, or we're just going to
Speaker 3: be continuously generating some sort of cash flow. So we
Speaker 3: talk about private markets as if it's this sort of
Speaker 3: monolith or one particular thing, but it's actually very diverse
Speaker 3: from type of asset classes you can have. So it's
Speaker 3: not just private equity, although I think Pietro's now specifies
Speaker 3: private equity, but there's also a lot of debt in
Speaker 3: there as well. Private credit is becoming very popular in
Speaker 3: this space. And then you get the sort of things
Speaker 3: that straddle the line a little bit in infrastructure, so
Speaker 3: you could have in for debt or infra equity as well.
Speaker 3: It also covers the whole spectrum of the risk return profile,
Speaker 3: so you could start at the novel technology area and
Speaker 3: venture which attracts the venture capital, all the way up
Speaker 3: to the sort of core infrastructure funds where your return
Speaker 3: profile is based on sort of steady streams of cash flow,
Speaker 3: and clean energy can offer that. So you've got really
Speaker 3: at either end and quite a lot in between it
Speaker 3: as well that is suitable in these within these particular
Speaker 3: asset classes that suit clean energy.
Speaker 1: And if you're looking to grow faster, then organic growth
Speaker 1: can allow you have some options here. And when making
Speaker 1: these choices, are we essentially how is the source of
Speaker 1: financing impacting the growth that we're seeing and how quickly
Speaker 1: it is or is not happening within clean energy And
Speaker 1: we have Pietro and here is focused specifically on solar,
Speaker 1: So maybe that's the technology that we should spend the
Speaker 1: most time thinking about. What impact is the move towards
Speaker 1: private markets happening on these companies in these industries.
Speaker 2: So we recently published a report looking at a group
Speaker 2: of fifty six publicly listed renewable energy companies active in
Speaker 2: the development space and owning assets, and as you mentioned
Speaker 2: earlier on, there's been a huge evaluation in this space.
Speaker 2: They currently have a total market capitalization of two hundred
Speaker 2: eighty two billion dollars just to give an idea of
Speaker 2: how big they are put together, but their median share
Speaker 2: price declined by almost one third since twenty twenty one,
Speaker 2: so there's been a twenty nine percent drop in the
Speaker 2: past three to four years, and so large infrastructure and
Speaker 2: private equity companies have taken advantage of this situation and
Speaker 2: moved in the space by completing a few multi billion
Speaker 2: dollar corporate M and A transactions, so they essentially take
Speaker 2: over ownership of huge renewble energy developers such as Neoen,
Speaker 2: which was acquired for six billion dollars by Brookfield, which
Speaker 2: is a Canadian investment firm, and US private equity firm
Speaker 2: Kkar took over Hamburg listed and Carvis, which is a
Speaker 2: leading solar and wind ipp for almost three billion euros.
Speaker 2: And so we're seeing a lot of movement happening in
Speaker 2: this space, and it's essentially down to valuations being really,
Speaker 2: really poor at the minute for listed clean energy downstream companies.
Speaker 1: So we've talked about how the equities market has cooled
Speaker 1: when it comes to clean energy. What I want to
Speaker 1: know is, given that you've looked specifically at Solar, I
Speaker 1: want this view on the valuations on the private market
Speaker 1: side too, and are we seeing cooling of interest on
Speaker 1: that side it reflects the same thing we're seeing in
Speaker 1: public markets or is it a different story.
Speaker 2: We actually track prices of assets that are being traded
Speaker 2: in the private markets as part of our secondary market
Speaker 2: analysis and prices have come down, but not as at
Speaker 2: the same speed as public equities. I would say definitely
Speaker 2: public listed companies have taken a bigger hit, and it's
Speaker 2: down to the ESG theme cooling off. This love story
Speaker 2: has come perhaps to an end. Can say the bubble
Speaker 2: has popped, and then there are other dynamics more related
Speaker 2: to the private market, and ultimately I think the big
Speaker 2: big factor hitting returns and a volume of investments cost
Speaker 2: of capital increasing over the past three years, so central
Speaker 2: bank rates have gone up by between three hundred to
Speaker 2: five hundred basis points in major markets. That has pushed
Speaker 2: up equity return expectations from investors because made it more
Speaker 2: difficult to raise financing and reaching final investment decision on
Speaker 2: projects has been more difficult than in the past. All
Speaker 2: of this feeds into the valuation of projects, whether they
Speaker 2: are listed or not listed. Another reason why high cost
Speaker 2: of capital has impacted the sector is that those institutional
Speaker 2: investors had moved into the space over the past decade
Speaker 2: and had gotten comfortable with relatively secure investment, so renewable
Speaker 2: energy investments are considered as a secure investment, while they
Speaker 2: have moved back into alternative investment opportunities such as government
Speaker 2: bonds which offer high risk free returns at the moment
Speaker 2: if you look at the bond yields in the UK
Speaker 2: or guilties at around four point six four point seven
Speaker 2: percent right now and the same in the US, So
Speaker 2: that is really affecting the volumes of investment in this segment.
Speaker 2: Coming back to your question around prices and whether assets
Speaker 2: are underpriced looking at the listed entities, we looked at
Speaker 2: the fundamentals and at ratios such as the price to
Speaker 2: book racial, price to earnings ratios, and that have without
Speaker 2: doubt come down, and so looking at the christ to
Speaker 2: book ratios as a financial metric, the medium price to
Speaker 2: book racial currently is one point four x, considerably lower
Speaker 2: compared to what it was four years ago when the
Speaker 2: medium point was three point eight x.
Speaker 1: So we've addressed the fact that things that touch esg
Speaker 1: in any way as a term went through a bit
Speaker 1: of a popular period and are a little bit less
Speaker 1: popular at the moment, and investors do just like anyone else.
Speaker 1: We are watching certain parts of the world change and
Speaker 1: there are certain topics that become very popular at the moment.
Speaker 1: What's clean energy's chance of becoming popular again?
Speaker 2: There's huge expectations around data centers and demand coming from
Speaker 2: data centers and financial buyers into renewable energy companies and
Speaker 2: assets are very bullish on what demand will look like
Speaker 2: in the next five to ten years, and the forecasts
Speaker 2: around electricity demand are pointing to strong growth after I
Speaker 2: would say a decade of stagnation. We do not forecast
Speaker 2: within B and EF demand coming from data centers, but
Speaker 2: I can provide you a figure from Bloomergin Intelligence which
Speaker 2: carries out analysis around this theme, and they expect data
Speaker 2: center demand to grow seventeen percent in the US by
Speaker 2: twenty thirty, So the expectations are really big. Clean energy
Speaker 2: developers are partnering with data center companies in various ways.
Speaker 2: It's either by signing PPAs power purchase agreements or by
Speaker 2: providing the infrastructure where to locate the data centers. Interestingly,
Speaker 2: Madrid listed Solaria, which is a solar company, finalized in
Speaker 2: agreement with the Japanese company to provide two hundred megawats
Speaker 2: of energy in a data center within their former module
Speaker 2: manufacturing facility, which hosts clean rooms which are ideal to
Speaker 2: host servers. So there's a lot going on, and I
Speaker 2: would say, perhaps what could slow down this growth is
Speaker 2: actually the bottlenecks to connect to the grid. So this
Speaker 2: has been a huge issue for so and win developers
Speaker 2: on the supply side, but it actually could slow down
Speaker 2: things on the demand side. So we know that in
Speaker 2: certain markets such as pain there are connection cues from
Speaker 2: data centers are exceeding ten gigors already and we expect
Speaker 2: this number to grow significantly in the months to come.
Speaker 1: So I'm thinking from the perspective of the companies operating
Speaker 1: in this space, of the clean energy companies, you're looking
Speaker 1: at the options available to you in order to raise
Speaker 1: money in order to expand take advantage of the energy
Speaker 1: demand coming from AI and generally we're seeing an increase
Speaker 1: in energy demand from a lot of different parts of
Speaker 1: the economy. What I really want to know is doesn't
Speaker 1: matter to them that much whether it's a publicly listed
Speaker 1: company or whether or not it's going to private markets,
Speaker 1: as long as they're able to raise that money. We've
Speaker 1: talked about some of the pros and cons of really
Speaker 1: the importance of keeping that share price high once you
Speaker 1: have listed. Maybe from the private market side, you know,
Speaker 1: what are the concerns that one might have if you
Speaker 1: are a clean energy company and trying to make this
Speaker 1: decision on how to go forward in finding more money
Speaker 1: to do more.
Speaker 3: There's definitely a trade off for a company raising their
Speaker 3: money in private markets compared to public markets, and it's
Speaker 3: the one we talk about often. It's the cost of capital.
Speaker 3: The investors who are investing in private markets and infrastructure
Speaker 3: type assets typically will demand an ill liquidity premium because
Speaker 3: you can't just exit very easily. It's very very difficult
Speaker 3: compared to if you're on a stock market. They're very
Speaker 3: very liquid asset stocks, right, you can buy and trade
Speaker 3: them in real time. Private markets, it's a little bit
Speaker 3: more difficult to shift them, and therefore there is an
Speaker 3: extra liquidity premium that goes on top of that, and
Speaker 3: that does represent the higher cost of capital. So it's
Speaker 3: not a free lunch, so to speak. It is a
Speaker 3: trade off between having a little bit less pressure, having
Speaker 3: investors and managers on your side who are perhaps a
Speaker 3: bit more patient, a bit more understanding of how it
Speaker 3: is you go about generating return, and those profiles are
Speaker 3: married perhaps a little bit better than they are in
Speaker 3: the public markets. But make no doubt, and this you
Speaker 3: will hear this from private market investors themselves, it will
Speaker 3: increase their cost of capital, and that is something that
Speaker 3: has to be considered.
Speaker 1: So they care, yes, is the answer.
Speaker 3: Yeah, from the public market perspective, and then they have
Speaker 3: to care about share press right. It's it's a legal
Speaker 3: requirement and nearly every jurisdiction that there has to be
Speaker 3: a focus on shareholder value. It's about deciding holistically which
Speaker 3: is the better option.
Speaker 1: So how you finance the growth in clean energy very
Speaker 1: much matters, and the cost of capital very much matters.
Speaker 1: So Pietro, what did you zero in on? And you know,
Speaker 1: I guess in as simplest sense kind of what was
Speaker 1: your methodology? But what did you zero in on?
Speaker 2: So we looked at a list of solar, wind and
Speaker 2: battery project developers. These are companies that are publicly listed
Speaker 2: with a total market capitalization of two hundred eighty two
Speaker 2: billion and on in total one hundred and seventy eight
Speaker 2: kickawads of late stage projects which are either commissioned or
Speaker 2: under construction. These companies are active in the downstream what
Speaker 2: we call the downstream segment. They do not manufacture equipment.
Speaker 2: There are not utilities, There are pure renewable energy developers
Speaker 2: or clean energy closed end funds. So there's this distinction
Speaker 2: between the two. On one hand, we have growth oriented
Speaker 2: companies which focus on share price appreciation do not handout dividends,
Speaker 2: and on the other hand, we have closed end funds
Speaker 2: which do not focus on share price appreciations. They rather
Speaker 2: focus their efforts on dividend payouts. So the note was
Speaker 2: looking at these two groups of companies.
Speaker 1: Are there risks for these private companies who have bought
Speaker 1: the public listings and you know what steps are they
Speaker 1: taking to then mitigate some of those risks.
Speaker 2: So the risk for these price the companies who have
Speaker 2: taken over renewable energy developers is that demand for electricity
Speaker 2: doesn't turn out to be as strong as they think
Speaker 2: it will be, and that demand from data centers will
Speaker 2: not boom in the years to come. Now, since the
Speaker 2: valuation for the companies they acquired was at a low,
Speaker 2: that risk is quite limited. But listening into the earning
Speaker 2: scores of these companies, what really struck me was how
Speaker 2: positive they are about the outlook and how big their
Speaker 2: expectations are in terms of growth. It comes as a
Speaker 2: really strong contrast in what the sentiment is currently between
Speaker 2: renewable and g acid owners, whether they are listed or private.
Speaker 2: I've been to a few conferences where the mood is
Speaker 2: really low due to power prices coming down since the
Speaker 2: heighs of twenty twenty two and because of increased fears
Speaker 2: of price cannibalization as more solar capacity comes online.
Speaker 1: And these private market investors are they specialists in space?
Speaker 1: Are they the infrastructure investors that have been involved since
Speaker 1: well before the ESG hiphe cycle, or are there new
Speaker 1: companies that are getting up to speed on this and
Speaker 1: is there just more wide ranging interest.
Speaker 2: I would say they are experts. They have been involved
Speaker 2: in in acquisitions in the past. Brookfield, for example, has
Speaker 2: raised thirty billion dollars via its private Global Transition funds
Speaker 2: in the past four years, and they've been really on
Speaker 2: a buying spree, acquiring huge portfolios. For example, in the US,
Speaker 2: they acquired three point four gigawats from Duke Energy. They
Speaker 2: acquired fifty percent stake in a big solar development company
Speaker 2: called Xedeo. So they know what they're doing, and in
Speaker 2: many cases they acquire companies which are not doing that great.
Speaker 2: There is restructuring their balance sheet, refinancing the debt and
Speaker 2: then perhaps looking for an exit strategy five years down
Speaker 2: the line. They might hold on to these companies for
Speaker 2: a longer term. But this is what their model looks like.
Speaker 2: The synergies between these buyers the likes of Brookfield, KKR,
Speaker 2: mazz Dar and acquired Entity, so the developers is quite important.
Speaker 2: They're quite beneficial. I would say these are strategic synergies.
Speaker 2: So on one hand we have the developers that get
Speaker 2: hold of the much needed capital, and on the other
Speaker 2: hand you have the buyers that they gain knowledge around
Speaker 2: how to develop projects. They get hold of large pipelines
Speaker 2: of projects. So buyers with the cash are showing interest
Speaker 2: in developers with a good geographical footprint and an interesting
Speaker 2: pipeline of projects which are both under development and operation.
Speaker 2: And if the pipeline includes battery storage, well this is
Speaker 2: a huge plus.
Speaker 1: So the way I'm thinking about the conversation we're having
Speaker 1: and who might be listening, I'm very much trying to
Speaker 1: view this through the perspective of somebody who is working
Speaker 1: at one of these companies in the clean energy value chain,
Speaker 1: maybe even possibly at a project developer who's looking at storage,
Speaker 1: wind solar and try and understand and the decisions that
Speaker 1: are being made within their organization on how they're going
Speaker 1: about financing the growth and the considerations one needs to
Speaker 1: really be thinking about and whether it's a good thing
Speaker 1: or a bad thing. Because we can look at the
Speaker 1: news and see changes in sentiments around ESG is a term,
Speaker 1: but really these projects are still happening. What are the
Speaker 1: sorts of things that you know you're thinking about If
Speaker 1: you are coming at it from the perspective of somebody
Speaker 1: who's actually working in this industry, the.
Speaker 3: Risk of term profile is paramount right, it's it's it's
Speaker 3: number one for all of these block students not a charity,
Speaker 3: it's an investors. None of them are charities. And also,
Speaker 3: for the most part, the money that they're allocating, the
Speaker 3: assets that they're allocating, don't belong to them. They belong
Speaker 3: to the pension funds, high net worth individuals of sovereign wealth,
Speaker 3: or you ever. And ultimately Blackrok's decision making, block student's
Speaker 3: decision making, KRS decision making is really kind of a
Speaker 3: function of what their clients want, and there's no getting
Speaker 3: away from if their client's demanders return or a good
Speaker 3: risk return proofile, that's what they've got to seek and
Speaker 3: I still then think that it's quite a good news
Speaker 3: story that those asset managers are still increasingly allocating to
Speaker 3: clean energy, because that means that they see it and
Speaker 3: they're the so called I mean, there's no camera in here,
Speaker 3: but I'm making air quotes. They're the smart money, right
Speaker 3: and they're still going after these assets. Now, it depends
Speaker 3: on the different types of funds that we're looking at
Speaker 3: and the clean energy ETFs. The equity ETFs obviously haven't
Speaker 3: done very well in recent years, and there is fundamental
Speaker 3: risks for some of the companies that are going into
Speaker 3: different different asset classes and different asset class focused funds.
Speaker 3: But there's something there. It's a diversifier at the very least.
Speaker 1: Pierre, Jo and Ryan thank you very much for joining
Speaker 1: today and talking to us a bit about this trend
Speaker 1: and the move from public to private markets when it
Speaker 1: comes to financing the clean energy transition.
Speaker 2: Thank you very much. Dana, thank you. Data.
Speaker 1: Today's episode of Switched On was produced by Cam Gray
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