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