By all accounts, the solar gold rush is on. In March, Citi’s alternative investment team proclaimed that the “Age of Renewables” was beginning and that price cuts in solar and wind would lead to a flood of consumer demand and increased capacity.
Investors are also flocking to renewables. Solar-focused ETF’s are seeing record asset levels. Portfolio managers are increasing their solar allocations to levels usually reserved for mainstream asset classes. Solar companies are seeing new lows in capital costs.
Solar’s emergence as a cost-effective and mainstream energy source should result in more low-cost capital for everyone in the industry, right? Not so fast.
While investors are learning to embrace solar, that doesn’t mean they’re willing to embrace every solar company. Even the most ardent solar supporters are using terms like “the ideal risk-return profile” when talking about attributes they’re looking for in solar investments. Investors don’t just want to put capital into solar companies; they want to put capital into the right solar companies.
Swelling investor demand for solar
Goldman Sachs recently announced that it plans to invest more than $40 billion in renewables by 2021. They’re not alone. Goldman and other top investment banks have already made sizable investments in the industry. Recent capital infusions into solar companies include:
- Goldman investing $500 million into SolarCity in March 2013
- US Bank and JP Morgan combining for a $630 million investment in Sunrun in June 2013
- Bank of American making a $220 million investment in SunPower
- Morgan Stanley investing $300 million in Clean Power Finance
Solar companies are also finding it easier to access low-cost capital. SolarCity recently announced that it is securitizing some of its distributed generation projects by issuing more than $70 million in asset-backed notes. This is on the heels of a successful $54.4 million dollar securitization in 2013.
The securitizations are notable because they’re some of the first of their kind for distributed solar generation. They’re also notable for their yield – 4.8 percent, which is a rate that competes with more widely accepted assets like bank swaps and high-yield debt.
The wider embrace of solar is being driven by new awareness on the part of portfolio managers. Many managers now see solar as being less volatile and risky than it was in the past. Rob Lutts, the Chief Investment Officer of Cabot Wealth Management, recently told the Wall Street Journal that his company viewed solar as the number one sector in 2014. He said the firm has allocated up to seven percent of client portfolios to solar investments.
Cabot isn’t alone. Millions of dollars are flowing into solar companies and funds that focus on the solar industry. The Guggenheim Solar ETF has seen its asset levels skyrocket in the past 18 months. At the beginning of 2013, the ETF had around $50 million in assets. As of February 2014, it had more than $460 million.
If you are not deemed to be the right solar company, you may just get left behind.
Even the biggest supporters of solar agree that not every solar company is a good bet. In his comments to The Wall Street Journal, Mr. Lutts admitted that one of the reasons solar has become fashionable is because “the weaker players” are out of the market.
Other investors agree that the key to investing in solar is finding the right companies. Bruce Jenkyn-Jones of Impax Asset Management told The Wall Street Journal that he has been increasing solar exposure, but that “solar is undoubtedly the riskiest area in our investment universe.”
To feel comfortable with a solar investment, managers have to be confident that their capital will be deployed quickly, efficiently, and effectively.
This is where process separates the strong players from the weak players in the industry. Two market leaders recently made investments in IT and acquisitions to streamline their capital deployment process. Not surprisingly, the companies who are focusing on process are also the ones accessing lower-cost capital.
So, which companies are the most likely to be favored by investors and ultimately win the war for capital? Those who have a repeatable and scalable process. Those who can move quickly and efficiently move deals through diligence. Companies who understand what investors are looking for and how to adapt to those traits will be in excellent position take advantage of the opportunity.
There will be no shortage of capital in the coming years, and it could be at cost levels the industry has never seen. However, the only companies that will have access to the capital are the ones who can effectively and efficiently deploy it.
Now is the time to re-examine your process. If you don’t do so now, you may get left behind.
