The current rally in the European bond markets, and the associated fall in bond yields, could create a strong driver for immediate and future investment in renewable energy. That’s according to Augusta & Co (Augusta), a trusted financial advisory firm that has handled over EUR10 billion of European renewable energy transactions.
As the cost of debt servicing has fallen to its lowest level in 40 years, managers in the insurance and pension fund investment community face the prospect of maintaining portfolio returns, while coming to terms with decreasing fixed income streams, which will have formed a large part of those portfolios. While this scenario raises important questions about future monetary policy for major European economies, Augusta highlights that capital flows in the short to medium term are likely to head for the stable above-inflation returns offered by infrastructure and, in particular, renewables.
Within the wider infrastructure class, renewable energy offers stable returns, usually in the mid to high single digits (including leverage and after fees), and an investment period that is often 10 or more years. Even as the market enters a post-subsidy environment, it may give insurance and pension fund managers the opportunity to lock in real, long-term yields.
In turning their attentions towards renewable energy, these investors will encounter a market that has matured rapidly over the past fifteen years. Growing technological efficiency, coupled with increasingly sophisticated approaches to asset management and financial risk mitigation, have made wind and solar portfolios an attractive investment proposition. This has been evidenced by substantial recent M&A activity in post-subsidy markets such as Scandinavia and Spain.
“Renewable energy has not traditionally been the asset class that springs to mind for investors looking for stable long-term returns, with real estate usually the first priority for investors seeking yield. However, the sophistication of many illiquid renewable energy strategies and their ESG credentials are attracting increased attention from the large institutional investor universe,” says Mortimer Menzel, Partner, Augusta & Co.
“Disappearing bond yields are creating a pull into renewables for many and they may yet provide a bright spot for investment in the coming years. Cheap debt is conversely also fuelling build-out of renewables, providing more deal flow.”
Having advised on six major renewable energy private equity transactions in H1 2019, with a cumulative value surpassing EUR890 million, Augusta anticipates that European renewable energy investments are likely to increase further throughout 2019 and into 2020, with Spain identified as a particular hotspot for renewable energy developer, project and portfolio sales, and the Nordics and France also continuing their high levels of activity.
