Equis Energy gave a US infrastructure powerhouse the perfect entry point into Asia’s busy renewable energy scene. Jackie Range examines what lies ahead for the nascent sector
The USD 5bn acquisition of renewable energy platform Equis Energy by Global Infrastructure Partners (GIP) and co-investors has lit a fire under an already hot market.
The deal underscores strong demand for exposure to Asia’s rapidly growing, yet diverse, renewable energy market. It is expected to trigger the creation of more platforms, underscoring buyers’ willingness to snap up development assets. A variety of buyers are circling the market. Sector players say this will remain a busy generator of M&A, with more deals to come.
“Equis was a complex yet attractive target, offering investors a unified multi-country wind and solar platform… a front-page deal such as Equis has drawn investor attention to Asia renewables,” says Hilary Lau, a partner at Herbert Smith Freehills.
“Recent exits have proved up the thesis that there is money to be made in quality renewable energy projects in the short to medium term, which will drive both exits and consolidations,” says Clifford Chance Partner Andrew Crook.
In January GIP, with PSP Investments, CIC Capital Corporation and other partners, completed their acquisition of Equis Energy from infrastructure private equity manager Equis Funds Group for an enterprise value of USD 5bn. The deal was settled in cash and included assumed liabilities of USD 1.3bn. It was an unusually big transaction for the sector and the amount paid was regarded as full value for the business.
Equis Energy is Asia-Pacific’s biggest renewable energy independent power producer, based on installed capacity, with 11,135 MW in operation, construction and development across more than 180 assets. Its diverse business spans Asia-Pacific with business in countries including Australia, Japan, India, Indonesia and Thailand. Moving quickly to grow its asset base, Equis Energy has clinched some eye-catching deals, including an agreement to build Taiwan’s biggest solar project.
“Equis Energy… has systematically executed its growth strategy since its founding five years ago. In that period, Equis Energy has become one of the leading renewable energy platforms in the region, with a best‐in‐class business model, a high‐ quality asset portfolio and an outstanding management team,” said Adebayo Ogunlesi, Chairman and Managing Partner of GIP when the deal was unveiled.
Since the Equis Energy deal New York-based GIP has put more money to work in renewables, paying USD 1.375bn in cash in February for a stake in NRG Yield and a renewables platform in a deal expected to close in the second half. When the Equis Energy deal closed, GIP said the deal made it a major player in key growth markets. GIP and Equis Energy declined to comment further on the specifics of the deal.
Equis initiated the sale of Equis Energy last year to enable limited partners to exit. Equis worked on a smaller business trust listing of operational assets at the same time, Inframation reported.
The sale process attracted strong interest. While Equis was looking to offload the whole business, there were non-compliant bidders which would have bid for parts of the portfolio had the process failed, Inframation reported. Given the diversity of Equis Energy’s asset basis, it was a surprise to the market that the business sold to a single buyer. It has changed the perception of M&A opportunities in Asian renewables, experts say.
“It is proof that there is a extremely strong demand for portfolios of high quality assets in Asia which are backed by a strong management team,” says Clifford Chance Partner Melissa Ng.
Underlying the healthy M&A environment is the rapid growth in renewable energy in Asia-Pacific, which is predicted to continue. ExxonMobil’s 2018 Outlook for Energy predicts demand for renewables in Asia-Pacific, excluding hydropower, biomass and waste, will surge by 274% between 2016 and 2040.
“Renewables have been on the rise across Asia via a number of projects… Clearly, countries are looking to renewables as a viable and green option, particularly in China (which has introduced a host of clean-energy policies) and India too. So, it is not surprising that fund managers are willing to pay a premium to get into the segment,” says Parvathy Iyer, a Senior Director at S&P Global Ratings.
Demand for power is high as developing nations look to further electrify while clean energy becomes more of a priority for governments. India has a renewable energy target of 175GW by 2020, up from 61GW now. Australia’s Renewable Energy Target is expected to bring in more than 6000 MW of investment by its 2020 deadline.
M&A in renewable energy in Asia will accelerate in 2018
“M&A in renewable energy in Asia will accelerate in 2018 as multiple countries like China, Vietnam and India move towards a larger portion of their energy mix coming from solar, wind, and other renewables,” says Mark Edmunds, Deloitte Asia Pacific’s Oil & Gas Sector Leader.
Falling costs are also a factor. According to the International Renewable Energy Agency (IRENA), solar photovoltaic module prices have dropped by some 80% since the end of 2009, with wind turbine prices falling by some 30% to 40% in the same period. By 2020, IRENA predicts all renewable power generation technologies now used commercially will be in the same cost range as fossil fuel fired, with most at the lower end or undercutting the cost of fossil fuels.
“Despite recent market volatility, energy and commodity prices have been relatively steady, allowing buyers and sellers to reach common ground more easily. Renewable energy costs continue to drop steadily, attracting more generators and investors to the sector,” says Lau.
While the Equis Energy sale underscores demand for exposure to renewable energy in Asia-Pacific, buyers will struggle to find similar opportunities, sector experts say.
“For large strategic investors that are required to make investments of a certain size, there is a scarcity of large platforms with quality assets,” says Credit Suisse Managing Director, and Head of Renewables & Industrials for Asia Pacific, Sanjeev Chaurasia.
“It is a very fragmented industry with many small platforms. We would expect to see consolidation as larger players seek quality assets to increase scale, which would give them a significant market advantage,” Chaurasia says.
Portfolios of assets offer the potential for diversification of risk, enabling buyers to avoid being too heavily exposed to a particular technology or regulatory environment for instance. Since the success of the Equis Energy deal, sector players expect an increased focus on creating such assets.
“(We) envisage the interest and value that Equis attracted will encourage others to build material multi-jurisdictional portfolios, both by greenfield projects and through M&A,” says Lau.
Other companies are already building up platforms: AC Energy Holdings of the Philippines has renewable energy and thermal energy assets, which it recently said it would split into two wholly-owned platforms. The company has more than 1600MW of attributable generating capacity, and targets 2000MW by 2020. It formed part of the Star Energy Consortium, buying Chevron Corporation’s Indonesian geothermal assets for USD 1.25bn and in January expanded into Vietnamese solar power.
Private equity firm I Squared Capital is also building an Asian renewable energy business. Last year it made the first acquisition for its Asia Cube Solar platform: five Chinese solar projects with a total generating capacity of 143MW. The fund was also eyeing Japan, Taiwan and Indonesia for deals, potentially targeting both greenfield and brownfield projects, Inframation reported.
Experts also expect to see more investors buy in to assets earlier in their development process. Equis Energy used a developer-led approach to grow quickly, in contrast to most fund managers which prefer to invest in projects which have comparatively lower levels of risk, with planning approval secured and a feed-in tariff in place.
“I think it likely that the mix of investors will change, as private market investors move from equity providers into the development stage itself,” says Crook at Clifford Chance. “The move by private market investors into the development space is likely to see increased M&A there,” he says.
A key sector complexity is that renewable energy markets across Asia are far from homogenous, with differing local policies, regulation, dynamics and pools of local investors.
In Asia, much of the M&A dialogue and activity is country-specific
“While more mature Asian countries (such as Japan, Korea and Taiwan) have been more successful in promoting renewable energy investment, renewable energy development across Southeast Asia is still in its infancy. A significant proportion of projects in Southeast Asia continue to be unbankable, due to protectionist regulations, offtake agreements that fall short of international standards… and land acquisition issues… if regulators can address some of these issues, Southeast Asia continues to remain a major opportunity for renewable energy M&A,” says Clifford Chance’s Ng.
With such an array of complexities, deals have often been country-specific.
“In Asia, much of the M&A dialogue and activity is country-specific and the norm is for potential investors such as infrastructure funds to look at country-level platforms,” says Chaurasia at Credit Suisse.
A raft of buyers are interested in the sector. In the Equis Energy auction, potential buyers included industry players such as Engie, Orix and Shell, along with infrastructure managers including I Squared, APG and Brookfield, Inframation reported. Players like them are expected to do more deals.
“With big oil companies announcing commitments to invest in clean energy, investment firms questioning the long-term value proposition of coal and other conventional hydrocarbons, and rapidly falling technology costs, we have certainly seen increased demand from a range of energy and infrastructure companies and investors, which has translated into highly competitive auction processes for strong assets and hefty price tags,” says Ng.
Private equity interest is also expected to continue in the sector, with asset recycling contributing to deal flow.
“Private equity and other funds are in good positions to buy, but we expect they’ll also trim existing portfolios, with some interesting assets reaching the market as a consequence,” says David Clinch, a partner at Herbert Smith Freehills.
A key attraction is the sector’s environmental and sustainability credentials, which potentially enables buyers to bolster their environmental, social and governance performance. The increasing trends for green investment and green finance also expected to drive investor interest.
“Large fund managers, pension funds, and wealth funds are also likely to increase their exposures to the renewable sector due to demand for ‘green’ investments and products. Inclusion of green products has gained a lot of attraction in the European market and with a large push of renewables across Asia (with falling costs making it reasonably attractive) we could see interest in this sector growing rapidly,” says Iyer.
Indeed, looking forward, the high level of interest in the sector could offer new opportunities for capital markets.
“I think there’s still a lot of headroom in terms of tapping out the liquidity that can be found on the private basis, and it’s not tapping into the listed capital markets. But I think if this trend were to continue, we should see a lot more opportunity in the capital market side, both equity and debt, much more. So there could be opportunity for corporate bonds, or they could structure green bonds to actually affect the funding for renewable energy platforms,” says Lee Seng Chee, Capital Projects and Infrastructure Partner at PwC Singapore.
Another key M&A theme is companies moving away from listing, finding equity markets aren’t providing good results for their businesses.
“Many founders, particularly in China, are taking their companies private,” says Chaurasia at Credit Suisse.
“Asian companies with overseas listings are seeing considerable discounts in valuations as their investor base is largely comprised of foreign funds that are too far away to fully understand the local regulatory regime and on-the-ground operating environment. A Chinese company listed in China could see its P/E multiple more than double than if it were listed in New York,” he says.
In March last year Trina Solar, a Chinese solar panel manufacturer said it had completed a going-private transaction. Another solar power products manufacturer, China-headquartered JA Solar Holdings Co., unveiled plans late last year to go private in a deal expected to close in the first quarter of 2018. JA Solar was founded in 2005, joining the NASDAQ in 2007.