In mid-March, my team, the M&A group at Primergy Solar, attended Infocast, the premier renewables financing and portfolio trade conference of the year. We expected the sea of navy-blue blazers and cordial greetings from the familiar, but growing crowd of renewable energy professionals. Less expected was the absolute lack of actionable solar and wind/storage development projects available for us to acquire.Fueled by historic amounts of private capital pouring into the market, the renewable M&A space is seeing unprecedented levels of activity. This has resulted in copious, eager solar investors willing to pay a premium for solar projects with little development and potentially lots of risks. The influx of capital seizing up the supply of projects is compounded by the stark supply chain issues now threatening the deliverability of solar projects and sending everyone into a tailspin.
What Changed
Increasing numbers of financial sponsors are investing in early-stage development platforms, which would have previously been selling projects into the market to buyers like us. And, new private equity-backed platforms are acquiring large portfolios and/or entire platforms to get in the game. As a result, the number of project sellers and quality solar projects available for sale has become increasingly scarce.We estimate that in the past 12 months, over 100 GW of development-stage solar projects, that would have previously been available for sale to long term owners and operators, are being held by project development companies now opting to find funding (if not already funded) and develop and hold the projects themselves.
U.S. M&A Transactions Over Past ~12 Months+/-
Power assets (and infrastructure) have always been go-to investments for long-term investors as they can offer uncorrelated returns to traditional equity markets – with interest in the environment as a major tailwind, renewable power assets continue to gain interest from large institutional capital. What we are seeing in the M&A market is proof of that. But with more capital chasing the same projects, new investors could be taking on undue risks.
How Primergy Does It Differently
Primergy entered the market as a buyer of projects shortly after its establishment in 2019. It was a good time to enter. There were ample projects (and sellers) available for sale and our team was at the ready to evaluate and develop projects with potential. The seasoned bench of our M&A team brought valuable relationships, which provided many counterparties for us to engage with and weed out the high-quality projects to build our portfolio.That second strength has been maintained: relationships have played a crucial role in Primergy’s successful acquisitions over the past year. Primergy’s M&A team has a history of being easy to work with, able to execute, decisive, and knowledgeable. This has and will continue to make all the difference as we see a dry-up of the renewable energy project crop among a scorched marketplace set afire with investment dollars from every direction.All the projects Primergy acquired in the last twelve months were from developers where Primergy team members had relationships – either previous project acquisitions or previous work experience with the selling developers. Our team was able to source and acquire nearly 2 GW of solar PV projects without participating in bank processes.
What Others Are Up Against
Some buyers -- especially new platforms trying to put capital to work -- are left with more challenging projects or portfolios of minimally developed projects, which are much riskier investments than acquiring shovel-ready projects. Despite taking on this additional risk, development fees are not going down. Buyers are agreeing to pay fees as if the projects are fully developed, and then still paying (and taking on more risk) to develop the projects themselves.We are seeing pricing in the market that we would never have dreamt of for very early-stage projects. To acquire anything near shovel-ready that is de-risked requires ultra-low cost of capital. And advanced projects with energy delivery dates before 2025 are becoming rarer. Under this backdrop, Primergy’s success in the current M&A market is truly attributable to the overall team’s reputation and the long-lasting relationships we have all built with developers and other partners. This led to repeat business for valuable projects, and fair developer fees and terms (for this market) without taking undue risks.
How to Thrive, Not Just Survive
Our opportune timing and talented bench have allowed us to establish an advanced pipeline from M&A coupled with the company’s ongoing greenfield efforts for projects with CODs 2025 and beyond. Primergy is extremely well-positioned and can be highly selective on incremental M&A opportunities, and we are thriving.Companies with portfolio and earnings targets are being pushed to take on more risk and we are seeing projects being sold at above-market prices. Because of the work we accomplished last year, we can remain more disciplined about what we bid on and bring into the Primergy portfolio. We are certainly looking for more crown jewel projects, but we are not trying to completely skew the risk return of project development just to build one more plant.It is a good time to be a seller, but to be a successful player in this market, we will continue to be strategic, adaptable, and cultivate relationships.As renewables continue to evolve, much will be decided in nearby months as the pandemic and supply chain turmoil unfolds, as policy in D.C. is decided, and as results from this gambling spree of buying and selling confirms the winners and losers. One thing is for certain: there is no shortage of funding or interest in long-term investment of solar projects.
