INSIGHT: Taking stock of yieldcos

Yieldcos — listed investment vehicles based on renewable-energy assets — have rapidly gained in popularity, with nearly $5bn raised through stock-market listings over the past year.

This trend reflects buoyant equity markets, as well as an investment focus on infrastructure because of its returns relative to other asset classes. With attractive, secure long-term cash flows based on proven operating assets with power-purchase agreements, investment-grade off-takers, low risk and high yields, these investments look very attractive.

Expected US wind and solar installations in 2014 could require $20bn of investment. So with North American yieldco issuance of $3.5bn in 2013 and nearly $1bn in the pipeline, these vehicles are financing a material proportion of the market’s needs. A further rush of issues is coming in the US, with Abengoa and SunEdison recently announcing solar yieldco initial public offerings (IPOs) and others, such as SolarCity and FirstSolar, said to be considering listings.

However, there are signs of investor fatigue with these investments, in the UK at least, with recent yieldco issues pulled or downsized. After nearly $2bn of issuance in the UK in the past year, at least three offerings totalling an estimated $1bn planned for the first half of 2014 have struggled to get away, and their difficulties will make it harder in the short term for those that follow.

The market for these products is, in Insight’s view, relatively restricted. These are equity products with bond-like characteristics, and the appetite in the equities market is for assets with equities’ risk profile. In addition, the market capitalisation and the average traded daily volumes for these stocks are low, making them relatively illiquid and therefore “un-investable” for most institutional investors.

The main target market for these products is, Insight believes, private wealth management, which appears sated right now. True, yieldcos have done well in the US. However, the British experience suggests that there may be a limit to the market’s appetite for these kind of structures.

In the UK, there is a relatively low level of differentiation between these products, all offering index-linked yields of 5-6% on similar asset bases in similar geographies, with the solar fund model seemingly the most challenged at the moment. Funds in the US are differentiated because of the country’s size and geographical diversity.

Other subtle differences exist. The UK business model has been largely for private equity and infrastructure funds to monetise and/or exit some of their holdings through financial engineering, while adding a way to earn a continued management fee for assets they have built. In North America, the model is more about developers and independent power producers finding ways to recycle their capital. For manufacturers, this sustains demand for their equipment. Investors seem relatively unconcerned by the provenance of the assets, although there are potential risks with both models.

Insight sees the attraction of listing some of these solid assets, and insurance and pension fund companies are desperate for stable, long-dated assets with predictable cash flows and returns. For now, they seem unwilling to invest directly in projects, mostly due to the lack of internal teams to evaluate such projects. Typically these funds are set up to invest, not transact, but judging by the size and relative liquidity of the listed yieldcos, they are too small for most of this investor group.

This could be overcome by listing in other markets, thus opening up new investor bases. Larger asset pools could lead to bigger, more liquid and tradeable funds, which might attract institutional investors. Certainly the existing funds could benefit from greater geographic diversity, size and technology type.

More thought also needs to be given to the investment profile these funds should have, as income/yield investors are only part of the market.

Maybe it is time for the utilities to dust down the renewables asset spin-off model, which would give them a vehicle to value and fund their green-energy businesses. The holy grail remains for developers to team up with a fund that offers a balance sheet with which to raise capital and a ready-made mechanism for selling operational assets.

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