(Bloomberg) -- Private equity firms face a sober reckoning on their renewable energy bets. Simply put, a lot of those startups aren’t worth nearly what their sponsors paid for them, and some of those zero-emission ventures are just plain zeroes.
It’s a reality check for investors such as BlackRock Inc., Riverstone Holdings and Canada’s Caisse de Depot et Placement du Quebec. They’re finding the buzzy startups they chose just a few years ago in wind and solar energy, electric vehicles and other environmentally friendly fields don’t make money on their own.
Instead, they depend in their early stages on subsidies and other government programs. It doesn’t help that initial valuations were inflated by cheap debt and competition from dabblers in ESG investments who bid up assets. It was a recipe for disappointment even before Donald Trump’s return to the White House, and now those federal supports are in jeopardy amid his opposition to renewables.
The result: Sponsors are marking down assets, cutting costs and calling for expert help as they try to figure out what their holdings are really worth.
“Private equity funds are saying, ‘Now what do we do?’” Jason McDannold, Americas co-lead for private equity at consulting firm AlixPartners, said in an interview. “Tightening of the belt won’t be enough.”
This is a stark change from 2021 and 2022, when the sector drew nearly $1 trillion of investment across those two years. The Inflation Reduction Act of 2022, which allocated hundreds of billions of dollars for clean-energy investments, added fuel to the fire. But it wasn’t always enough to turn a speculative bet into a profitable company.
BlackRock, for instance, stunned investors in December by marking down investments and overhauling leadership of its third Global Renewable Power fund after posting a negative return. Riverstone has marked down at least seven investments, according to filings analyzed by Bloomberg. Some have been slashed to zero, with at least one in bankruptcy.
Losing Value
Those aren’t the only flops. Caisse de Depot et Placement du Quebec, or CDPQ, one of the world’s largest pension investors in infrastructure, had multiple EV-related bets go bust, including Lion Electric and Northvolt. Tikehau Capital took a stake in Demand Power, a developer and operator of power supply systems that missed target dates for commercial operations on two projects and went into receivership.
And Greenbacker, a major investor in climate and green technology, said Jan. 29 that its chief financial officer left and the firm is recalculating the value of its independent power producer and investment manager, Greenbacker Renewable Energy. Managers are holding off on publishing monthly net asset values until they can finish reviewing the portfolio and their expectations.
Most of the firms declined to comment, and they typically don’t publicly disclose the cost of writedowns from individual holdings. But some like CDPQ say that even with the setbacks, their renewables portfolios have crushed benchmarks for conventional energy over the long term.
While fund managers have always had some wiggle room around how they mark private assets, limited partners are anxious to get a return on their investment, forcing the reckoning at private equity firms.
Backers of startups have long accepted the reality of some failed bets in the aim of finding the next big thing. What made this cycle so painful was the high valuation awarded even to unprofitable firms in the boom days of 2020 and 2021, making the failures a more severe drag on returns.
The reversal stems in part from the early stages of the pandemic, when rock-bottom interest rates meant portfolios of wind and solar farms were valued at 15 to 20 times annual earnings, said Pavel Molchanov, an analyst at Raymond James. Multiples are closer to 10 or 12 times earnings today, making the firms targets for writedowns or impairments, Molchanov said.
In turn, that’s forcing out investors who weren’t especially committed to begin with. “There was an exuberant couple of years where tourists entered the space, and they’re now leaving,” said Scott Jacobs, chief executive and co-founder of sustainable infrastructure investment firm Generate Capital.
What Works
It’s not all bad news for renewables. Institutions such as pension funds covet wind and solar farms already in operation because the stable income from lengthy power-supply contracts matches with the investors’ long-dated liabilities. Brookfield Asset Management agreed this week to spend $1.7 billion to expand its US onshore renewables in a deal with National Grid Plc, and CDPQ is committing about $7 billion to acquire Innergex Renewable Energy Inc.
A CDPQ representative said the setbacks at Northvolt and Lion were outliers. Overall, two of its renewables portfolios posted five-year annualized returns of 11.6% and 19%, respectively, trouncing the 7.9% gain for their MSCI benchmarks.
Goodleap, which provides financing for solar panels and battery storage, is a more cautionary tale. Riverstone marked the investment as high as 2.8 times the gross multiple on invested capital as of the end of 2021, before sliding the valuation back down to one, or break-even, as of last year’s second quarter, filings show.
Cutting Back
BlackRock, which wrote down assets in its renewable fund after executives from its Global Infrastructure Partners took a look at the portfolio, cited setbacks for investments in electric vehicle charging, renewable generation and power storage and transmission, according to an investor letter reviewed by Bloomberg.
The internal rate of return for BlackRock’s Global Renewable Power Fund III fell to a negative 0.3% at the end of the third quarter from 11.5% in the preceding three months. The firm halted efforts to raise about $7 billion for a fourth iteration, according to a person with knowledge of the matter.
Some consultants say marks for renewables were always too optimistic.
“This moment was probably always coming because there has been such an extraordinary difference between the public market valuations and the private market valuations,” said Peter Gardett, Karbone Inc.’s head of research, energy and commodities. “Arguably the public market selloff has been way overdone. But the truth is most of the private market funds never have re-calibrated to those new numbers. That can only go on so long.”
Even so, private equity firms aren’t backing away from renewable investing. KKR & Co. has raised $2.6 billion toward a $7 billion goal for its first Global Climate fund and identified energy transition as a key area of investment for its infrastructure business. TPG Inc. has gathered $6 billion toward a $10 billion target for its Rise Climate private equity funds. Brookfield has amassed about $12.5 billion of a $17 billion target for its second global transition fund.
The sector’s downturn is creating opportunities to pick up assets on the cheap, Connor Teskey, chief executive of Brookfield Renewable Partners, told investors last month.
“The simple fact is that the fundamentals for energy have never been better,” he said.
