Our society’s deep dependency on non-renewable resources has come to a head. Between looming threats of climate change and vulnerabilities in the U.S. electrical grid, private equity is poised to play a key role in a more sustainable future.
In 2020 alone, private equity invested more than $11 billion into renewable energy projects—nearly doubling its total of 5.7 billion in 2019. This shift in focus from fossil fuels to clean power can be credited to a mix of social, environmental, and government considerations. Most importantly, though, the cost of alternative energies has greatly decreased in the last 50 years, making their installation and use significantly easier. In fact, solar is now cheaper and more efficient than coal-based power, and utility companies across the U.S. are switching to renewable energy without increasing customer rates.
The future is green and investors want in. The question is, how can business owners in the solar industry get their piece of the pie?
This article will cover the current landscape of private equity in the solar space, and tips for solar companies seeking private equity investment.
Private Equity and Solar Energy
A major factor in the push for greener energy sources has been support from governments around the world. President Biden recently rejoined the Paris Climate Agreement and has proposed the U.S. reach 100% clean energy by 2035. Moreover, at the end of 2020, Congress passed a spending bill that included $35 billion for energy research and development programs, as well as a two-year extension of the Investment Tax Credit for solar power.
"There is going to be a radical shift towards renewables in the coming decade, and private equity is well positioned to play a key role with this secular trend,” said Arturas Rainys, Principal at Trivest Partners, a private equity firm focused exclusively on the support and growth of founder and family-owned businesses.
To Rainys point, Acadia Renewable Energy recently received more than $130 million from the Carlyle Group for eight solar projects across Southern Maine, which will generate enough power to sustain 19,000 homes with solar energy throughout the state once completed. Another timely proof point is Blackstone’s investment in the largest rooftop solar array in the U.S., which installed 22 acres of solar panels on New York City’s Stuyvesant Town apartment buildings. These examples represent a fraction of the deals being done.
Investments in renewable capacity totaled more than $2.5 trillion between 2010-2019, according to BloombergNEF data. Solar alone drew in half of those funds—$1.3 trillion to be exact—and grew from just 25 GW at the beginning of 2010 to more than 660 GW by the end of the decade. That’s enough energy to power 100 million homes in the U.S. each year.
The high volume of capital flowing into the renewable energy sector has increased asset prices. To counter this, private equity firms seeking higher returns are turning to projects under development as opposed to ones already operating.
“There is enormous white space opportunity in whole-house energy efficiency, residential solar and energy storage, which are each already multi-billion dollar categories. This market is forecasted to more than triple over the next 10 years with plenty of emerging opportunities in areas from grid services to EV charging infrastructure,” added Rainys. “Powerhome, a business that received an investment from Trivest’s Growth Investment Fund in 2018, serves as an example of a whole-house energy efficiency business offering residential solar and energy storage that has seen a tremendous growth over the last 5 years, and has quickly become one of the largest residential solar companies on the East Coast.”
Landing Private Equity Investment
Opportunities for solar companies looking for private equity investment abound, but there are important steps business owners should take prior to striking a deal.
According to Rainys, “Many founders have built terrific businesses but lack essential elements to properly exit and monetize their years of hard work. We help founders and families properly position their business, think through succession plans, and build out a deep management team to ensure a successful transition to institutional ownership.”
When planning an exit, solar executives should take the following steps:
Define your goals.
The founder should determine exactly what he or she wants out of private equity partners. From walking away completely to continuing to serve as CEO, the level of involvement post-transaction will help determine the right private equity firm and avoid regrets down the line.
Know what your business is actually worth.
Understanding your business’ true value helps in framing negotiations and setting realistic expectations. Small business owners should consider engaging a reputable advisor to help them with the process.
Separate the business and personal finance.
All business expenses and earnings should be handled in their own dedicated accounts and not commingled with personal expenses. This allows investors to evaluate the underlying profitability of the business and determine its value with greater speed and certainty.
Buyers will sometimes offer the seller an “earnout,” or contingent payments, which is money set aside until certain performance targets are achieved by the seller. Careful consideration should be given to earnouts because some contingencies can quickly turn into golden handcuffs.
Surround yourself with a strong team.
Going through an M&A process on your own is not advisable. At minimum, founders should have a business attorney, a Certified Public Accountant (CPA), a Certified Financial Planner™ (CFP®), and an industry consultant to protect their best interests during the transaction.
Plan your post-sale financials.
Prior to selling a solar firm, founders should think about what type of life they desire post-sale. Most people hope to achieve financial independence; therefore, personal finances and lifestyle considerations should be heavily considered.
Solar energy continues to show promise for private equity investors, and savvy business owners stand to make high returns if they play their cards right. Solar is not the only alternative, though. As wind, geothermal power, hydroelectric energy, and other renewable sources gain popularity, solar companies will need to continue to innovate to stay ahead. Luckily, private equity can help them do just that.
To learn more or schedule a call visit: https://www.bleakley.com/mackin
Investment advice offered through Private Advisor Group, a registered investment advisor. Christopher Mackin is solely an investment advisor representative of Private Advisor Group, DBA Bleakley Financial Group and not affiliated with LPL Financial