Solar Energy Farms Investment generates Alpha for the Hedge Fund Community

Solar energy is starting to see an increase in investments from hedge funds and private equity firms as the industry grows in size. More than $250 billion has been invested in wind and solar energy farms annually, over the past 3-4 years. While more than 50% of the financing has come from commercial banks, an increasing amount of money is starting to come from other sources of capital. Hedge Funds such as KKR and Blackstone are increasing their bets on renewable energy assets. These energy assets give an assured rate of return, which is almost double what you get from traditional municipal or government bonds.

Please note that the recurring subsidy flows from the sale of power by wind and solar energy plants typically look like the interest payments that you get from traditional bonds issued by the government. This means that hedge funds and PE firms are increasing their investment into these assets. Solar Energy farms are becoming commonplace these days unlike the earlier days. It was a risky proposition with supplier, foreign exchange, capital risks etc. However, the industry is maturing and is no longer a niche exotic one. More than 10 GW of solar power farms will be built in China and almost 2 GW in USA this year. The total solar pipeline is supposed to exceed 100 GW now, with solar farms planned across countries as varied as Chile, South Africa, Morocco etc.

Though the industry is maturing, risks are still considered high which means that smart investors have an opportunity to generate Alpha if they invest in the right projects. Some of the large solar energy developers are also looking to keep the best solar assets for themselves rather than selling it. SunEdison (SUNE) will soon list its solar asset subsidiary as will Jinko Solar (JKS). This will help the companies generate more value rather than selling these assets to a third party.

Solar energy farms used to generate IRRs of 25-30% in the boom days, but now these returns have come down dramatically as governments have sharply reduced the subsidy rates. However 8-10% returns can still be easily generated from solar assets, which is good enough for the multi billion dollar asset managers who are getting meagre returns in the currently financial repression days we are living in. Central banks have artificially reduced the returns by keeping the rates near or at zero levels. Solar assets in such a world look extremely attractive.