No dearth of equity

06 February 2020 |

Singapore’s sovereign wealth fund, Temasek, and Swedish PE fund, EQT, have announced entry in the Indian renewable power sector with a corpus of USD 500 million. They have set up a new renewable IPP platform, O2 Power, as a 50:50 joint-venture. The venture has got off to a brisk start by hiring a team of senior managers from ReNew and bidding for a 300 MW project in the NHPC 2,000 MW solar power tender.

  • Bulk of equity investment is coming from offshore sources, mainly financial investors;
  • Easy availability of equity is a relief for the sector particularly at a time when debt financing is constrained and there are mounting concerns about offtake risk, policy uncertainty and execution;
  • We expect risk aversion to abate and bidding process to become competitive shortly;

Temasek and EQT are two of the latest international investors to jump into the fray. Just three months ago, Masdar, UAE’s sovereign wealth fund, announced an investment of USD 150 million in Hero Future Energies. Meanwhile, Abu Dhabi Investment Authority (ADIA), Abu Dhabi’s sovereign wealth fund, has been making further substantial investments in Greenko (alongside GIC of Singapore) and ReNew (alongside CPPIB, the Canadian pension fund). CDPQ, another Canadian pension fund, has also made substantial investments in Azure Power and CLP’s Indian business.

Table: Private equity investments in renewable power in 2019

Source: BRIDGE TO INDIA research

In total, there was an estimated investment of USD 2 billion by global financial investors, mainly sovereign wealth funds and pension funds, last year alone. These investors are attracted to the sector as much by yield play, quasi-sovereign offtake, ‘green’ investment tag and ability to deploy large sums of money quickly. There is also a strong herd mentality factor. Investment opportunities in most western countries are limited and returns are relatively low. The Indian government has also played its part by talking up the sector, adopting large targets and founding International Solar Alliance.

The financial investor class has now almost entirely crowded out domestic as well as international strategic investors. Interestingly, the spate of recent investments has come at a time when the sentiment has been ridden with serious concerns about offtake risk, policy uncertainty, execution and debt financing hurdles.

We believe that the sheer amount of cheap global capital is encouraging short cuts to investment decisions and higher risk taking. It is possible that after a lull of over a year, resumption of normal service (falling tariffs) would resume soon. Subject to module prices remaining soft and no customs duty on modules, the all-time solar tariff low of INR 2.44/ kWh may be under threat later in the year.

The question is what is the likely exit for financial investors? Strategic investors are not willing to meet exit valuation expectations and the IPO route seems unlikely in view of overall risk-return profile and past market experience with power stocks.

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