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Ted Brant | Terry Grant | Wendy Carlson |
Asset sales have been picking up, as players flush with cash look to put money to work and developers aim to fund project development ahead of the expiring tax credits. “There is just a vast amount of un-deployed capital looking for places to go everywhere you look. In general, what we’re seeing is more dollars chasing not enough deals,” says Ted Brandt, principal and ceo at Chicago-based Marathon Capital.
“As the year has gone on, there has been an increase in M&A activity because a lot of those people, along with qualifying, need capital to support the project. That means either a capital raise or an M&A process around those assets. A lot of those assets are likely to trade in 2014,” says Gregg Elesh, principal and chief investment officer.
PFR Managing Editor Sara Rosner sat down with Elesh, Brandt and Managing Directors Terry Grant and Wendy Carlson to discuss Marathon’s take on wind, solar and thermal trades this year.
PFR: You were voted Best M&A Renewable Advisor this year in our awards. Can you describe Marathon Capital’s experience in the renewable asset class?
Carlson: We are very pleased to be recognized for renewables M&A. It is a big part of our business and has been a large, growing activity for us here. Although, we have expertise in other areas of the market and we are certainly active in other types of transactions.
Focusing on renewables M&A, usually we have at least 10 active transactions in the market. We get the insight from the full spectrum across that marketplace: the buyers, the sellers, the financing entities and the tax equity. We really do have that real-time market knowledge that our client base is looking for when they want an advisor to assist them with an asset sale. Through all of the skills that we have in-house, and that real-time knowledge, we are able to package together the right approach to maximize the value for those clients.
We have a lot of repeat business here. People come to us, time after time, to sell an asset or to raise money for them or for their company. We even have people on the other side of the table from us who become clients after a transaction. A buyer of a project in one year, has come to us the following year to sell one of their other projects because they saw how we were able to get higher values and run a really thorough process to make sure that we were touching all parts of the marketplace when we were seeking investors. Same on the tax equity side, where a tax equity investor, who came in on a transaction where Marathon Capital represented a developer, then came to us to advise them on how to get more tax equity investments completed.
We see the whole marketplace. We’ve been very, very active in wind for about a dozen years. M&A has been one of the larger sectors of our business. We’ve also been completing many geothermal transactions, which is a more limited market, but we have a large role in that marketplace and a large piece of the business and we’ve been successful in closing those transactions.
Solar is an area of our business that has been growing and we are active across all areas of that industry: utility-scale, commercial and industrial, down to the residential level. Those smaller transactions have been getting a little more attention lately as some of the state RPS programs are focusing on smaller solar transactions and more financings are being done around those.
We continue to see a lot of buyers who are not tax efficient, who need tax equity, and that is one of the things that our company can bring to a transaction. If we bring in a buyer who needs a structure to be able to monetize the tax benefits, that’s a strong area of our practice that we can bring to play.
PFR: How does this year in asset-based M&A stack up to years past? How do you see it finishing out?
Brandt: I think you have to look at this year with a couple bellwether events. The first thing that I would emphasize is the continuing liquidity across the market. There is just a vast amount of un-deployed capital looking for places to go everywhere you look. In general, what we’re seeing is more dollars chasing not enough deals.
For the first time, we’re seeing interest rates coming back on an unsubsidized basis, to the point where, probably this year, we’re going to see 10-year Treasuries having a real rate of return as opposed to a negative real rate of return. The last couple of years, we’ve seen those rates move about 120 basis points.
We haven’t yet seen that effect across the marketplace, but it’s inevitable. There will have to be some yield movement in the rates in the market. But so far, we’ve seen so much liquidity that we haven’t really seen that evidence.
The other things you have to look at across the M&A market, is that obviously there are two big wind portfolios, the second one including some non-wind, gas and coal assets from Edison Mission Energy and the BP arrangement. Needless to say, it was big news when BP withdrew the offering and put it back on the shelf. We weren’t surprised by that. We were, frankly, surprised by what we could call ‘the optimism’ that BP had around the process. We’re in the market all of the time and we know the realism there and how few people have the tax appetite to make some of those deals work.
Ultimately, those are the two big deals. There have been a whole lot of deals that we’ve been part of, or have watched, that have been single asset, smaller deals. What we’ve seen this year has really been the advent of hedged wind deals, largely in ERCOT, but also a few in PJM.
Also, you have to look at sort of an alternative to the M&A, at what NRG pulled off in their spinoff, as well as what Pattern Energy is trying to do now with their yieldco. The jury is out on whether that is going to work out, although we think the market is going to like what Pattern has to offer. That certainly will be a model.
PFR: What about M&A activity by resource? Solar, wind, thermal?
What we’re seeing is the solar business churning out fewer large projects and we’re seeing most of the trading in smaller projects. We sold a 60 MW project earlier this year and are just completing a 20 MW project. We’re finding very heavy bidding in those markets, with 30-50 participants in a process.
The wind business has been much more arrested because, essentially, everybody was out of inventory at the beginning of this year and people have been re-tooling. We’ve seen, and participated in, a few small, one-off sales. But, we think virtually everybody is focusing on the RFP process and any bilateral discussions that they have going as they try to qualify for the year-end cutoff.
The gas market continues to be pretty interesting and frothy. We’re seeing heavy bidding on virtually everything there. We’ve even got an oil asset in the market, the Wyman asset for NextEra, and we’re finding a rather surprising amount of participation. This is a high heat rate, old oil plant up in Maine and we’re finding some rather enthusiastic bidding on that asset. That largely has to do with the fact that natural gas isn’t in the market.
For us, we’re seeing an imbalance between liquidity and inventory. But there are still going to be a number of transactions that get done. For both Marathon Capital, as well as the market, I’d predict that 2014 will even be stronger than 2013. That’s when a bunch of the wind assets that are getting started this year will ultimately cut over and trade hands and go to financing, or look to permanent financing.
Elesh: We’ve seen this before. Our regulatory process that took so long to get a PTC extension set the wind business back a fair bit this year. As you went into the year, inventory was low because people had been stalled. What you’re really seeing now is a real rush to qualify projects for the PTC. As the year has gone on, there has been an increase in M&A activity because a lot of those people, along with qualifying, need capital to support the project. That means either a capital raise or an M&A process around those assets. A lot of those assets are likely to trade in 2014.
Sitting here today, we’re encouraged. We’re having a pretty good year and we think in 2014 the wind business is going to be pretty strong. Then, you look at Terry Grant and his team out West focused on the solar business. I think that has been strong all through the year. Because of the way tax incentives have been laid out, they knew what the picture was for them and they had a running start going into this year.
There’s been a lot of activity around capital raises, around portfolio sales, around individual asset sales. It started out strong and it’s getting stronger as the year goes by. I think we’ve seen this happen before, where it picked up over the course of the year. Maybe at the end of the day, you see a few less transactions concluded this year, but it’s going to lead into a lot of activity in 2014 from our perspective.
Grant: It does feel like a busy year. It certainly feels a lot busier than anything we saw last year, from the solar business perspective. I know there are a couple of other macro trends. There seems to be brighter lines in peoples’ business models, they seem to be more receptive. We saw SolarCity get done and that certainly defines some boundaries in the residential marketplace. We’ve seen additional levels of interconnection changes in California with the cluster programs. We’ve seen the RAM contracts; that market has continued to grow. The smaller asset market has grown.
It seems that business models are better defined and consolidation is occurring. Solar valuations are generally off their bottom and there genuinely seems to be a market attempting to be more organized.
Check back next week, when Marathon officials discuss the market for buyers and sellers, respectively.
