Mainstream searching for investor funds for expansion

John Ihle, The Sunday Business Post Market Correspondent, 22/12/2013

Mainstream Renewable Power has intensified the construction and operation of its electricity projects

Mainstream Renewable Power, the global wind and solar energy company run by former Airtricity chief Eddie O’Conner, is beginning to look to traditional investors for new capital, tapping pension funds and insurance companies for downstream investment to pay for the construction and operation of its electricity projects. The six-year-old firm, which is building a 19-gigawatt development pipeline, has set up a separate unit, Mainstream Capital, to raise money from large infrastructure funds and offer institutional investors beyond the core equity shareholders who have backed the company to date. The idea is to broaden the spectrum of funding as the company moves from the riskier greenfield development phase of renewable energy projects to the more steady-state operations phase.

Mainstream is exploiting a niche already carved out by specialist investment firms, who in recent years have realised that steady returns backed by government subsidies on sustainable electricity generation are a good fit for conservative institutions and pension investors looking for safe bond – like investments with good yields.

“The rationale for Mainstream Capital is to source the correct risk-adjusted capital by matching long-term liabilities,” said Manus O’Donnell, chief executive of Mainstream Capital.

For wind and solar farm projects, with their long lifespans and state-backed revenue streams, the long-term liabilities and fixed income needs of pension and investment funds are a good match, especially when old reliables like deposit rates and government bond yields are repressed, as they have been in recent years.

“Once you’re in the operational phase, the value-add can be very big as you get success and the projects become cash pimps at that stage,” said O’Donnell. “The risks are down to the credit risk of the backer.”

Mainstream has deployed four people from its corporate finance function to the new venture and will be working through the structural details through the end of next year, when it expects to start raising money.

O’Donnell said the company was considering either setting up a fund so institutions can allocate capital for Mainstream to invest on their behalf or a joint venture with a large international fund to co-invest in projects. Irish investors would have access to a fund structure, but no domestic institutions have the scale to participate in a joint venture.

For smaller Irish investors, whether individuals, pension schemes or institutions, other avenues exist for getting exposure to the growing renewable sector. Solar 21 runs a €100 million portfolio of solar energy farm assets, mainly in Italy, which it acquired in €5 million tranches. Investors get exposure by participating in a loan note to the company – an IOU – which pays fixed coupon over the term out of the revenue produced by the solar farms.

“It’s better than having units in a fund because we’re obliged to pay to pay,” said chief executive Michael Bradley. “Investors have ultimate recourse to the company.”

Solar 21 structure the investment so that the backers – usually high net worth individuals with self-invested pensions or small company retirement schemes – get a fixed rate of return at 8.5 percent out of the fixed feed-in tariff paid by electricity consumers to subsidise alternative energy producers.

Effectively, the public service obligation levy on the electricity bills of Italian consumers winds up in the pockets of Irish investors. Solar 21 takes the topside of any returns, which have averaged 14 percent in the four years the company has been operating.

The investment should perform like an annuity backed by a 20-year purchase agreement. The risk for investors, apart from Solar 21 mismanaging the assets, is that cash strapped governments change or divert the tariff receipts, leaving investors with lower returns. This happened in Spain a few years ago when the government realised it had set the rate too high to be viable.

“Greece, Ireland and Portugal have all maintained their policies despite the bailouts,” said Bradley. “The POS levy makes this very robust, even in hard times.”

With bank deposits being so low, brokers are offering this type of investment to their customers as an alternative, especially with deposit interest retention tax (Dirt) rates hitting 41 percent after the latest budget. Solar 21 also offers tax efficiency, as loan repayments are sheltered under certain conditions.

Policy clarity and long-term certainty are hallmarks of the approach taken by Business Venture Partners, the veterans of this area of investment with seven years in business. The investment managers focus on Ireland and Britain, taking equity stakes in energy companies or investing in projects similar to Solar 21 and Mainstream Capital.

Source: The Sunday Business Post