Summary: Mergers and acquisitions (M&A) of Latin American renewable energy assets were up more than 180% to almost $8 billion in 2015, a sign of rapidly growing new capital sources to the region and industry. This in turn will make earlier-stage capital easier to access and facilitate the construction of new assets. The timing couldn’t be better.
About the Author: Carlos St. James is an advisor to energy investors and developers in emerging markets. He founded the Argentine Renewable Energies Chamber in 2005; has been a board member of the Latin American & Caribbean Council on Renewable Energy since 2010; founded the Middle East-Americas Energy Council in 2014; and is publisher of the Latin American Energy Review.
He was recently named Summit Chairman of the upcoming LAC-CORE Finance Summit in Miami, Florida in September 2016.
Last year a worldwide total of $55 billion in mergers and acquisitions (M&A) deals took place in the renewable energy sector – existing assets like wind farms, hydro power plants and solar parks changing owners. And deal flow was up by a very impressive 95% — almost doubling – from 2014, a sign of a vibrant global industry.
But more impressive is that M&A in Latin America represented almost $8 billion of that global total, and deals taking place in the region were up a whopping 181% from 2014, according to a new Price Waterhouse study.*
Why is this important and who cares about M&A?
It is actually very important — especially for emerging markets — and anyone who is a link in the Latin American value chain of the renewables industry should rejoice.
A growing M&A market requires a pool of assets that are operational and generating cash flow, and whose risk is now low enough that a new set of investors come in to take them over. Among other things, this allows the earlier stage, higher risk investors and bankers to sell, take profits and redirect capital back into new deals. M&A is the natural next progression in the evolution of renewable financial markets in the region: from angels to seed investors to venture capital and finally institutional and public markets. These latter-day investors are looking to acquire market share and diversify portfolios, secure in the knowledge that they can repatriate profits.
Over the last decade project developers putting together renewable energy deals in Latin America would quickly hit a major obstacle: access to capital. Early stage investors are wary and demand big returns for their risk; banks are skittish and keep asking for more collateral before financing a deal. Part of their concern has been that the later stages of capital – institutional investors and public markets – are not yet present in a meaningful way. These are the investors to whom the first higher-risk capital wants to sell to after the assets are up and running.
This is the perview of the M&A industry. To the extent risk perceptions drop, longer term capital in the form of pension funds, insurance funds, etc., will enter the market and provide greater maturity and long term liquidity to a market. The fact that it is beginning to take place in Latin America (even if for now limited to Brazil, Mexico and Chile) is an excellent sign. M&A deal flow means: (a) there are enough assets in the region that they can begin to change hands; (b) that these assets have fairly dependable cash flows and predictable long term valuations; and (c) the risk profile of the combined industry and region is dropping and thus making more capital available for more deals to take place.
The buyers fall into one of four categories: Corporate; Institutional; Infrastructure; and Other.
- Corporate includes energy and power and utility companies. They represent two-thirds of all M&A capital invested in renewables;
- Institutionals include pension funds, insurance funds, mutual funds, sovereign wealth funds and investment banks. These represent about 15% of M&A investing.
- Infrastructure investors include specialised infrastructure funds and private equity funds. They are the smallest players and represent only 4%.
- Other comprises sovereigns, private investors, management buy-out, etc. They represent the last 15% and are the fastest-growing segment but don’t usually operate in Latin America.
Part of the process of creating these new bridges to capital involves establishment of organizations (such as the Middle East-Americas Energy Council, or the Latin American & Caribbean Council on Renewable Energy), and having the industry gather at key events such as the upcoming LAC-CORE Finance Summit later this year in Miami.
An indication of the size of the opportunity
But the M&A opportunities in Latin America are especially intriguing because assets can be acquired at a bigger discount. In any given transaction there is a target price set by the seller and a bid price offered by the buyer. In efficient markets the difference is small: there is a lot of deal flow and the established market value of any given asset such as a wind farm or hydro power facility is pretty well known in advance. For example, last year in Europe, North America and Asia Pacific the variance between target and bid prices averaged 20% for renewable assets. In Latin America, however, the variance was a whopping 300%: there is a mismatch between perceived values, that opens the door to savvy investors who know what they are acquiring.
Furthermore, Brazil’s weaker economic environment in 2016 gives an advantage to foreign buyers because of the weaker local currency. And chinese investors are some of the biggest players in Latin American renewable assets and they are largely corporate buyers – as opposed to the comes-with-strings-attached sovereign funds.
Finally, CO2 emission reduction targets are becoming increasingly credible on a global level. This acts as a way to give momentum to corporates and utilities looking to migrate from coal or gas to renewable electricity generation and to focus on expanding their renewable energy capacity. Acquiring existing assets is the easiest way to do that.
* Price Waterhouse Coopers, Power & Renewables Deals: 2016 outlook and 2015 review; www.pwc.com/powerdeals
© Latin American Energy Review 2016
About the Author:
Carlos St. James is the founder of the Argentine Renewable Energies Chamber (CADER, by its initials in Spanish); board member and was elected the first President of the Latin American & Caribbean Council on Renewable Energy (LAC-CORE); founder and chairman of the Middle East-Americas Energy Council (MEAMEC); and founder and publisher of The Latin American Energy Review. His private sector background is focused primarily on finance and bringing together stakeholders so that deals get done. He advises governments on renewable energy policy, counsels private equity firms seeking to enter the region; and brings together stakeholders, including investors, for new energy projects.
He obtained his undergraduate degree in international economics from DePaul University and his masters in international relations from the Fletcher School at Tufts University.