Rotating assets

Renewable energy asset rotation stalls in Europe but will LatAm follow?

Asset rotation in renewable energies is the technical term used to describe companies funding assets at a particular stage of their lives before selling them on to new owners once they have matured.

For example, a venture capital firm may make the initial investment before selling to a private equity company who in turn sells it on to a pension fund. This is how the capital markets work, venture capital is expensive but takes on more risk, pensions funds want attractive assets with less risk and so are happier with lower returns.

A recent Bloomberg report revealed that, particularly in Europe, assets are not rotating as they had in the past. This slowdown has been primarily caused by the stable financial returns of certain renewable assets and the fact that sustainable bonds allow companies to re-finance assets without having the need to cash-out at early stages.

A principal at a UK-based renewable energy investor confirmed, “It’s understandable, there is so much dry powder in private equity and the returns from these assets are strong, why would you sell? Additionally, we’re seeing more utilities and oil majors buying and holding. This means it’s harder for the pension funds to get hold of these assets.”

“There is so much dry powder in private equity and the returns from these assets are strong, why would you sell? Additionally, we’re seeing more utilities and oil majors buying and holding.”

Principal, renewable energy investor, UK

The Bloomberg article gave EDP, Portugal’s electric utility, as an example, “[EDP] rotated about 87% of its assets from 2014 to 2016, but intends to rotate only 35% of mostly-renewable assets from now until 2025.”

This trend has not yet hit Latin America, where asset rotation is seen as a proven model of continuous delivery of significant value creation to reinvest in organic growth. The growing appetite for renewables in the region allows investors to recycle capital and accelerate growth in renewables.

“Despite the consolidation of dynamic renewable energy markets in Brazil, Chile and Mexico other countries such as Colombia and Uruguay will soon offer significant new opportunities with high-investment returns.”

Director, renewable energy company, Colombia

However, it is still too early to know if the slowing of asset rotation in Europe will spread to Latin America. A Director of a renewable energy company in Colombia commented, “Unlike the US and Europe, the demand for renewable energy solutions is still significantly increasing while its costs remain comparatively low. In addition, despite the consolidation of dynamic renewable energy markets in Brazil, Chile and Mexico other countries such as Colombia and Uruguay will soon offer significant new opportunities with high-investment returns.”

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