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Cap Hedge Emerging Manager Series - Renewable Energy Investing Enters the Mainstream

March 28, 2017 | Sample HubSpot User
Cap Hedge

David Sher, of the Greenbacker Group, clears up some of the misconceptions about renewable energy investing as well as discussing the importance of education when it comes to pitching your fund to investors.

Emerging Manager Profile - David Sher, of the Greenbacker Group

There’s a fine line between philanthropy and impact or sustainable investing. While the goal of the investor is to choose investments that achieve a socially responsible goal, returns are still a very important factor and the relevance of that fund’s strategy must be a response to a real need in the market.

For David Sher, CEO of the Greenbacker Fund, the lack of infrastructure investment across the US, especially within the energy sector, was a large driver for him and his partners in creating their renewable-energy focused fund.

“I think there has been a confluence of events that have occurred leading to the need and increased interest in renewable energy assets,” Sher said. “Rising electricity demand, power plants that have been neglected and are being retired in favor of both cleaner and safer alternatives, the falling cost of solar and wind resources, and the rise of mandates in a majority of U.S. States are making renewable energy far more cost effective and broadly available than ever before.”

The changes in the industry in the last five years have been staggering. When Sher and his partners started the business in 2011, solar panels cost approximately $1.90 per watt. Today, Sher said, the cost of some of the same panels are now as low as $0.40 cents per watt.

“The costs of resources necessary to build wind and solar farms have fallen considerably in the last five years. As a result, in a majority of places in this country, renewable energy is competitive with traditional forms of power generation on cost,” said Sher.

Greenbacker Renewable Energy Company is a publicly registered, non-traded limited liability company. The fund is structured similarly to a REIT and is made up of a diversified portfolio of income-producing renewable energy power plants, energy efficiency projects and other sustainable investments.

With the rise in interest in impact and sustainable investing from both single and multi family offices, we recently chatted with David to get his take on launching the fund.

Who are the investors interested in a renewable fund strategy?

Our investor base is interested in a diversified energy portfolio. They particularly like the steady predictable income that comes from investing in these assets, along with some degree of long-term inflation hedge.  Some investors also have an interest in increasing the use of renewable energy across the country and making an impact.

What’s unique about your fund?

Our concept is similar to a REIT. Whereas a REIT is generating income from rental incomes, typically under long term lease, what we’re doing is buying solar and wind farms and other assets and then selling the electricity back to Utilities, Municipalities, Corporations and in limited cases individuals under long term contract which creates a steady predictable stream of income for the investor. The assets are sighted in many areas around the country including at airports, public works facilities, schools and corporate facilities.  

What has been some of the challenges that you have encountered launching the fund?

As with any fund, the obstacles and hurdles are that you need to be able to create a pipeline of investments which matches the velocity of your capital raise, otherwise you experience drag.  Fortunately, our relationships in the market have allowed us to solve this problem and create a large pipeline of deals.  One of the great things about renewables and solar in particular is that you can purchase assets for as little as one million dollars and as much as two hundred and fifty million dollars or more which from an institutional quality perspective will look virtually identical; same contractual buyer of power (offtaker), same quality equipment, same level of monitoring, etc.  Thus, these investments are very scalable and fit very well with the way our capital is raised.   This cannot be said of many other infrastructural or real estate investment strategies which depend upon much larger format individual asset purchases.  Imagine, for example, buying an airport as an infrastructure investor.

Where are you seeing the majority of investment in renewable energy projects in the US?

In terms of solar farms, there are a number of states where we see a lot of opportunities including California, Massachusetts, North Carolina, Arizona, Tennessee and other states.  Wind is much more place dependent since good wind resources don’t exist everywhere.  Overall our portfolio of assets is currently spread across 13 states and Canada.

What type of response or feedback have you received from family offices and what size investments are you seeking from these investors?

Family Offices and other institutional investors have been extremely interested in the asset class but have frequently asked where it fits in the allocation schema since it has some characteristics of Real Estate, Real Assets and Infrastructure.  Our biggest challenge is the education process since this asset class has a relatively recent pedigree.  Overall we are seeing investments of between $3 and $20 million for the fund and have more than enough opportunities to invest in several hundred million worth of transactions.

What are some of the misperceptions that potential investors have regarding your investment strategy?

The first thing that many people assume when we talk about renewable energy is that we’re talking about “Cleantech” investments, which have had a relatively disappointing track record in the private equity space.   In fact, Greenbacker is not a “Cleantech” fund.  We invest in renewable energy power plants and sell the electricity generated by those plants to credit worthy buyers; utilities, municipalities etc.   The plants which Greenbacker owns utilize well established, bankable technologies with a long track record of successful deployment.  We do not invest in “bleeding edge” technology solutions.

The second thing that tends to come up in our discussions with potential investors, is the perception that renewable energy investing is all about subsidies and tax credits.   While renewable energy projects do benefit from federal and state level incentives; so do pretty much every other energy source.   Investors in oil and gas MLP’s will almost certainly be familiar with terms such as, “intangible drilling costs” and “depletion allowances” as well as other tax subsidies associated with oil and gas extraction.  While renewables do benefit from tax incentives, it is important to note that they are designed to encourage further deployment of these technologies as well as to level the playing field with other energy sources.

Any advice for fellow emerging managers in the renewable energy market?

Well, things have certainly gotten easier to explain as renewables have moved deeper into the mainstream.   As renewable deployment continues to grow, it creates two major effects which help investors to understand the story.   Firstly, investors see solar and wind facilities being built and operating in their own communities.  This makes the investment thesis much more tangible to them.    Second, further deployment of renewables creates employment for renewable energy professionals and demand for new workers in the sector.   Many people are surprised to learn that there are already more than twice as many workers in the solar industry as there are in the coal industry and that trend is continuing.  That said, I think that there is still a good amount of education that needs to be done for investors to understand what is happening on the ground.  Renewable energy deployment has grown so rapidly that many people are still basing decisions about the sector on information that may have been true five to seven years ago but no longer apply.   I also think however that this presents a big current opportunity as there is still a large gap in perceptions which today’s investors can exploit.  Once more money enters the market, we believe that it is inevitable that there will be cap rate compression but this will be a big benefit to today’s investors in the sector.

For more information on the Greenbacker Fund, you can visit their website at http://www.greenbackerrenewableenergy.com/

Tags: industry trends Alternative Investing