Brilliantly Boring

2014 has been the year of the yieldco.  This rarely seen corporate animal has evolved rapidly recently, and now herds of yieldcos have trudged into view, listing on London markets and around the world.  They have different antecedents, varying characteristics and no doubt changing futures.  But the one thing they all have in common is that they are boring.  Brilliantly boring.  2014 seems to be the year that cleantech has grown up to become dull.  It’s a great achievement.

A yieldco is a listed vehicle containing mature, revenue generating renewable energy (or other) assets.  It is perceived as low risk by markets, and aims to offer a solid, reliable and unspectacular dividend, perhaps 6%-8% on the float price.  Yieldcos include Brookfield, NRG, AES Corp, TransAlta, Pattern and Next Era Energy.  In the UK, a significant recent IPO was the John Laing Environmental Assets yieldco. The companies aggregate and manage a large group of infrastructure assets (typically several hundred million pounds) using proven equipment and with long term Power Purchase Agreements.

They’re significant because they mark the end of a long transition in renewables and cleantech from a high risk, subsidy dependent, technology innovative proposition suitable only for venture capitalists and pioneers to a solid, mature, steady, low risk proposition suitable for pension funds.  This journey has taken over 20 years, but now renewables are just another asset for a fund manager to add to their portfolio.  The dullness represents a great success.

Of course, the issue now is where capital can be deployed that is seeking a higher risk, higher return profile.  Many investors have developed very profitable businesses through the journey of renewables.  There is currently more capital available than opportunities.  Where can these investors deploy next?  Project finance no longer offers satisfactory returns, and too many investors have been burned by pure cleantech plays to re-enter the VC stage.

An emerging investment space is capital deployed to help the scale up of existing early stage but proven technologies, often through innovative finance or business model structures.  Another area is around making existing assets work smarter, so energy trading plays or monitoring/performance enhancement technologies.  Energy efficiency is a key area – ESCOs in particular have proven very successful in buildings energy efficiency, and there is significant potential in rolling out the approach to other sectors, such as industrial processes.

These new technologies and areas are promising.  The novelty and commercial challenges impact on cost of capital, but offer higher returns. We will see a similar journey as for renewables, from exciting tech start-ups to boring yieldcos.  And the journey offers a new opportunity for good returns.