Focus: the solar energy industry, and its impact on institutional investing

Focus: the solar energy industry, and its impact on institutional investing

In speaking with a broad range of debt and equity investors each week (including traditional private equity, family offices, and independent sponsors), we’re always impressed by new trends.  While many firms continue to have success with an “industry agnostic” strategy, other firms are focusing on narrow industry segments to establish a specialization in a particular field.  One such specialization of late is solar energy.

The solar energy industry is often thought of as being dominated by the photovoltaic (“PV”) panels, which are the most obvious component of a system and which are often manufactured in Asia.  The industry includes many other equally important components, however, which depend on the specific installation, configuration, and technology involved in a project.

Total solar PV installations declined in 2017 due to weakness in the California and Northeast US residential markets.  Despite the year-over-year decline (off a very strong 2016), more than 1.6 million solar installations have been completed in the U.S., and non-residential demand remains strong.

According to GTM Research, the cost to install solar has dropped by more than 70% since 2010, leading the industry to expand into new markets and deploy thousands of systems nationwide.  This has created more demand for solar energy components and, with this demand and the development of improved technology, new entrants are joining the market with many types of solar-related services and components.  These developments encompass energy storage methods as well as solar cell efficiency which reduces cost and increases application.

Financing for solar products also remains strong.  According to Pitchbook, 36 private equity firms report specific focus on solar energy, with many more having interest as part of a broader mandate (for example, general manufacturing).  Growth equity for the industry comes from a variety of new sources in a multitude of unique structures including majority and minority ownership.  Further, private debt funds have emerged over the past 5-10 years to fill a gap created by increased financing need and sometimes-rigid bank lending criteria.

Because companies in the solar industry tend to be small and entrepreneurial, 33% of the solar transactions in 2017 came from venture capital and 29% came from strategic (corporate) sources.  Surprisingly, the proportion of transactions coming from private equity firms in 2017 was only 13% (source: Pitchbook).  We expect private equity participation in the solar market to increase, as the smaller companies combine to form larger firms selling to larger customer bases.

Investors’ growing interest in the solar industry, as evidenced by our anecdotal experience of late, should accelerate consolidation in an already growing segment.