Avendus Capital

Making a mark in the renewable energy M&A space

Prateek Jhawar, Executive Director and Head, Infrastructure and Real Assets, Avendus Capital

Established in 1999 in Mumbai, Avendus Capital currently has a presence in 11 cities across four countries. The company provides financial services, focusing on creating customised solutions in the areas of asset management, credit solutions, investment banking and wealth management. Its two wholly-owned subsidiaries are Avendus Capital Incorporation, New York and Avendus Capital (UK) Private Limited, London. The subsidiaries offer merger and acquisition (M&A) and private equity services to clients. In an interview with Renewable Watch, Prateek Jhawar, executive director and head, infrastructure and real assets, Avendus Capital, talks about various topics including the company’s exposure in India’s renewable energy sector, key trends, and the organic and inorganic growth market. He also shares his perspective on the return expectations of investors, structural issues in the sector and the uptake of innovative sources of finance. Edited excerpts…

When did Avendus Capital enter the renewable energy market?

In 2008-09 we started seeing activity pick up in our energy vertical. Initially, our activity was focused on thermal power projects. For our clients in this space, we raised close to $500 million from various inves­tors. By 2012-13 we realised that renewables were becoming more mainstream and investors were willing to commit long-term capital. To this end, Avendus Capital created a dedicated team for the clean en­ergy industry. Initially, our focus was more on new platforms as not many ass­ets were there to trade or invest in. Also, the scale of projects was smaller in the range of 20 MW-100 MW capacity. In the past three years, the capacity has increased significantly.

It is key to not only understand the sector in depth but also to maintain a wide network of international investors. Currently, we know close to 150 global companies and funds that are interested in investing in this space. In India, there are around 25 such companies. We expect many more players to enter the Indian market in the future.

What have been the key deals that the company has worked on in the renewable energy industry?

One of our first experiences in the renewables space was with Sunborne Energy. It was an early entrant in the space, backed by marquee VC investors, looking to raise growth capital. Over the years, we have worked on various assignments in the power value chain for market leaders such as the Mahindra Group, Torrent Group, DB Power, JITPL and more.

In the renewable energy space, we partnered with early movers in the sector such as Ecoren, Nupower, OGPL, Bermaco En­ergy, Cleanmax and more. The initial the­me and idea for most of the players was to on-board private equity investors for growth financing. Though the industry and investor set has evolved drastically over the years, they continue to favour long-term yield investors. Recently, we assisted Ayana Power to purchase Adyah Solar Private Limited from ReNew Power. Adyah Solar had developed and owned a 434 MWp of solar power project in Karna­taka. We were also advisers to the Mahin­dra Group, when they wanted to monetise their assets for the first time and ended up selling projects to CLP India. We have also been advisers to Norfund, the Nor­wegian investment fund, and as­s­is­ted them to invest $100 million in Four­th Partner Energy.

What have been the key shifts in the renewable energy sector in the past few years?

The shifts in the market can be put in two buckets – technology and financing. In terms of technology, the key change is that renewables have become more mature. It is cheaper than grid parity when power is being generated, but at par with other sources of energy if storage is included.

In the next five years, renewables’ deployment will be at the current scale, that is, 20-30 GW of greenfield projects. Of this, around 70 per cent will be in favour of solar projects. We have observed a renewed trend of investors willing to invest in hydro­power in a bid to assist grid balancing.

Also, a major trend, going forward, will be to achieve round-the-clock power. To this end, many hybrid projects will be set up, including solar-wind, renewable-gas and re­newable-hydro. However, such projects will remain mainstream in the next three years. After five years, it is expected that st­orage projects will start becoming main­st­ream. The storage space will see many te­chnological developments. The cost of this technology is a key concern at present.

For the end-use space, the key change will be in the solutions provided by developers of C&I renewable energy projects. Going forward, it is expected that regulations in this space will ease up in a bid to make the segment more flexible. In addition, green hydrogen too will become main­stream for end-users. Apart from the­se, domestic manufacturing of solar components will pick up and this will be a key market in India. Investors will be eager to deploy capital in all these segments.

In terms of financing, we will continue to see more long-term investments and bigger balance sheets getting attracted to In­dia. The market has started differentiating between owning operational projects for capturing yield versus the risk of de­veloping projects. In both, more institutional capital will come in. The role of de­ve­lopers and asset owners will be clearly identified.

I think local debt is competitive and a lot of capital is attracted from bond markets for renewable energy projects in India. Structured debt, which was used to fi­n­ance equity, has become expensive. Ac­c­ordingly, there is a shift towards long-term equity capital, which is less expensive. This long-term equity is being used for project development.

According to you, what is the future outlook for organic and inorganic growth in the rene­w­ables industry?

Over 100 GW of renewable energy assets have already been commissioned. The country will keep on creating over 20-40 GW of assets every year so that organic growth is substantial. In­or­ganic growth ta­k­es place because of inventory, as assets are built for a period of 25-30 ye­ars. Given today’s inventory of 100 GW of re­new­able energy assets and an investment horizon of five to seven years, we can expect 15-20 GW of assets to be traded every year. In the next 5-7 years, the inorganic gro­wth will reach a 30 GW-40 GW market size.

What concerns do investors have from India’s renewable energy sector, especially in operations and maintenance (O&M)?

I don’t agree that investors see O&M as a risk. And if they do consider it a risk, then why are the return expectations going down? If the risks are high, the return ex-p­e­ctations should go up. If we consider an organic and inorganic growth market of total 40 GW with Rs 10 million to be deployed per 1 MW, then, around Rs 400,000 million of capital is ready to be deployed every year. Which market provides that kind of opportunity?

The ownership of assets is becoming more and more institutional. The industry has also attracted many highly qualified professionals. With this, the quality of ass­ets is also improving. The return ex­pec­tation going down is a win-win situation for all industry stakeholders. It is good for end-consumers who will get cheaper power and for developers as well, as they will be able to sell their assets to someone who is expecting lower returns on the product. Lower return expectations also mean that the renewables market in India is more robust.

What are the key structural issues in the re­ne­wable energy sector?

The payment risk from distribution companies is a key structural issue. The key issue with financing is that industry stakeholders are not sure about underwriting. At times, industry stakeholders are worried about aggressive bidding and the low margin of error of the industry. Finance-related issues also result from regulatory changes as is the case in duty changes that change module prices.

Is the adverse impact of Covid-19 still present in the industry?

No, it is not present now. There were some issues in the initial two to three months. Post that, the renewables sector has pick­ed up pace. In the past year, large-scale deals have been finalised and record low tariffs have been discovered. I don’t see any risk of Covid-19 in the sector now.

What will be the uptake of innovative sources of finance?

Most innovative sources of finance have become mainstream now. For a source of finance to be innovative, the key is to have the right amount of capital to be linked with the right asset with the right expectations. Yes, more foreign capital will come into the Indian market through green bo­nds. Going forward, more yield compani­es will be formed to own operating ass­ets, most likely in the form of InvITs.

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