Alternative Energy
Yield Cos? More like Yield Can’ts!

Alternative Energy
Yield Cos? More like Yield Can’ts!

Bryan Birsic

Last month, Carol Clouse at Institutional Investor reached an interesting conclusion that yield cos – dividend growth-oriented public companies – are not everything they have cracked up to be.

Instead, they have become the financial equivalent of American Idol (RIP); you’re hoping for another champion in Kelly Clarkson, but end up with William Hung, a Ricky Martin train wreck.

Here’s the problem: Despite expectations of 10% to 15% annual returns, they’re actually not much higher than ten-year U.S. treasuries, clocking in at 3%.

Pattern Energy Group (PEGI) has a yield of 4.5%, making it the energy industry’s highest to date.

This disconnect isn’t a death knell for the structure but offers a pause for thought. Yes, yield cos provide a number of benefits: They decrease capital costs, introduce new investors to the renewable sector, and spur financial innovations, among others. If you’re an institutional investor and willing to wait it out as the market matures and expands, then yield cos hold great potential, but you might be waiting a while.

The reality is that you can do better.

Here are two reasons why yield cos are a lazy renewable investment if you’re really looking to benefit from the industry’s growth, and what you should consider instead.

Syphoning Off Risk is Why Your Returns Suck

Yield cos were created to offer a predictable, steady cash flow and de-risk renewable investments.

They work by public companies syphoning off volatile activities - such as development and construction - into separate income streams. This allows investors to receive dividends generated by underlying property performance alone.

Still, it’s important to note that current financing procedures used by the majority of companies in the renewable space take on risk unnecessarily, because they use due diligence processes ill-suited to the industry. It’s like chopping vegetables with a samurai sword. Sure, it will get the job done, but it’s really not the best tool to do so.

Building a model that can more accurately perform due diligence reduces risk in the upfront, ensuring only fully vetted, high quality deals are offered as investment opportunity.

Taking it back to our vegetable analogy, it’s the equivalent of using a mandoline slicer: faster, easier, prettier shaped carrots – a tool designed for the job in hand and that job alone.

A Band-Aid Solution to a Larger Financing Problem

One of the undeniable benefits of yield cos are the reduction of capital costs.

This is a good thing all round, but only certain properties are likely to benefit.

Residential and large commercial are already well serviced, but smaller, viable commercial properties have redheaded stepchild status. Large commercial due diligence processes require too many man hours to be used on projects of a smaller status, and using credit scores instead, as is done with residential, is a bad proxy for underlying market performance. The result of this is that yield cos help raise capital for large commercial properties and not for this middle section, leaving potential investments on the table.

An investment vehicle created to increase access to only area of a market is not a solution – it’s an interim fix until something better comes along.

While yield cos and the conversations they generate about the future of renewables and investor appetite are welcomed, they are not a silver bullet for renewables. And, as they tarnish slightly in the eyes of the market, one hopes this makes way for something new that truly tackles deep-seated industry issues to rise up instead.

What to Do?

One interesting to watch is the relationship that develops between yield cos and the underlying physical assets. In real estate there is a canary in a coalmine relationship between REITs and property values. If the same is true for yield cos, a maturation in prices could indicate an impending renewable energy boom.

Ultimately, yield cos are training wheels for the renewables sector. Get familiar with the territory and any risks, but don’t get permanently attached. Tech and industry innovations are heralding a growth spurt in renewables paving the way for opportunities in alternatives, private equity and venture capital that could dwarf the returns of yield cos, don’t be left racing to catch up.

Bryan Birsic

Bryan Birsic is the co-founder and CEO of Wunder Capital, a solar investment and financing firm, which offers an accessible solar portfolio for any accredited investor. Previously Birsic has held positions at Village Ventures and Bain Capital.

Twitter: @WunderCapital 


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