Terra Firma Capital May Invest Almost $700 Million in Clean Energy in 2011

Guy Hands’s Terra Firma Capital Partners Ltd. may invest as much as 500 million euros ($692 million) in clean energy this year as low interest rates and rising oil prices make the industry more attractive.

The British private equity firm’s founder said he earmarked 300 million euros to 500 million euros for renewable energy in his TFCP III fund, which raised 5.4 billion euros in 2007. Hands, 51, is looking at onshore wind projects and anaerobic digestion technology, which converts waste to energy.

“Clean energy was bubble-like in the U.S. about five years ago,” Hands said in an interview in the Channel Islands. “Today, our view is that people have gone too much the other way and are too conservative. Without doubt, clean energy will increase as an investment type over the next five to 10 years.”

Hands, a former Goldman Sachs Group Inc. executive who built Terra Firma into one of the U.K.’s most prominent funds, has taken stakes in clean energy since the start of the credit crisis three years ago. His leveraged buyout fund lost almost a third of its value when Citigroup Inc. wrested control of the EMI Group Ltd. record label. Hands said his “green energy” investments have returned four times what he put into them.

Speaking from his office in Guernsey between the U.K. and France, Hands said cheap financing is bringing together buyers and seller of projects so “there will be a vast increase in the amount of energy derived from low-carbon sources.” Should Middle East unrest push crude prices higher than the $103.41 a barrel it reached in the U.S. last week, that may prompt regulations benefitting alternatives to fossil fuel.

Oil’s Impact

“If it goes on for a year and the situation develops adversely and oil prices are higher for a longer amount of time, that will clearly start to affect economic decisions,” Hands said. “If it became a feature of the next five to 10 years, it could have a pretty major effect. Having control over your supply has a lot of value.”

West Texas Intermediate crude futures in New York rose 58 cents a barrel to $100.21 this morning after closing at the highese prices since September 2008 yesterday.

Terra Firma, which has completed transactions worth 43 billion euros since it formed in 1994, invests in clean energy as part of a general fund. The funds for clean energy will come from the 1 billion euros yet to be allocated in the TFCP III. It also buys stakes in housing, agriculture and entertainment. The firm has invested 13 billion euros of its own equity and distributed 12 billion to clients, with an internal rate of return of 40 percent since then.
Wind Purchases

It paid $143 million for the British wind turbine operator Novera Energy Plc and $350 million for Everpower Wind Holdings Inc. in the U.S. in the last two years.

“We are not compelled to invest in clean power, and deals have to stack up against our other investments,” Hands said. “It’s about getting into the cycle and investing when it’s economically attractive.”

Terra Firma already produces 10 percent of the U.K.’s electricity from clean sources.

“That’s something that people miss,” he said. Terra Firma has gained prominence with EMI, the Beatles record label that Citigroup wrested control of from his private equity firm last month.

Terra Firma may buy two dozen smaller generation companies or a few bigger ones and is evaluating about 20 wind projects, Hands said.

‘Opportunity’

“We’re seeing a significant amount of opportunity, and it’s a question of finding the ones we like,” he said. Terra Firma also has gas and hydro assets.

It’s four to six weeks from completing an agreement to buy the solar energy company Rete Rinnovabile Srl from Terna SpA, Italy’s grid operator, for as much as 670 million euros. That could be a platform for further solar purchases, Hands said.

Quentin Stewart, Terra Firma’s financial managing director, said the firm is “starting to think carefully through anaerobic digestion” because “there’s a potentially interesting shift” in the technology and financial incentives on offer in the U.K.

On wind, he said, Terra Firma focuses on buying cheap assets so incentives or subsidies aren’t so crucial. It’s focusing on projects onshore as the industry focuses on developing bigger offshore projects.
Interest Rates

The plans are predicated on borrowing costs remaining low, though Hands didn’t specify how cheap they need to be.

“If there’s a pickup in interest rates, buyers will run for the hills, and sellers will be stuck with assets they cannot sell,” Hands said. “It’s a fragile market, but it’s a better market than it’s been for a few years from a transactional point of view.”

The clean energy industry attracted record investment of $243 billion in 2010, according to Bloomberg New Energy Finance. Hands said his plans don’t require changes in government policy, though he expects some form of carbon tax to emerge in the U.S.

A national carbon cap-and-trade bill backed by President Barack Obama to curtail emissions from burning fossil fuels didn’t get enough support to pass last year.

In that market, Terra Firma bought Everpower Wind, a New York-based developer, in August 2009. It was a way of entering an industry where no capital flowed after the financial crisis, Stewart said.

Debt Expense

Late last year, Terra Firma cut debt expense at Everpower’s Pennsylvania-based Highland wind farm by refinancing a high-cost loan it agreed to around the time Lehman Brothers collapsed in 2008, Stewart said.

Terra Firma intends to use Everpower as a platform to buy distressed wind farms assets and to build a portfolio business, he said.

The company has avoided investments in Spain. The solar market there cut subsidies as the government sought to reduce electricity costs. “We didn’t like the market structure, and I think that’s proved to be right,” Stewart said.

It bought Infinis Plc in 2003 when it was an under-managed 10-megawatt waste-to-energy company that no one thought worth anything, Hands said. It now produces almost 500 megawatts of renewable power.

“On a mark-to-market basis, our green energy investments have returned about four times their initial investments, which is pretty decent,” Hands said.

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