Goldman Sachs Wants Do-Over on Solar Model That Once Boomed

(Bloomberg) -- More than three years after Wall Street soured on an investment model for renewable energy, Goldman Sachs Group Inc. is trying to reinvent it.

The firm has launched a so-called yieldco, which buys clean-power projects and pays investors dividends from electricity sales. Goldman has sketched out plans to take the company public in the next few years.

The effort is the latest sign of a comeback for a business structure that fell out of favor in 2015 as clean-energy giant SunEdison Inc. began careening toward bankruptcy after a multibillion-dollar acquisition binge. Goldman was an early champion of the model, and as demand for solar surges the bank is betting a rejiggered version will appeal to investors hungry for steady returns.

“This is a world that continues to be yield-starved,” Jon Yoder, head of the Goldman Sachs Asset Management renewable power group, said in an interview.

The move feeds into Goldman’s push for more stable, recurring, fee-based revenue as it leans away from the historically strong trading and investment-banking operations that helped build it into a powerhouse. Goldman has made it a priority to grow its alternative-asset management business and is taking steps to bring disparate investing efforts under one roof to spur growth.

Goldman has raised about $4 billion of equity and debt for the yieldco, with about $100 million from the bank and its employees. It has amassed 1 gigawatts of solar arrays, enough to power about 725,000 homes. Most have long-term contracts to sell power to investment-grade buyers, including schools, corporations and federal, state and local government agencies.

Yieldcos first emerged more than six years ago in the U.S. and became major growth engines for renewable power. The idea seemed simple: developers could sell solar farms to publicly-traded yieldcos they controlled, then use the cash to build even more. Yieldcos, meanwhile, used revenue from electricity sales to pay shareholders dividends. As yieldcos bought more plants, they promised dividends would continuously grow.

Investors liked the story. They could support clean energy while reaping returns guaranteed by long-term power-supply contracts. Eight North American yieldcos went public between 2013 and 2015.

Then came the collapse of SunEdison, which relied on two yieldcos to finance its dizzying buying binge. As the company expanded, questions arose about its governance, and investors began to doubt whether the yieldcos could continue to pay rising dividends. Then renewable energy development slowed, and Wall Street cooled on solar stocks. No major yieldcos have gone public in the U.S. since 2015.

QuickTake Q&A: Yieldcos, Fuel for Energy Projects, Draw Scrutiny

Rising Again

Now investors are warming to solar again. A global solar index maintained by Bloomberg is up about 20% in 2019 after declining four of the last five years. And shares of the four biggest publicly traded U.S. yieldcos are up an average of 30% this year, with TerraForm Power Inc. and Pattern Energy Group Inc. up about 50%.

One thing that tripped up early yieldcos was an inherent conflict of interest: The developers selling power plants to yieldcos were often their parent companies. Consequently, Wall Street will watch closely to see how any new yieldcos will be structured, said Sophie Karp, an analyst at KeyBanc Capital Markets Inc.

“Investors would be super-focused on governance issues,” she said in an interview.

Goldman will buy assets from unrelated companies, and it won’t be marketed as a huge growth engine like earlier yieldcos, Yoder said.

“This isn’t a growth stock -- this is a dividend play,” he said.

To contact the reporters on this story: Brian Eckhouse in New York at beckhouse@bloomberg.net;Sridhar Natarajan in New York at snatarajan15@bloomberg.net

To contact the editors responsible for this story: Lynn Doan at ldoan6@bloomberg.net, ;Michael J. Moore at mmoore55@bloomberg.net, Joe Ryan, Pratish Narayanan

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