Growing wind services market offers growth avenue for private equity firms

June 2015 | EXPERT BRIEFING | PRIVATE EQUITY

financierworldwide.com

Since 2006-07, new wind markets have emerged in Eastern Europe due to high potential and the favourable policy scenario. These markets, nearly 10 in number, collectively represent a significant opportunity for private equity (PE) investments.

Market for wind services is growing continuously

The wind industry has grown more than 20 times in the past two decades, with installations reaching approximately 370 GW in 2014, up from only 17.4 GW in 2000. This tremendous growth in installations has in turn created a huge market for wind farm maintenance services. Traditionally, turbines are serviced under warranty contract by turbine OEMs for a few initial years. Assuming a standard five year warranty period, approximately 160 GW of the global wind capacity is expected to be out of warranty in 2014. Further, more than 40 GW of capacity is expected to come out of warranty every year up to 2020.

Turbine OEMs are leading the services market but ISPs are getting preference

The turbine service market has traditionally been dominated by turbine OEMs, mainly due to their warranty period and technical knowledge. However, as the market is maturing and fleet is coming out of warranty, many localised independent service providers (ISPs) have emerged into the market, offering a cost effective alternative to turbine OEMs. They are either specialised service providers or component OEMs. The success of ISPs, especially in mature and open markets like the US, Spain and Germany, is visible from their revenue growth in recent years. For example, Deutsche Windtechnik, a Germany based ISP, has seen a growth of approximately 32 percent in the past five years with revenue reaching around €70m in 2014.

First round of PE investments in ISPs has proven to be effective

This growing market has already seen PE investments in several large ISPs of Denmark, Germany and the US since 2008. For example, in 2010, Upwind raised approximately €27.2m from Kleiner Perkins Caufield & Byers and Mission Capital Group. Polaris Private Equity, in 2012, acquired a majority stake in Connected Wind Services. Parcom Deutsche Private Equity, a subsidiary of ING bank, acquired a majority share in Availon in 2008. These investments have proven to be effective as revenues of Availon and Connected Wind Services have nearly doubled.

Volker Hichert, who represents the interest of Availon owner Parcom as managing director, commented: “Availon has exceeded all our targets to date. Our expectation was 20 per cent annual growth – it has been more than 30 per cent.”

Eastern Europe expected to emerge as the next frontier for PE investments

As previously noted, since 2006-07, new wind markets have emerged in Eastern Europe due to high potential and the favourable policy scenario. These markets, nearly 10 in number, have collectively added approximately 8.2 GW since 2006. Nearly 80 percent of this capacity is concentrated in Poland and Romania. The growth trend is expected to continue in the coming years; for example, installed capacity in Poland alone is expected to reach 6.6 GW by 2020, according to Poland’s National Renewable Energy Action Plan.

To tap this opportunity from services, new ISPs are expected to emerge, as was the case in the now mature markets of the US and Spain, where the number of ISPs increased as the installed base grew and more capacity came out of warranty. ISPs from established markets like Germany and Spain have already started moving into nascent Polish and Romanian markets. For example, Deutsche Windtechnik entered the Polish market around 2014 and has been successful in getting maintenance contracts from players like RWE (197 MW in Poland). Availon, another leading ISP in Europe, is also present in these emerging markets.

Growth companies will be attractive for PE firms, but what are these growth companies?

There is no doubt that the growing service market will drive the growth of wind service providers. However, this ‘growth’ must be carefully assessed by PE firms in the screening process itself to identify the targets. Gazelle companies may not necessarily be the ones that will grow in future. In recent years, the landscape of wind services has been shifting from low value, labour based services toward high value, asset optimisation services.

In addition, services like component remanufacturing, up-tower repairs and data based performance optimisation are increasingly becoming of high value to asset owners. Hence, in order to grow, an ISP must have additional attributes beyond growing revenue and a strong customer base.

Risks of an emerging market exists but impact would be in the long term

Like every emerging market, uncertainties on future capacity additions are present, of which both ISPs and PE firms should also be aware. EWEA, in its report on wind growth in Eastern Europe, identified the biggest risk as lack of long term policy support. Christian Kjaer, head of the lobby at EWEA, in 2013 said: “Some countries such as the Czech Republic, Hungary and Bulgaria are without stable renewable energy legislation. Investors and banks will withdraw unless governments put in place long-term renewable energy policies.”

This would mean slow growth of out-of-warranty market size in the region post 2020.

Sidharth Jain is director and Rahul Kapoor a senior analyst at MEC Intelligence. Mr Jain can be contacted on +91 (124) 480 2700 or by email: sidharth@mecintelligence.com. Mr Kapoor can be contacted on +91 (124) 480 2700 or by email: rahul@mecintelligence.com.

Sidharth Jain and Rahul Kapoor

MEC Intelligence