When regulation blocks the route to exit

A 1998-vintage fund from European private equity firm Doughty Hanson has yet to be fully realised because of its partial ownership of Danish turbine manufacturer LM Wind Power, which is also co-owned by another, more recent, Doughty Hanson fund.

Doughty bought into what is now LM Wind Power in 2001, followed by a 2008 bolt-on acquisition. That means that the $2.66 billion Doughty Hanson III Fund has been an investor in LM Wind Power for the last 13 years and counting. Fund V, a 2007-vintage, is the other owner of LM Wind Power, having invested €460 million in 2008.

Thirteen years is not the kind of holding period private equity is typically known for, even taking into account that it, like everyone else, has had to adjust to the most severe financial crisis since the Great Depression.

But while Fund III has been able to steadily divest its other assets following the worst of the 2008 financial crisis – a Spanish bus firm last year; a tin-can maker in 2012 – LM Wind Power remains stubbornly entrenched in its portfolio.

In some ways, that’s bitterly ironic, because Doughty’s investment in LM Wind Power should be the kind of good PR story private equity GPs dream about. Since the firm took ownership, LM Wind Power has opened manufacturing facilities in China, India, Poland and Brazil, doubling the number of countries it operates in. It has also cut procurement and manufacturing costs by €100 million and created more than 2,000 jobs. Industry trade body the European Private Equity & Venture Capital Association has profiled the deal, pointing out how Doughty’s ownership has transformed the company into “the world’s leading manufacturer in the renewable energy space”.

All of which raises an obvious question: are businesses servicing the renewables market inherently harder to exit? When I tweeted this question in November, I received this response from Roberto Leigh, a partner at SUMMA SAFI’s private equity fund, which invests in Peruvian energy assets: “Yes, if [you’re] invested in a turbine [maker]/module supplier. No, if [you’re] invested in projects that are now operating.”

So what makes a company like LM Wind Power a tough sell? Regulation, that’s what.

A read through LM Wind Power’s annual reports is enlightening. In 2010 and 2011, the message was largely optimistic, with regulatory uncertainty starting to creep in in 2012. Still, annual sales hovered between $700 million and $750 million. Then in 2013, the bottom fell out, with the company pointing out that strong economic and political headwinds led to the first contraction in the size of the wind market in 14 years, resulting in annual sales of $550 million.

What happened in 2013? Well, in the US, for example, the end of a federal subsidy gutted the wind market from over 13 gigawatts (GW) installed in 2012 to only 1GW installed in 2013.

If you’ve spent the better part of a decade growing a company to global leadership status only to have political decisions suddenly reconfigure the size of your key markets, it’s natural that you will have to change tack and hold off on your exit. (And understandable if you’re hesitant to back such a business in the future.)

With demand strongly correlated with political decisions, political risk may end up trumping the business cycle for private equity investors servicing the renewables market.