YieldCos vs. IPPs

I was catching up with my saved articles and came across this analysis of RE YieldCos and listed IPPs.

Even though the article focuses on asset management in the new rate environment, I read it as a lesson on storytelling of perceived value.

The article states that YieldCos have enterprise value to EBITDA multiples trading at an average of 8x, well below the c.12-13x multiples of independent power producer (IPPs). One of the reasons given is that investors are "more attracted to the more comprehensive set of services provided and growth offered by the IPP model."

So I started to think what the differences really are. YieldCos and IPPs have very similarly priced off-take contracts in place. These were made during the low interest rate environment. The cashflow from projects must be rather similar. Rising cost of debt concerns both.

The fundamentals of operating model don't seem that different either. Some of the IPPs may be more active operators with in-house technical and project management teams. But many IPPs buy these services outsourced. If there is capital available, both YieldCos and IPPs are able to invest into new project pipeline with renewed terms, reflecting the current rate environment.

So the answer must be with the perceived view of the "enabling growth" angle. The growth is built on having a good project pipeline and availability of capital with reasonable terms.

Here the YieldCos seem to have as a disadvantage. The investment story (and contractual commitments) that has been sold to investors is about maximising dividends. As the rates have gone up, the "YieldCo shares were trading at ranges from a 15-40% discounts to net asset value (NAV)" in November 2023. This makes raising capital for new investments very difficult, as the dilution for current shareholders is heavy.

IPPs have a different investment story, story of growth. Instead of paying sizeable dividends, they frame their story as "building future growth". Even though their portfolio of projects (and the cashflows from them) is not that different from the YieldCos, they are better able to adapt to the changed rate environment.