Warren Buffett has invested in solar power plant projects. Could a similar strategy work for an average bond investor as the search for yield alternatives heats up?
When Solyndra was still a headline term and solar manufacturers were failing, Buffett's MidAmerican Energy stepped up and acquired two large-scale solar power projects in 2012.
Buffett's first big solar buys were dubbed a "shot in the arm" for the industry, but some analysts viewed the acquisitions in a different, though still positive, light.
Buffett's researchers analyzed the long-term nature of power purchase agreements (PPAs)—requiring an "offtaker"—typically a utility—to buy the power generated from the project at a predetermined rate over a period of years, and saw an investment opportunity with an annuity-like income stream and risk profile they liked.
Traditional fixed-income investing, even with a delay in the taper timeline, remains in the doghouse in a rising interest rate environment, and that has led to the proliferation of bond replacement strategies shorter in duration and taking greater credit risk, and in some cases, risks noncorrelated to interest rates. A 10-year annuity with a steady stream of income and a competitive yield is also an option, if an investor is willing to invest like Buffett in solar power projects. You don't need billions like Buffett, though, and you don't need to own the projects.
Peer alternative energy lending firm Mosaic has attracted attention in its first year of operation for its unique alternative energy project funding model, which allows individuals to invest as little as $25 in solar power projects and become Mosaic note holders—the note is unsecured debt with the underlying loan senior secured debt backed by the solar project asset. Its notes have ranged in yield from 4.4 percent to 6.4 percent with five- to 12-year terms.
(Read more: Barbarians at the bond fund gates)
It sounds like a bond replacement strategy, at as much as double the 10-year Treasury yield for most of its recent projects, albeit with some unique risks:
- The notes are longer term than many credit investors want
- They are illiquid, lacking any secondary market
- The owner of the solar project has to rely on income payments from the solar project's customer (though this is arguably no different than a corporation defaulting on debt)
- There's also weather risk—to mitigate against the risk of a solar project being damaged by a storm, Mosaic requires that there be sufficient property damage insurance to cover the cost of repairing the project
- There is technology risk associated with solar panel performance
Due diligence on solar investment projects is a nascent field, too, but that risk is part of Mosaic's pitch: It's one of the few nonbank companies to offer such expertise—the company says its project finance team has combined experience totaling 50 years and $1 billion of transaction volume, and a bank-like due diligence process stemming from a CIO who led Union Bank's solar project finance team..
When Mosaic recently conducted a survey of investors, the search for yield that is at a fever pitch in the fixed-income arena was not high on the list of reasons the company's notes were selling out—75 projects have been fully funded in less than a week, while three August projects raised $425,000 in 24 hours. The No. 1 reason for investment was transparency—investors know exactly which project their money is invested in. That was closely followed by environmental impact—investors can measure all the carbon saved on the Mosaic website. Investment returns were not among the primary investment triggers—in fact, some Mosaic investors have said they will take less return for greater social impact when faced with the choice.
(Read more: The bond market's ticking time bomb)