UPDATE 1-Terra Firma plans up to $5 bln energy fund-source

* Terra Firma joins with China Development Bank -source

* Wants $3bln-$5bln for new fund -source

* Will target renewable energy in China, globally -source

(Rewrites first paragraph, adds details on fund, renewableenergy)

By Simon Meads

LONDON, Oct 8 (Reuters) - Terra Firma , the privateequity firm led by high-profile dealmaker Guy Hands, is planninga multi-billion dollar fund with a Chinese bank to invest inrenewable energy, underscoring its faith in green power despitewaning enthusiasm in some markets.

The partners are expected to start raising between $3 and $5billion in the next few months, with China Development Bank

to put an as-yet-undefined amount into the fund, aperson familiar with the situation said.

Terra Firm declined comment.

After suffering the bruising loss of music group EMI toCitigroup last year after Terra Firma defaulted on loansfrom the lender, the new fund presents a chance for Hands torepair Terra Firma's reputation by refocusing on coreinvestments in areas including energy and infrastructure.

Terra Firma already owns three renewable energy companies -landfill gas producer Infinis, U.S. wind farm group EverPowerand Italy's leading solar power generator Rete Rinnovabile - andhas done successful deals in utilities and waste management.

Its latest planned fund indicates confidence in the growthof renewables at a time when the costs of solar and wind powerhave prompted some governments to reduce subsidies as theybattle to balance their budgets.

Such cuts have not much dented the investment pictureoverall and global spending on renewable energy reached $257billion in 2011, according to a report according from the UnitedNations Environment Programme and the Renewable Energy PolicyNetwork for the 21st Century, nearly the total in 2007.

A number of private equity firms, including Blackstone

and KKR , and their mid-sized rivals Bridgepoint

and HgCapital, have invested in renewable energydeals. SAFER DEALS

China Development Bank will market the new fund to potentialinvestors in China, while Terra Firma will seek backers inEurope and the United States among traditional private equityinvestors and infrastructure fund investors, the person said.

Terra Firma, whose last investment was the 825 millionpounds ($1.3 billion) purchase of care homes operator FourSeasons in April, put plans to launch a buyout fund on iceearlier this year after scant interest from its private equityinvestors.

The latest move would focus Terra Firma's new investments onpotentially safer deals, after the firm lost 1.7 billion poundsof its own and investors' money on EMI, which it bought in ahighly-leveraged deal at the peak of the buyouts boom in 2007.

But it could also offer lower-return deals than the industryhas targeted in the past.

Hands has been one a of a growing number of private equityexecutives to warn that annual returns from private equity willbe lower than the 20 percent-plus which buyout houses promisedbefore debt markets seized up.

In the current environment, investors should be happy with a15 percent annual return, TPG co-founder David Bonderman toldthe Asia SuperReturn conference in September.

That's bringing private equity returns closer to those ofinfrastructure groups that typically promise annual returns ofbetween 10 and 12 percent, from relatively safe long-terminvestments.

Terra Firma's new venture will look for investments in Chinaas well as internationally, the source said.($1 = 0.6176 British pounds)

(Editing by David Holmes)

((simon.meads@thomsonreuters.com)(+44 20 7542 9969)(ReutersMessaging: simon.meads.thomsonreuters.com@reuters.net))