Renewable energy has become an established asset class within European equity capital markets but within the sector the nascent hydrogen market is tempting investors with its growth potential, say sources speaking to the ECM Pulse.

Last week, Nel [OSL:NEL], the Norwegian firm focused on the production, storage, and distribution of hydrogen from renewable sources, priced a USD 171.65m primary capital raise to fund an increase in its production capacity.

Nel’s deal is its largest follow-on transaction to date and was executed in response to increasing investment opportunities, said a source close to the deal. Who added that the growth story in hydrogen drove investor demand.

Wilhelm Flinder head of investor relations at Nel said that the company was able to utilise a newly opened issuance window, and its long track record as a listed company, to execute the deal. He added that the deal dynamics were helped by the increasing relevance of the asset class and that the world cannot get to a zero-emission state without hydrogen.

“Investments must be made, which will benefit companies such as Nel selling the technology needed to enable this energy transition,” he added.

In the first quarter of 2022, there have been five hydrogen transactions worth USD 368m, making it the second busiest quarter ever for the asset class by deal count and the third best in terms of deal value.

Sources speaking to the ECM Pulse say the asset class remains in its infancy but, like other energy-linked asset classes, is seeing renewed impetus since the Russian invasion of Ukraine.

Hydrogen also offers a fundamentally different investment case to traditional renewable energy stocks, which trade like utilities and offer income through regular dividend payments.

Hydrogen technology is far more like early-stage pre-revenue tech companies in that investors are buying the asset class, and the companies within it, based off future potential rather than the practical application of its technology now.

An investor said his firm was increasing its focus on hydrogen technology as an early-stage investment and had equity analysts looking at both blue and green hydrogen and the practical application of both technologies. Blue hydrogen is produced through the utilisation of natural gas and green hydrogen through water electrolisation.

“It is very much on the horizon of investment opportunities we are now looking at,” the investor said.

Hydrogen IPOs return

While several renewable energy companies have some operational focus on hydrogen technology, there are still relatively few pure-play listed operators with the liquidity profile that investors want.

Sources say several hydrogen companies were exploring an IPO last year but withdrew from the pipeline when sentiment turned against renewable energy listings. But investors remain keen on the asset class at the right price.

“We had a wave of potential IPOs in the space early last year that went away, but it is a space that people have to look at given the energy transition,” said a second investor who already has some relatively sizeable investments in the sector.

Italian hydrogen producer DeNora is contemplating an IPO in 2022 with a potential valuation of EUR 5bn. In Germany, Thyssenkrupp [ETR:TKA] is still assessing the possibility of an IPO for Nucera, its hydrogen technology arm, possibly valued at up to EUR 6bn.

“One of the IPOs we didn’t do last year was a hydrogen deal, which we pulled because of ESG investor fatigue, but there is now plenty of appetite given the amount of work that needs to be done on energy transition and Europe’s energy independence plans,” said an ECM banker.

Much of the funding for hydrogen technology is coming from private markets, and there is significant competition from private equity for the best assets, a second banker said.

However, there are opportunities for public markets investors to invest in hydrogen, either through listed investment trusts that own hydrogen producing assets, or through pure-play listed-hydrogen technology companies.

Across the five hydrogen ECM transactions that have been executed in 2022, there have been two IPOs: Haffner Energy SA [EPA: ALHAF] and Clean Power Hydrogen Plc [LON:CPH2], and three follow-on deals for listed companies, the largest of which was the Nel capital raise.

According to Dealogic’s likely-to-issue data, several hydrogen technology companies feature among the 100 likeliest issuers in energy and utilities. These include Aker Clean Hydrogen [OSL:ACH], Cortus Energy [STO: CE], Horisont Energi [OSL:HRGI] and Hydrogen Refueling Solutions [EPA: ALHRS].