Venture capital investments in solar have slumped to a record low just as funding booms for third party lease companies, according to a report out today.

Mercom Capital's Solar Funding and M&A Report found that only $126 million was invested in solar in the first quarter of this year, compared with US$220 million last quarter and US$324m in the first quarter of 2011. This is the second lowest quarter for VC funding since 2008.

Raj Prabhu, CEO of Mercom Capital Group, said: "What we're seeing are the effects of overcapacity, so many companies going out of business and thin film struggling. With PV prices falling 60%-65% over the last couple of years and the technologies that VCs have bet on like thin film failing, nobody is really challenging crystalline silicon at this point. Either way you look, it's not pretty.

"VCs have been burned and have become very cautious and the only factor is that you're seeing some funding towards the downstream, like lease companies such as OneRoof and Sungevity."

Although deal flow remained steady at 26 in the first quarter versus 27 deals in Q4 2012, the average deal size was US$4.9 million for the quarter.

But downstream, the trends have been far more positive, especially for solar lease companies. OneRoof Energy’s US$30 million round and Sungevity's US$28 million funding from Brightpath Capital Partners, Lowe’s, Vision Ridge Partners, Craton Equity Partners and Eastern Sun Capital Partners.

Prabhu said: "Third party lease guys are very bullish. But we've got to watch and see. SolarCity has only been public for a few quarters. It's not like they are making a whole bunch of profits either. We have to carefully watch how they execute, will they make profits, what happens after the ITC expires in 2016. The next two or three years they may get to a level where they can do without subsidies but let's wait and see."

Rounding out the Top 5 were CSP company eSolar, now integrating molten salt storage technology, which raised US$12.8 million; crystalsol, a developer of flexible thin film technology, with US$11 million raised; Goal Zero, a provider of portable solar power systems which raised US$7 millionand PsomasFMG, a solar system provider, which also raised US$7 million.

But the US$126m total for VC was dwarfed by the US$463m in funding invested in third party finance/solar lease companies, often by large institutional investors, for residential and commercial project funds. Mercom has tracked approximately US$5 billion in disclosed solar lease funds in 41 deals. Of that US$5 billion, US$4.8 billion were raised in the United States.

Third party finance/solar lease firms raised about half a billion dollars in residential and commercial project funds in the first quarter with three of the transactions of US$100 million each. SunPower announced a US$100 million financing programme with US Bancorp for home installations. Bosch Solar Energy also established a US$100 million fund with its subsidiary aleo solar, which will be made available for commercial and residential solar projects in the United States. OneRoof Energy announced that it will invest US$100 million in residential solar projects with MS Solar Holdings, a subsidiary of Morgan Stanley and Main Street Power, with debt financing provided by National Bank of Arizona.

"These are actually the funds that OneRoof or Sungevity or SolarCity raised for the installations," said Prabhu. "The VC part of it goes towards the companies for corporate growth so this is very important. If they have the ability to raise funds they can pretty much succeed in the market."

The largest disclosed M&A transaction was solar cell manufacturer Goldpoly New Energy Holdings’ acquisition of power plant developer China Merchants New Energy Holdings in a non-cash transaction valued at US$273 million.

But Prabhu said that acquisitions in large financial institutions continued to grow in M&A activity, which in the first quarter amounted to US$306 million in 15 transactions.

"Institutional investors and asset managers are the most active acquirers," he said. "We see that as a big positive. That the market has got really comfortable with purchasing solar projects, looking at it as a safe long-term investment for their portfolio. It wasn't the case three years ago, they were very sceptical, now they are the most active acquirers as a group."