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A shot in the arm for SolarCity

At a time when investors have darkened on the solar power industry, a big investment firm has moved in to buy a stake in SolarCity, the biggest company in the sector.

SolarCity is expected to announce that it has raised $113 million in a new investment led by the clean-energy arm of Silver Lake, as well as the solar company’s chairman, Elon Musk, and its CEO, Lyndon Rive.

The new financing is meant to be a show of confidence in SolarCity, the biggest installer of rooftop solar power systems, as questions have arisen about a recent shift in strategy. The company announced last month that it would focus on becoming cash-flow positive by slowing down its astronomical growth rate. The rate, about 85 percent a year, is expected to slow to about 40 percent.

And the company, which has reported a quarterly profit only twice since going public in December 2012, reported a bigger-than-expected loss for its third quarter.

Shares in SolarCity have fallen by 28 percent since then, even after rising by 6.73 percent following Wednesday’s report to close at $27.31, by up $1.75. That values the company at about $2.7 billion, down from more than $5.2 billion at the same time last year. And the company has become the target of investors such as investment manager James S. Chanos who are betting that its stock will continue falling.

New York State has made a huge bet on SolarCity, investing $750 million to build and equip a new solar panel factory for the company at RiverBend in South Buffalo that is expected to bring 2,900 jobs to the Buffalo Niagara region, both at the factory and its suppliers.

The SolarCity plant, centerpiece of Gov. Andrew M. Cuomo’s Buffalo Billion economic-development initiative aimed at reviving the region’s economy, will be the biggest solar module factory in the Western Hemisphere, and the company said it believes that the panels will be the most efficient of its type in generating electricity from the sun.

Yet other companies in the solar industry have struggled, as well, over the last several months, notably SunEdison, a rival solar energy provider that investors worry has overextended itself financially in pursuit of growth. Shares in that company have tumbled by more than 80 percent over the last 12 months.

Still, the slump in the solar industry has drawn the attention of Silver Lake’s clean-energy arm, Kraftwerk, which had invested roughly $25 million in SolarCity in February 2012, before the company went public – and quadrupled its money by the time it sold off its holdings a year and a half later.

Executives at the investment firm had stayed in touch with company management, according to people briefed on the matter, asking what would be the best way to become involved again in the company.

As SolarCity’s stock tumbled over the last three weeks, Silver Lake Kraftwerk executives approached Rive and offered what they described as a show of confidence in the company: a big investment. “We believe that SolarCity is a highly attractive long-term investment opportunity,” Josh Raffaelli, Silver Lake Kraftwerk’s managing director, said in a statement.

Under the terms of the deal, Silver Lake Kraftwerk would buy $100 million worth of notes, convertible into shares at $33 each. Musk would put in $10 million, and Rive would buy $3 million.

The convertible notes do not pay out interest, these people said, because Silver Lake Kraftwerk expects to reap its profit from what it hopes will be a resurgence in SolarCity’s stock price.

While Silver Lake Kraftwerk will not take a seat on the company’s board, it will have weekly access to Rive and have regular updates on the company’s plans and strategy.

Behind the investment firm’s move is a belief that SolarCity will remain the biggest and hardiest company in the solar power industry. The company’s shift to focus on positive cash flow signified to Silver Lake Kraftwerk an effort to prepare for the long term, becoming less of a speedy growth company and more like a reliable utility, the people briefed on the matter said.

“We firmly believe that SolarCity’s near-term focus on cost reduction and cash flow break-even is absolutely the right strategy,” Raffaelli said. “Distributed solar generation is an enormous opportunity and we believe there is no other company better positioned to take advantage of it.”

The change in strategy could become especially important by the end of next year, when a federal tax credit that covers 30 percent of the costs of installing the company’s rooftop systems is scheduled to fall to 10 percent.

Focusing on improving cash flow is meant to allay Wall Street’s fears about how the company will finance itself after losing its significant tax advantage. And the ability of solar providers to finance themselves reliably has become a huge concern among investors, as seen by the steep slide in SunEdison’s stock price.

Moreover, according to people briefed on the deal, SolarCity remains significantly larger than its competitors combined, giving it a market share that Silver Lake Kraftwerk believes will be hard to beat.

The investment is expected to close Dec. 7.

News Business Reporter David Robinson contributed to this report.