Under the terms of the deal, Aquila Capital will acquire Smakraf, which has a portfolio of 45 hydropower stations that have a total average annual power generation over 500GWh.
Norwegian utility Statkraft owns 40% interest in Småkraft, while other partners include Agder Energi, BKK and Skagerak Energi, each with 20% stake.
Smakraf also has 15 projects under construction and more than 100 projects under development.
The transaction is planned to be completed by the end of 2015.
Aquila already owns small-scale hydropower company Norsk Grønnkraft and has stakes of 36% in Tinfos and 33% in Jørpeland Kraft.
Aquila Capital hydropower co-head Oldrik Verloop said: "Since 2009, we have acquired over 100 hydro plants in Europe, giving us an edge in sourcing and securing hydropower opportunities for our institutional investors.
"As our investors aim to bring long term capital to support the expansion of renewables in the energy mix, the acquisition of Småkraft will consolidate our operations in Norway.
"It will make us the largest operator of small-scale hydropower plants in Europe."
The acquisition, which represents the third public hydro transaction in 18 months for Aquila Capital, is expected to further expand the firm’s footprint in the sector in Norway.
Statkraft chairman Haakon Alfstad said: "Aquila Capital’s acquisition of SmÃ¥kraft AS will ensure the continued growth of small scale hydro production in Norway."
Earlier this year, Statkraft commissioned the 172MW hydropower plant in Peru.
