At last week’s Renewable Energy Finance Forum in New York, a panel of investment bankers shared suggestions for cleantech companies on innovative ways to access capital—yes, they insist, it’s still out there—more cheaply and efficiently.
It’s no secret that cleantech funding has dipped in recent years, thanks in part to policy uncertainty, dampened risk appetites among investors, and a host of other factors. But at REFF Wall Street, a panel of high-profile, clean energy-focused investment bankers entreated industry executives and investors to consider innovative approaches to securing funding for their startups rather than resign themselves to a bleak funding environment—and suggested a few places they might start.
“Your capital formation strategy is as important as your technology strategy,” said Jeffrey McDermott, managing partner at Greentech Capital Advisors, a New York-based investment bank dedicated to alternative energy. “That’s a sea change from four years ago.”
Several of the panelists also stressed that cleantech fundraisers shouldn’t make the mistake of assuming that investor demand for their sector is drying up. That’s just not the case, said many of the panelists—what’s changed is the best way to access that demand.
In fact, Marathon Capital CEO Ted Brandt made his stance on this point clear in another panel later in the day: “Never before have renewable energy assets been so acceptable to such various types of investors,” Brandt said. “We’re seeing pension funds invest in this space, sovereign wealth funds, huge amounts of family offices. Never have we seen the liquidity or the capital that is sloshing around the system.”
How, then, to approach capital formation in this changed landscape? The panelists offered conference attendees several bits of advice:
1) Securitization needs to be better explored in the renewables space.
Christopher Radtke, director of the power and renewables group in the investment banking division at Credit Suisse, pointed to asset-backed securities and high-grade bonds as next-step financing models, particularly in the distributed solar arena.
As solar energy costs continue to fall, solar will represent an enormous investment opportunity, he said, and since investors are already familiar with bonds backed by auto loans, student loans, and the like, Radtke believes they’re likely to grow quickly comfortable with similar structures backed by renewables projects.
2) Don’t give up on the public equity markets—just look at them a bit differently.
“IPOs have been difficult,” said Ray Wood, managing director and head of U.S. power and renewables at Bank of America Merrill Lynch, “but we shouldn’t focus on equity markets as having failed us.”
Instead, Wood advised, cleantech entrepreneurs should look closely at what has been working in the equity market.
One of the structures he mentioned was the “YieldCo,” which is a c-corporation (that is, a corporation taxed separately from its owners) that acts as a holding company for renewable assets, thereby allowing the vehicle to carry forward net operating losses and shield taxes. All of this makes for a mid- to high-single digit cost of capital—otherwise difficult to find for renewables.
Wood also pointed to REITs (real estate investment trusts) as a vehicle to look into, given that the IRS has attributed REIT status for energy-efficient projects on the basis that they are building components.
Finally, he suggested that listeners consider the master limited partnership (MLP) structure. In May, U.S. Senator Chris Coons and Congressman Ted Poe reintroduced the “MLP Parity Act,” which would allow renewable energy generators to access MLP tax benefits. According to Wood, political insiders say the bill has momentum—renewable energy entrepreneurs would do well to follow its progress.
In another panel later that day, Marathon’s Brandt also expressed optimism about cleantech companies’ prospects in the equity markets. Given that IPOs and primary market activity have been so severely dampened in the past several years, he said, he and his team believe that prices on secondary assets are bound to go up—a boon for fundraising cleantech companies.
“We think it’s a terrific time for anyone with real projects to raise capital,” he said. “It’s just a very exciting time for the industry.”
3) When it comes to mergers and acquisitions, focus on asset sales, not corporate transactions.
At first glance, M&A in the renewables space hasn’t looked so good the past couple of years: both 2011 and 2012 saw a decline in deals and valuations, and 2013 “looks uninspiring as well,” said Schuyler “Skip” Grow, managing director and head of the clean technology group at Morgan Stanley. But breaking down those numbers reveals some insight that Grow says is worth noting: asset sales held reasonably strong, even though corporate M&A was down. “That represents a big shift compared with 2009 through 2011,” Grow said.
In 2011, the cleantech industry saw $36 billion in corporate transactions, and $7.1 billion in asset sales. In 2012, corporate transactions had dropped precipitously to $13.6 billion, but asset sales had climbed to $7.9 billion. In 2013, asset sales look to overtake corporate transactions, with a predicted $10.2 billion in deals, compared with only $9.8 billion in corporate transactions.
Looking forward, Grow said, “we think asset sales will predominate, and corporate transactions will continue to decline.” Those hungriest to buy, he said, are large multinationals looking to add technology solutions with low capital expenditure requirements to their product suites.
4) For private equity funding, look abroad.
Given the extreme difficulty of raising private equity capital at the moment, entrepreneurs have to change their tactics when it comes to this type of funding, too, says McDermott of Greentech Capital Advisors.
“Running the same play is not going to work given the market backdrop,” he said.
One of his main pieces of advice to his clients, he said, is “if you’re looking for funding, you’ve got to be thinking global.” Total global project capital investment in 2007 was $68 billion—$16.7 billion of that came of the U.S., and $12.5 billion from China. In 2012, the global total was $101 billion, and only $11.9 billion of that total came from the U.S.—China’s contribution had rocketed to $56.4 billion.
Helping matters, he said, is the fact that foreign investors have their eyes on the U.S. “The best disruptive technologies are being funded in the U.S.,” he added. “We think there’s a good path to capital from foreign institutions recognizing this fact.
5) Focus on the right sectors.
Which clean sectors are hot right now? McDermott pointed to natural gas-related technologies, as well as those focused on water and waste/recycling.
Areas that have cooled off, he added, include biofuels, solar, LED, and early-stage companies in general.