Subject: Wall Street: We Like Energy Efficiency, Not Much Else
From: "Eric Schwerin" <[email-masked]>
To: "Hunter Biden" <[email-masked]>, "Michael Muldoon" <[email-masked]>, <[email-masked]>
Date: Thu, 30 Sep 2010 18:03:29 -0400

Wall Street: We Like Energy Efficiency, Not Much Else
At the Renewable Energy Finance Forum, investment bankers aren’t feeling irrationally exuberant.

San Francisco, Calif.--At the Renewable Energy Finance Forum-West, energy bankers said that clean technology segment leaders should be able to IPO successfully and that energy efficiency is an attractive sector.  But they also predicted that oil companies will scale back their investments in wind energy and that the availability of capital will remain limited in the short term.  

To attract growth equity in a difficult climate, bankers advised companies to pursue realistic valuations at which their existing and new venture capital and/or strategic investors will participate.

On Public and Private Capital

“Everyone needs to be realistic because it is a brutally tough market,” said Ray Wood, Co-Head of Global Alternative Energy at Credit Suisse. “Government subsidies are under attack politically. Commodity prices are at historic lows and will remain this way because of shale gas. Utilities’ demand for power [and] new generation is down. Their desire to sign Power Purchase Agreements (for renewable energy) is down. [...] The IPO market is very difficult.”

Nonetheless, BrightSource Energy has begun preparing for an IPO, and Amyris, Codexis andTesla were able to go public.  The IPO market is thawing, at least for industry leaders.

“What set these names apart?  Investors are looking for leaders. Each did a great job representing their segment, whether it be electrification of vehicles or biofuels,” said Kevin Genieser, a Managing Director at Morgan Stanley. “In the cleantech space, companies with relatively small revenue bases and relatively modest gross margins at the time of their IPO are having very successful deals in the market.”

“Broadly, we still feel that the cleantech space is undercapitalized,” continued Genieser. “But I can’t say it is all great news.  If you look at how overall IPOs have done in the marketplace, it has been relatively challenging with regards to getting deals done and with the ranges themselves.” 

“Private equity volumes are down dramatically,” added Credit Suisse’s Wood. “With the notion that the IPO market is uncertain and with growth being discounted versus intrinsic value, it is very hard for private equity investors to find sure things [in which] to invest.  While the money is there and the government’s terms are better than they were after the contagion, the overall market environment to believe stories is harder.”

On Energy Efficiency

“We are bullish on energy efficiency,” said Parker Weil, Co-Head of the Americas Energy and Power Group at Bank of America Merrill Lynch. “A famous criminal was asked why he robbed banks. He said that’s where the money is. Energy efficiency is where the money is. It is where projects are cash-flow positive. It is where debt capital can be attracted because the paybacks are attractive.”

On Wind

“Oil companies are rethinking whether they should own their wind companies. The return oil companies get from drilling is higher than from investing in wind farms,” said Sandip Sen, Global Head of Alternative Energy at Citigroup.

“In wind stocks, there is a consistent theme. Upstream manufactures have seen a decline in their backlog, they have seen margin compression with price pressure on the units and they have to provide more vendor finance per unit sales,” said Credit Suisse’s Wood. “The theme we have seen in solar, the upstream buying the downstream and having vertical integration (to maintain unit sales volume), we have begun to see that in wind, as well.”

On Growth Equity Investors

“It is a risk-averse market. Capital is looking for risk mitigation and realistic valuations. Growth equity investors will give up upside to get downside protection,” said Jeff McDermott, the former Joint Global Head of Investment Banking at UBS and current founder of Greentech Capital Advisors. “Investors want to see well-articulated business plans with limited capital intensity [and] management teams that are extremely strong and filled out.”

“If existing investors are willing to put in new capital in at the valuation point, it really makes a difference,” added McDermott.  “If you get one of the top 15 or 20 VCs to come in at the valuation that you want to market off of, it will give you tremendous momentum in the marketplace.  If you bring in a strategic investor, it will also be a big help. That vote of confidence is important to investors’ investment decisions.”

Eric D. Schwerin
Rosemont Seneca Partners, LLC
1010 Wisconsin Ave., NW
Suite 705
Washington, DC 20007
(202) 333-1880
[email-masked]
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