The press release went out on a Monday and by early Wednesday, John Buehler had fielded 15 telephone calls from people he’d never met, each trying to sell him on some new clean technology-related project.
Buehler has done project finance for Energy Investors Funds (EIF) for almost 20 years, investing in everything from coal power to natural gas to landfill-to-energy projects. But when his firm announced it had helped Solar Power Partners raise $100 million in debt and equity, he started hearing from venture capitalists and entrepreneurs for the first time.
The move into cleantech has resonated with EIF’s limited partners. “Our LPs like it,” says Buehler, one of three managing partners at EIF. “They’re pension funds by and large who have a predilection for it, as long as you can get attractive returns. We won’t do it if the returns are better for a fossil fuel project. USPF III [a $1.35 billion fund raised in 2007] probably has 20% renewable energy in it.”
EIF has what cleantech startups are increasingly desperate for: cash. And lots of it. The plummeting economy has wiped out a lot of would-be sources of big dollar deals for solar plants, ethanol refineries and other clean energy projects. The investment banks are toast, hedge fund managers are watching their portfolios burn and buyout shops are focused on keeping their existing investments afloat.
There is some hope, though. EIF, which has $3.4 billion under management, is one of a growing number of project finance firms looking at cleantech deals as a way of goosing returns. “We’re pretty virgin at it,” admits Buehler. “What we’re doing is going a step back and realizing that a lot of the new additions to capacity will come from ideas that were spawned by a VC or a cleantech.”
Historically, there hasn’t been much for Buehler and other project financiers to look at. They typically don’t get involved unless there’s some serious proof that a new technology is going to work, usually that’s at least one production plant, generation facility or refinery that’s already up and running. That means a big up-front cost for startups that VCs have been unwilling, or unable, to pay for. Project finance investors didn’t want to take on technology risk and venture capitalists didn’t want to pour big bucks into build outs. Now VCs and project financiers are turning to each other for help.
For the Solar Power Partners deal, Buehler worked with first round investor Globespan Capital Partners’ Barry Schiffman to go through the financials. The VC firm had put $6 million into Solar Power Partners a year before. “We talked to Globespan about how they valued these guys,” says Buehler. “They built a model for us and we built a model internally. It was a hybrid of a venture approach and a discounted cash flow approach. … It was easier because they’d already kicked the tires and signed up in a way that was significant to us.”
Hundreds looking for capital
That’s exactly the sort of collaboration Carlos Pineda is looking for. Pineda is the Senior Development Officer of Newton, Mass.-based General Compression, a cleantech company looking to bottle the power of wind turbines in underground compressed air storage facilities and he’s looking for funding. If the company is successful, it will help wind energy plants smooth out their delivery of electricity and overcome the problem of producing the most power during times of the least demand. There’s a technology risk associated with the wind energy to compressed air conversion and once you get over that, there will be a big bill to actually purchase the huge underground salt caverns that typically store natural gas.
The project finance market needs to learn more about the cleantech market and what it will take to get that innovation into projects.”
Pineda is just one of hundreds of entrepreneurs in the cleantech business working on companies that have both a technology risk and a large capital requirement. “We’re in the midst of a Series A right now and I can tell you it’s not a great time to be raising capital, especially if you’re in that valley of death,” he says. “Technology investors are willing to be in for three or four years, but then you go to the project equity guys and they feel comfortable in financing projects but they don’t like the technology risk. You get stuck between those two pools of capital. There are a lot of companies I know of who are getting stuck there, too.”
It’s hard to put a number on exactly how many companies are sitting on good technology but a lack of funds for expansion. Members of that group have several key characteristics: they’ve been around for a few years, have raised a modest amount of venture and are working on something that requires a manufacturing plant or refinery. Typical businesses include solar panel makers, biofuel companies, wind and wave power generators. Using those guidelines, you can do a little back-of-the-envelop math to come out with a number that’s likely in the low hundreds.
A handful of these companies have landed financing and are blazing the trail for VC and project finance collaboration. So far this year, 15 cleantech companies have raised $100 million or more, according to data from Thomson Reuters (publisher of VCJ).
The number of companies likely to be looking for funds is growing. More than 150 cleantech companies were financed in Europe, the U.S. and Asia during the third quarter of 2008, according to market research organization Cleantech Group, up more than a third from the same period in the previous year. And companies that were financed in 2005, 2006 and 2007 are starting to reach the end of their venture-financed runway. More than 40 cleantech companies have raised $25 million or more so far this year, according to Thomson Reuters. It’s likely many of those will be out for an even bigger investment for their next round.
That’s great news for project financiers. “They don’t want to be competing in a pricing war,” says Todd Alexander, a partner at law firm Chadbourne & Parke who has represented dozens of biofuel companies. “If you can be a little smart and pick a cellulosic company that is a few steps ahead, you can fund it on a less competitive basis and you’re not in a bidding war.”
Big Projects, Big Speed Bumps
But just as project financiers and venture capitalists are increasingly sniffing each other out, the global credit crisis put a tight leash on debt financing and the firms that might have financed growth. “We know that debt as an instrument is very difficult to obtain, if not completely gone,” says longtime solar investor Alain Harrus of Crosslink Capital.
That’s a problem because some of the biggest deals in the cleantech business have had swaths of debt. Consider Solyndra, a Fremont, Calif.-based maker of cylindrical solar panels that came out of three years of stealth mode in October. The company says it has raised $600 million from venture capitalists, private equity investors and a hedge fund. None of that is debt, says the company’s public relations executive Ashley Seashore. But the company did raise $119 million in August, according to a regulatory filing. Only $31.7 million of the convertible promissory notes it sold went to working capital though. The rest of the money, $87.2 million, went to pay down the company’s debts, suggesting the company relies on loans to expand its operations.
Solyndra is just one of the companies likely to get hit by the debt contraction. “Is it harder to find debt today? Sure it is,” says Buehler. “That’s why [the U.S. government is] trying to bolster the system with bailouts. The supply is shorter and terms are getting tougher.”
It’s scary times out there. The banks are totally shut down.”
It’s already hit biofuel makers. “It’s scary times out there,” says Barry Cohen of Biofuel Capital Partners, a private equity fund for biodiesel and other biofuels-related technology and production companies. His firm specializes in getting algae oil producers up and running, often securing debt on their behalf. “The banks are totally shut down,” Cohen says. “The only thing you can base loans on right now is real collateral.”
(Biofuel Capital Partners is distinct from Biofuels Capital Partners, which is mentioned in the Fund Notes section of this issue of VCJ. —Ed.)
The result of a higher cost of borrowing is pretty clear to project finance folks. It eats off their bottom line. “It’s not like anybody’s out of the market, but it is getting more difficult to raise debt capital,” Buehler says. “The project finance marketplace will be slow and steady. You could build stuff on a smaller basis using equity and just wait for the debt markets to catch up, but what would the result be? Lower returns.”
The lack of debt is bad, but it’s not the only thing making the marriage of cleantech venture capitalists and project financiers difficult. The credit crunch has pulled the rug out from many of the players.
“We know that hedge funds that have a lot of capital have seen a lot of redemptions, so they don’t have a lot of capital for project financing now,” says Harrus of Crosslink. “Then there’s the big buyout shops that have relied on leverage in the past and now the capital they have will be earmarked for their own projects. A lot of the solar projects that were relying on one of those have been put on hold or canceled.”
Notably, several large cleantech investments in the past year had the support of investment banks and insurance firms that have been clobbered by the Wall Street crisis. It is anyone’s guess if those players will participate in later rounds for those companies.
For example, insurance giant AIG, which had to borrow tens of billions of dollars from taxpayers, backed thin-film solar panel maker Sulfurcell Solartechnik in a $135 million expansion financing in July. The equity investment, which was led by Intel Capital, will help the Berlin-based company build a bigger manufacturing plant.
Morgan Stanley has been an active cleantech investor this year as well. While it was one of two blue chip investment banks left standing after the Wall Street crisis, Morgan has still seen the value of stock plummet 70% this year. Investors weren’t cheered by the news in September that Mitsubishi would pay $9 billion for 21% of Morgan.
A lot of the solar projects that were relying on one of those [hedge funds or private equity firms] have been put on hold or canceled.”
Among the cleantech companies that Morgan has backed recently is Moser Baer Photo Voltaic. It bought 6.5% of the New Delhi-based company for $92.5 million in September. Moser Baer will use the money to set up a manufacturing plant for thin film solar panels in Chennai.
Earlier this year, Morgan invested in solar company BrightSource Energy. It participated in a $115 million Series C for the company in May with VantagePoint Ventures, Google.org and others. BrightSource is using the money to build solar power plants in the Mojave Desert.
Morgan’s only major competitor, Goldman Sachs, has seen its stock price fall 47%, raising questions about how active it will continue to be as a cleantech investor. In February, it participated with New Enterprise Associates (NEA) and others in a $50 million Series B for solar cell maker Suniva. The Atlanta-based company is using the money to increase the capacity at its manufacturing plant by 400% and has closed delivery deals worth $1.28 billion through 2013 on the basis of its expansion.
Just two months ago, Goldman inked a $120 million investment for smart grid company GridPoint Systems, backing up VCs such as NEA. Arlington, Va.-based GridPoint is using the money to acquire other companies, such as V2Green, a company that integrates plug-in electric vehicles with the power grid.
Even investors that weren’t directly impacted by the Wall Street crisis may have to scale back on deals. Citigroup, for example, lost 37% of its market capitalization during the first week of October. The firm has been an active investor in expansion stage cleantech companies this year. In September, it co-led a $140 million Series B investment in Santa Monica, Calif.-based SolarReserve, which is building solar power plants. And in January, Citigroup backed a $42 million Series B investment in EnerTech Environmental, which produces a renewable fuel from bio-solids and other high-moisture wastes.
The turmoil on Wall Street is unlikely to wipe out the cleantech market or kill the burgeoning cooperation between project finance professionals and venture capitalists. There are plenty of private equity firms that specialize in energy and have plenty of dry powder to weather the storm. Middle Eastern investors such as Abu Dhabi-backed MASDAR and the Qatar Investment Authority have been quietly putting big money behind clean energy and electric vehicles this year. They may have the resources to ride out the downturn.
Some investors are downright optimistic. “Banks still need to put money to work and they’ll underwrite tangible assets,” says Crosslink’s Harrus. “Once the markets stabilize, the money will start flowing again and it will go to the areas where there are opportunities for high growth, and cleantech is well positioned for that.”
It’s a sentiment that project financiers echo. “There will be money for good projects,” says EIF’s Buehler. “Our energy demand goes up 2% a year, and the cushion we have beyond capacity is going down from 115% to 110 percent. That means that we have to continually build. Power is power. You need to have capacity and you need to have more of it tomorrow than today.”
That’s why Buehler is still happy to talk whenever a cleantech company calls.