Status of Renewable Energy Finance in the U.S.

10/20/2010

How have U.S. renewable energy companies fared in the public markets and in private finance this year?

ACORE just released a report on conditions in the US and China, and on their efforts to help both countries move renewable energy forward.

Following a successful first quarter, public equity markets have recently exhibited considerable volatility, largely due to the European credit crisis and policy uncertainty, resulting in many clean energy IPOs being delayed and leading to a large IPO pipeline. Private equity and venture capital investments, however, are increasing substantially quarter-on-quarter, with a particular focus on energy smart technologies, solar and wind, and investment still overwhelmingly concentrated in California. Asset and corporate financings are recovering from the lows of 2009, but still lag behind Europe and, increasingly, China.

Public Markets

Given current market conditions where investors are unsure about where the economy and energy policy is headed, investors in clean energy stocks have become increasingly selective. U.S. and European investors are favoring companies with differentiated products or business models and are increasingly shying away from markets they perceive as commoditized, such as the wind and solar supply chain.

Given the general capital shortage and market uncertainty, combined with an abundance of public clean energy companies to choose from, only those companies that are particularly differentiated from their competitors are receiving investor interest.

Interest in clean energy stocks was strong in the first quarter (Q1), when investors had growing confidence as markets appeared to be in a steady recovery from the global recession. Q1, which is traditionally the slowest quarter for stocks, exceeded the previous quarter's investment by more than 72% and exceeded Q109 investment by more than 144%.

However, in Q2, the Eurozone sovereign credit crisis began impacting global equity markets, particularly in Europe and the U.S. Investment in clean energy stocks declined 2.6% from the first to second quarters, an unusual quarterly investment trend.

Four IPOs and seven secondary offerings have been completed in the U.S. this year, for a total of $513 and $476 million raised, respectively. Two U.S. companies had IPOs - Codexis (biofuels) and Tesla Motors, (electric cars); and two Chinese companies had IPOs - China Hydroelectric (small hydro operator) and JinkoSolar (vertically-integrated solar manufacturer).

These companies represent a range of clean energy sectors, and their stock prices have each performed very differently since their IPO. This is partly due to the individual company's prospects and partly due to changing investor sentiment.

China Hydroelectric, which launched on the NY Stock Exchange on January 22, 2010, was a casualty of this shift in investor sentiment. With a 61% decline in stock price from January to present, the company is  the worst post-IPO performer in the U.S. this year.

While this statistic illustrates the decline in investor appetite for clean energy deals since early-2010, it should be recognized in the context of the significant success of the IPO at the time of its offering-the company twice increased its offering size in the month preceding the offering, and ultimately raised $110 million, almost double its initial proposed deal size of $61 million.

Second generation biofuel company Codexis, which made its IPO at the beginning of the unfolding of the European credit crisis, has also experienced a substantial decline in investor confidence-a 35% drop in stock price since its April 21 debut.

On the other hand, the recent IPOs of Jinko Solar and Tesla Motors have fared significantly better, with Jinko Solar's stock price increasing a substantial 98% since its May 13 IPO, and Tesla's stock up nearly 70% in early trading and 13% since its June 29 debut.

Tesla Motors has attracted a considerable amount of attention for being the first and only company to produce a long-range battery powered car-the highly publicized "Roadster"-as well as developing strategic partnerships with industry incumbents Daimler and Toyota.

As a result, the IPO was an instant hit with investors-the company originally intended to raise $155 to $178 million, but increased the offering price when it recognized the extent of investor enthusiasm and ultimately raised $260 million in June 2010, making it the largest U.S. clean energy IPO of 2010.

This is a remarkable feat in the current climate of investor caution, and Tesla's success can be attributed to the fact the company is operating in a sector of growing investor interest (i.e. energy smart technologies) and offers a differentiated product with strategic partnerships.

Still, the current environment remains one of investor caution, with two U.S. IPOs being pulled in June, and another in early August, with a cumulative potential deal value of nearly $745 million. So far in 2010, the aggregate value of IPOs that have been postponed or cancelled far exceeds the value of those that have actually occurred. Some companies have been in the IPO pipeline for several months now, waiting for an appropriate market opening.

Jinko Solar is an exception, seeing a substantial increase in stock price since IPO. The stock didn't get much of a reception when it went public - the majority of the stock price increase occurred in August, following the release of its Q2 2010 earnings. Q2 revenues and module shipments were up markedly from Q1 and substantially exceeded market estimates, resulting in upward revisions in expected annual earnings from equity research analysts and increased investor interest in the stock.

Private Equity Market Activity 

Private investment activity in clean energy in the U.S. has not tracked the public markets - there's been vast growth in investment from Q1 to Q2 2010.

Private market investor sentiment is less cautious at present, with investors reporting an abundance of high-quality companies to choose from, relatively low valuations, and less competition than before the financial crisis. Therefore, for venture capital and private equity firms with capital, early and mid-2010 has been an optimal period in which to invest.

Q1 2010 investment was $1.7 billion, and Q2 2010 investment was $2.1 billion, both of which exceeded the previous four quarters of investment by a considerable margin.

These statistics demonstrate the U.S. continues to lead the world in clean energy venture capital and private equity investment, with Q1 and Q2 private market investment representing 60% and 89% of the global total, respectively. As with public market investment, there has been a trend toward investment in energy smart technologies, particularly electric vehicles, as well as continued interest in solar and wind companies.

Illustrative of investor interest in electric vehicles, hybrid sports car manufacturer Fisker Automotive raised $74 million in Q2 and Coda Automotive raised $58 million in May 2010. The vast majority of this type of investment is centered in California, particularly with regard to solar, as a result of the generous policy incentives in the state.

Investor exit strategies have also changed somewhat recently, given public market volatility and costs associated with a public offering. There's a shift toward strategic sales to corporations as opposed to IPOs, and there have been an increasing number of Asian companies actively seeking strategic acquisitions, which is a relatively new trend.

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Adapted and excerpted from the US- China Quarterly Market Review, which covers the clean energy market in the US and China, and ACORE'S work to make renewable energy more successful in the U.S. and in China.