Don’t get swept up in the hype of the Tesla IPO. Clean tech is not yet ready for prime time.
by Heidi N. Moore, contributor
It’s a common convention for horror movies to have at least one character who, cornered by the monster/attacker/murderer/villain, yells to his compatriots, “Go on without me! Save yourselves!” The same phrase should also be common among clean technology companies listing for an initial public offering.
Tesla Motors, which makes renewable cars, was today that willing sacrifice. After a promisingly high listing price of $17 – higher than the $14 to $16 range – the shares popped high to $19 and then spent the rest of the day jumping around, as the Dow plunged over 230 points.
Sure, Tesla, which has sold 1000 electric cars, may be a victim of the market’s insanity today. But in a broader sense, Tesla could have been another virgin sacrifice to allow the market gods to finally smile upon its sector. After all, one company’s success in publicly listing is often a thumbs-up for its rivals to try to go public as well.
Not so in the clean energy world, where the bigger trend has been repeated withdrawals and postponements of IPOs; the ones that do occur mostly trade disastrously within just a few months. Cleantech company Solyndra just scrapped its IPO and those who have gone public, including A123, Codexis and Jinko, are all trading miserably off their IPO prices.
There was also the brief “golden age,” as one banker called it, of solar-company stocks and IPOs, for instance, that reigned between late 2004 and late 2008; after that, market wiped out the valuations of the entire sector by over 83% within a year.
That curse – and how to overcome it – was a theme of the conversations today at the Renewable Energy Finance Forum- Wall Street, held at the Waldorf-Astoria hotel in Manhattan.
At Tuesday’s sessions, 10 investment bankers from firms including Goldman Sachs, Morgan Stanley, Bank of America-Merrill Lynch, Credit Suisse, Deutsche Bank, Citigroup and Jefferies talked about the dark irony facing renewable energy companies.
The short answer is that the cleantech sector is not ready for primetime. There is plenty of money waiting on the sidelines, the bankers said bullishly- and mind you, they’re paid to find those investors. Still, money managers tend to shy away from putting money into untested companies, that largely do the same kinds of things, and that easily consume millions of dollars for expensive product build-outs.
So cleantech may be great for society, but for the past few years, it has been ruinous to investors’ wallets. One banker noted that investors looking at clean tech companies first ask whether the company has enough funding to last until it reaches profitability; almost none of the companies do.
There are a few reasons for this. Clean energy is capital-intensive, requiring technology research and building costs for solar panels and wind farms; clean energy is more expensive to use and to implement than fossil fuels, which also benefit from government subsidies; and clean energy’s appeal to investors is a victim of the uncertain energy policy in the U.S. and ruinously expensive tariffs in Europe.
One banker who enumerated many of the issues facing these companies was Jeffrey McDermott, the former co-head of global banking at UBS and current co-founder of Cleantech Capital Advisors. McDermott said the capital markets were often so problematic that cleantech companies rely on private money.
Then he provided a daunting list of what private equity investors want from cleantech companies: an investment from a prestigious or successful venture capital firm, management teams with long prior track records in the sector, previous investors who promise to keep investing in the company, a realistic valuation, a fully financed business plan, limited capital intensity, limited capital risk, and the promise that they will get structured securities that are high up in the company’s capital structure.
Mind you, that’s what they need if they can’t approach the public markets. The standard is even higher for companies thinking about an IPO.
Given all those requirements, it’s no longer a wonder that few cleantech companies go public; it’s a wonder than any of them do.
The outlook is far from bleak, however. True, bankers expect few cleantech IPOs this year, with the exception being Enel’s renewable energy unit. But the debt markets are cooperative and there should be plenty of debt offerings, the bankers said.
–Heidi Moore is Sweeping the Street for the next two weeks while Colin Barr is on vacation.
