Volatility in the overall financial markets have taken a heavy toll on clean tech companies with IPO ambitions, while valuations of publicly traded stocks had dropped dramatically by two thirds, investment bankers in the sector conceded this week.
Clean tech market sector capitalization was valued at $475 billion at the high point in 2007, said David Dolezal, head of the Americas Renewable Energy and Cleantech division at UBS, the largest trader of clean tech stocks. But that figure has now been slashed to $142 billion, the equivalent market capitalization of pharmaceutical giant Pfizer.
Dolezal told the REFF West conference in San Francisco yesterday that the sector had not tracked overall stock valuations: “The entire publicly listed clean tech space is of value equal to the capital of Pfizer. What happened? Revenues and earnings haven’t declined in the space – in fact for some companies they have more than doubled. But the multiples investors are willing to pay for those revenues have declined dramatically. Those multiples have compressed by more than 50%. The overall S&P has only compressed by 15%.”
The Trough Of Disillusion
He said that such a dramatic decline could be explained by over-inflated expectations of how fast the clean tech space would grow and what it could deliver. But he predicted that the sector would recover, following a “valuation cycle” seen in other high-growth industries. Alternative fuels for vehicles and biofuels would be target growth areas within the clean tech sector, he said.
“You tend to have a period of overvaluation in the beginning and if we call that the 2007 timeframe where we had inflated expectations, we’re on the flipside of that coin right now which is what we would term the ‘trough of disillusion’. That never lasts. We typically see in high growth industries that valuations will recover.
Dolezal said that the sector is currently undervalued and public companies could be in a good position to acquire or buy back stock.
“There’s a question mark around 2012 but we do think that the environment’s going to improve and fairly significantly from a valuation standpoint.
“Ultimately as this sector matures and becomes larger, we’ll reach a point of stability where we’ve got the types of valuations in the public markets that we can rely on.”
Kevin Genieser, managing director at Morgan Stanley’s Clean Energy and Renewables division, said that clean tech IPOs had run dry amid “the sad state of the IPO markets” in general. The result was “a lot of people on the sidelines.”
Still Lining Up
Biofuels firm Elevance Renewable Sciences is the most recent clean tech company to register an IPO listing with the SEC. Renewable Energy Group, Silver Spring Networks and Luca Tech are among the clean tech companies that have filed to go public.
“We’ve seen issuance drop particularly in the second half of this year as the markets dropped, [and] as volatility went up particularly in the last two months we saw equity dry up. And for the first time since I can remember, we haven’t had any IPOs post Labor day when traditionally we see a dramatic number of IPOs come to market.
“We’re seeing a huge pent up demand. We see 121 deals that have now filed to go public and that’s over $28 billion of potential issuance.”
“Around $1.6 billion of IPOs have been filed [in the clean tech space] so there’s a great deal of pent up demand and huge diversity – everything from energy efficiency to smart grids to biofuels and solar names.”
“We’re still big believers in the long term prospects at Morgan Stanley of the clean technology space. It’s just been a very challenging time as you look over what’s happened over the past few months.”
Timing Is Still Everything
Sandip Sen, the global head of alternative energy at Citigroup Global Markets, admitted that two clean tech IPOs his firm was involved with this year – Gevo and Kior – would have been tougher to launch if they had come later in the year.
But he said that although markets were weak, corporate strength had increased. He said: “The flip side [of all the negativity in the markets] is that corporate balance sheets are about as strong as they have ever been. Companies are stronger from a credit perspective than they used to be in previous crises. So while the markets are weak, corporates are very strong, they have strong liquidity, and significant access to capital.
He added that Citigroup had been very active in the Department of Energy’s loan program and hoped that the conditional commitment of $1.8 billion for the Desert Sunlight project would be confirmed this week.
“We can only say that we’ve been dealing with successes at least up until the point of getting conditional commitments and we hope to close a very large transaction in the next 48 hours because if it doesn’t close in the next 48 hours, it goes away.”
“If all stars line up” the announcement for the loan would be made this week, he said.
But Sen admitted in later comments that he was “nervous” about meeting the DOE’s deadline for the 550MW thin film solar deal.
Earlier this month the developer, First Solar, said it would fail to meet the September 30 deadline for another of its projects, a 550MW solar plant in San Luis Obispo County.
GE and NextEra are reported to have expressed an interest in purchasing the project. But he declined to respond when asked what would happen to the project if the $1.8 billion loan failed to be authorized.
Consolidation Now The Bright Spot
Jeffrey McDermott, managing partner at Greentech Capital Advisors, said that the picture for mergers and acquisitions in the clean tech sector was much healthier. “Finally, some good news; there’s a lot of M&A activity and it’s going to continue.”
He said that M&A in the clean tech sector had risen from $29.7 billion in 2009 to $51.3 billion in 2011 year to date. A great deal of the activity was in Europe and growth would continue in Asia thanks to the political atmosphere in both regions.
“There might be a lot of climate science denial in the US, and a sense that we can continue to ‘drill baby drill’ in America, but every time I’m over in Europe or in Asia I’m heartened by the fact that leading companies with leading pools of capital are very focused on the need for sustainable infrastructure and alternative energy is a cornerstone of that,” McDermott said.
But he warned of pitfalls for companies hoping for success from a twin track approach to exits by filing for an IPO while seeking a strategic acquirer.
“In this sector the evidence proves that this doesn’t work. In 2010 there were 72 IPOs filed, 75% got completed in the clean tech sector. In 2011 YTD 38 have filed, half of them have completed, 12 of them were waiting, 6 of them postponed and only Landis & Gyr, which as a foreign company had filed a confidential SEC registration took an M&A exit by selling to Toshiba.
“There’s limited value and [could be] counterproductive to file a registration statement if you really think your exit is M&A.”
Photo Caption: A trader on the floor of the New York Stock Exchange.
