Fortune Magazine's Brainstorm: Green is one of the better conferences ahead of Earth Day. After attending a few times in Southen California, I decided to enjoy their virtual conference portal from the comfort of my home and avoid flying down to Los Angeles. The reticence of public markets to value cleantech companies was on everybody's mind and almost palpable through the screen.
Fred Krupp, the President of the Environment Defense Fund, cut to the chase today in a one-on-one conversation with Jeremy Grantham from GMO by saying the cleantech sector needs to accept that natural gas is going to take center stage. It should focus on making it cleaner until renewable energies can scale. The panel yesterday on "Follow the Green Money" was particularly useful to understand how the solar and wind sectors got in the situation they are today, and why they are still good bets.
Actually, wind farm financing is considered as solid as a bond according to Michael Eckhart, the Global Head of Environmental Finance at City Group. He was insightful in explaining the true link between government policies and the availability of funds for cleantech private companies. People tend to focus on the private equity market (VC, etc.) but it is only $15Bn compared to $150Bn in project financing.
The availability of debt funds is critical for getting infrastructure projects off the ground, and government policies have influence on that. The project financing market has a much bigger impact than loan guarantees on tech companies. "Solar farm financing is also being considered as a bond" explained the executive from the City Group. Returns have been from 10% to 20% in the private market.
The issue is on the public market where tech companies tend to exit. There again, it is important to look beyond today's state. Mr. Eckhart linked the current state of price competition in solar in China today to the decision of European countries, such as Germany 10 years ago, to open manufacturing sites in China and share intellectual property. "There are now more than 500 companies fighting to survive in China in wind and solar alone".
China does not have more incentives to install renewable installations, but the manufacturing base needs to consolidate there before prices stabilize on the market. Hence, the difficulty for solar companies in the US like SunPower and FirstSolar who decided to close manufacturing sites this week. It will take time for the market to consolidate and come out of subsidies but the market is solid long term.
Alain Salzman, CEO and Managing Partner of VantagePoint Partners, echoed the sentiment and mentioned that public market goes up and down: "Two years ago there was no public market for SoLoMo and it is in a fury today", he reckoned. Actually, he made the point that infrastructure markets "dwarf" the size of the advertizing that is fueling social media. It will take a long time before companies are involved in monetary transactions.
Large VC's like VantagePoint that have set up cleantech funds have enough capital to wait. The challenge is for VC generalists who are less focused and have less horizon. Alain Salzman also debunked the myth that cleantech is an homogenous market. He cautioned about the danger of having a monolithic view, and mixing solar and water for instance. "It is silly to look at Solyndra and make a generalization across sectors that have little in common".
Alain Salzman took the example of digital innovation like LED that is transforming the lighting business, and has nothing to do with natural gas. "It is important to disagregate" explained the CEO of VantagePoint that invested in Solazime and Tesla. Both have done well on the public market although they are not quite profitable yet.
VantagePoint was the first institutional investor in Tesla for with an initial investment for $50M valuation at the time. The public market cap of Tesla today is about $3Bn. "The connection between energy, lighting, electrical vehicles, etc. is that we are dealing with resource limitation in a world that is going to do more" concluded Alain Salzman who still believes that technology innovation can be a big part of the solution.
The third and last panelist, Ray Wood from Credit Suisse, highlighted that emerging markets are playing a growing role. Alain Salzman mentioned that representatives from Fortune 500 companies and international funds are coming to Silicon Valley every week: "They get it! And that despite the state of the current public market.
"Michael Echkart from City Group agreed and believed that policies drive technoloy and finance to where society wants to go beyond pure price competition. "Cleantech companies will fight hard and some will do very well ultimately"
"We invest in the inevitable" added Mr. Salzman who would rather on the right side of forces that drive the market long-term. The hearted discussion was great and helped balance a "gloom and doom" feeling at the conference this week into a transformative vision that bears hope.
A number of companies that originally planned to go IPO this year have put their plans on the shelf and raised money from private investors instead. This is the case of Fisker and BrightSource. Private capital still believes green companies will do well despite the state of public market.