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Private Equity Flees Clean Energy as Investment Falls

Private Equity Flees Clean Energy as Investment Falls

Private equity companies and venture capitalists including Draper Fisher Jurvetson and Braemar Energy Ventures reduced renewable-energy investment to the lowest since 2006 as once-promising companies failed or were sold at a loss.

Private equity and venture-capital investors provided $5.8 billion to solar, biofuel, wind and smart-grid startups worldwide last year, down 34 percent from 2011, according to an annual ranking by Bloomberg New Energy Finance. The decline was part of an 11 percent drop to $268.7 billion in total investment for renewable energy last year from a record $302.3 billion the year before.

The decline shows a wariness among investors who’ve been burned by losses, especially those who backed solar-panel manufacturers competing with Chinese companies. It also reflects a shrinking market as fewer entrepreneurs sought capital for clean energy startups, said Vinod Khosla, the billionaire founder of Menlo Park, California-based Khosla Ventures.

“All the fashionable VCs have gone away from it,” Khosla said in an interview. “Even the number of businesses people are starting is smaller.”

The decline is the result of waning government incentives for renewable energy and weak performance in the stock market, which made it harder for investors to extract value, said Ethan Zindler, an analyst at New Energy Finance in Washington. As a result, renewable-energy startups are now finding it harder to get funding.

‘Less Money’

“Venture investors in early stages do not have the same access to capital they did five years ago,” Zindler said in an interview. “There is less money available,” and backers “can’t easily see the pot of gold at the end of the rainbow.”

Draper Fisher steered $43.6 million to cleantech companies last year in 14 deals, down 37 percent from 2011’s total investment. Braemar’s total backing dropped 14 percent. Draper Fisher didn’t make an executive available for comment.

While the VCs are pulling back, some of the slack is being picked up by large corporate investors.

Royal Dutch Shell Plc participated in a $26 million funding round in December for GlassPoint Solar Inc., which is developing a system to use heat from sunlight to produce steam that’s used in oil recovery operations. And Alstom SA, the French power- equipment company, is backing BrightSource Energy Inc., the California-based solar-thermal provider.

“The area that we have seen a real spike in activity has been from the corporate world,” said Alan Salzman, chief executive officer of VantagePoint Capital Partners in San Bruno, California. “The level of activity by them has kept growing at a very significant rate.”

Buffett’s Benefit

Other aspects of the renewable energy industry, including the steady revenue produced by large-scale power plants, are now mature enough to attract mainstream investors such as Warren Buffett. His MidAmerican Energy Holdings Co. agreed this month to spend as much as $2.5 billion to build two large solar farms in California, and last year formed a unit dedicated to its wind and solar holdings.

Venture capitalists are finding it harder to take successful companies public to generate paydays that offset bad bets after clean energy shares sank for a third consecutive year in 2012.

The WilderHill New Energy Global Innovation Index fell 5.5 percent last year, prompting companies such as BrightSource and Smith Electric Vehicles Corp. to shelve initial public offerings. That resulted in some venture capital firms pulling out of clean energy, according to Martin Lagod, a managing director and co-founder of Firelake Capital Management LLC.

Difficult Exits

“There have not been the kinds of highly successful exits that would support broad ongoing investment,” Lagod said. “Venture investment is down in large part due to a number of firms pulling back or leaving the space altogether. We are seeing a very high degree of selectivity by the investors who remain in the market.”

Also to blame is political pressure for reining in subsidies from the U.S. to Germany amid the high-profile bankruptcies of companies that took funds from President Barack Obama’s administration, including battery maker A123 Systems Inc. and solar manufacturer Solyndra LLC.

“Some events, like the press around Solyndra or A123, have probably hurt the IPO markets,” Khosla said. “If the markets stay the way they are, our goal is not to sell them faster but to just go slow and steady.”

Bankruptcy Blight

A123 Systems, a provider of batteries for electric cars, filed for bankruptcy in October after receiving $132 million in backing from the U.S. Energy Department. Solyndra was awarded a $535 million federal loan guarantee from the Energy Department before failing in 2011. Both led to widespread criticism of renewable-energy companies as bad investments.

And last week, China’s Hanergy Holding Group Ltd. completed its purchase of MiaSole Inc., a manufacturer of thin-film solar panels that had been backed by Kleiner Perkins. Santa Clara, California-based MiaSole had received $500 million in funding from investors.

Biofuel companies that went public in 2011 slumped last year, driving down interest in new IPOs. Gevo Inc. shares plunged 76 percent in 2012, and Kior Inc. fell 37 percent. Fulcrum BioEnergy Inc., which makes ethanol from trash, withdrew its IPO registration in November, and Enerkem Inc. did so in April. Both cited poor market conditions.


The poor market for IPOs carries over to hinder potential acquisitions, another traditional exit strategy for VC investors, said Neil Suslak, a managing partner at Braemar Energy Ventures.

“Strategic sales have been driven often times by a strong IPO market” and acquisition opportunities may not improve until initial share sales rebound, Suslak said. About half of Braemar’s exits have come from IPOs and about half from acquisitions, he said.

“It all starts with the IPO market and the M&A market,” said VantagePoint’s Salzman. “The financial markets have been discouraged by the poor performance of the biofuel IPOs that had occurred previously and what we call the solar wars, with the Chinese crashing the market and selling stuff below cost or at negative margins.”

And the venture capital companies that were able to put together deals to monetize their renewable-energy investments were working harder for less payoff, said Alain Harrus, a partner at Crosslink Capital Inc.

“The few exits that took place were reasonably solid, but they were not spectacular,” he said. The size of those exits and the length of time it took them to occur “pales in comparison to anything that had to do with software over the last three years.”

IPOs Shifting

As a result, investors are shifting away from putting money into solar manufacturers and looking for other segments of the industry poised to make more money, said Ravi Viswanathan, a general partner at New Enterprise Associates Inc.

He pointed to the December IPO of Solarcity Corp. as a success, since that company develops solar projects that benefit from lower panel prices instead of manufacturing the technology in competition with Chinese companies. Solarcity, led by billionaire Elon Musk, raised about $92 million in an initial offering on Dec. 12 and has since almost doubled.

“You’re going to see IPOs go away from pure energy generation, manufacturing-intensive businesses to different models,” Viswanathan said. “Solarcity was great for the sector. Whole sub-industries are going to get formed there, on the software side, on the networking side, on the monitoring side and on the financial services side.”

These trends are reshaping VC investment patterns. “We are going through a repositioning of cleantech,” Chrysalix Energy Venture Capital Chief Executive Officer Wal Van Lierop said. “The big sectors — solar, wind and LEDs — are in the process of being consolidated, they’re maturing, so they fall out of the cleantech opportunity basket. We now are trying to find the next hot spots.”

Copyright 2013 Bloomberg

Lead image: Coins via Shutterstock



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