The renewable energy sector might be an exciting sector in terms of the scale of opportunities available and its disruptive nature, but from an investor perspective, it is just like any other – investors need to feel assured of a positive return on investment, while lenders need to know their risks are limited as well – but they also need to see clear and defined exit strategies, especially in a new company with a novel clean technology or renewable energy business plan, especially given the fickleness of most RE start-ups.
The prospects of exit strategies in the renewable energy domain has been enhanced by the growing interest of venture funds in energy technology, which is complemented by new private equity and hedge funds moving into this space. While there have been many successful exits for firms in this industry in the west, the same cannot be said of the Indian renewable energy sector.
In the last couple of months, I had the opportunity to speak at some prominent conferences related to investing in the Indian renewable energy industry. The question of exit strategy cropped up both times. This was not exactly surprising – if you are a PC or VC, exit strategy would obviously be one of your core concerns after all!
I thought I’d do a bit of research on this topic to see case studies of exits in the Indian renewable energy sector.
I have discussed the following in this article:
- Exit Periods
- Types of Exits
- Risks in Exit Strategies for Renewable Energy Sector
In companies belonging to the cleantech industry, exits take longer than for companies in the software or Internet industries. It is tough to generalize, but VC exits in this industry could take 5-6 years and PE investments 7-10 years. Large PE investments (say, in sectors such as large hydro) could take well over 10 years to exit.
Types of Exits
The types of exits for VCs or PEs are fairly well-known, but it merits repetition:
- Initial public offerings
- Subsequent Round Fundings
1. Initial public offering
As such, the option of issuing an IPO in the time frame of 24-30 months from initial funding would provide needed capital to reduce any outstanding debt, repay any shareholder obligations and/or original investors’ equity capital, and fuel growth. The strategy works well for growth through acquisitions, since the purchase of the acquisition can be blended with publicly traded stock while conserving cash. IPOs of bundled RE projects have been successful in mature markets like Europe, but have yet to be tried in emerging markets. I must admit that barring some prominent IPOs such as those of Suzlon, the IPOs of “green” companies were few and far between. Not exactly surprising because there are not too many “green” companies any way! A few green IPO examples from India:
- Suzlon Energy, the world’s fifth largest wind turbine maker went for an IPO in Sep 2005.
- Indowind raised Rs.73.34 Crores through an IPO during 2007, for setting up of 9 MW Wind Farm.
- Suryachakra Power Corporation, which deals in biomass, wind, and other means of green energy generation, went for an initial public offering in 2007.
- Polygenta, a producer of high quality environmentally sustainable polyester, was quoted on Mumbai’s stock exchange in Feb 2010. OK, this is not exactly renewable energy, but it’s close.
- Orient Green Power, backed by PE firms Bessemer and Olympus Capital, is set, by June 2010, to become one of the pioneering green energy IPOs in India. This IPO is expected to be keenly watched by the venture capital and private equity community in India.
Acquisitions will comprise an important exit route. True, it is unlikely that companies would be lapped up the way they are lapped up in the Internet industry, but expect to see significant activity in this sector, all the same.
For instance, worldwide, over a hundred companies concentrated in energy efficiency alone were swooped up in acquisitions, and just in 2008 alone, according to reports. Just as important, there were 100 different buyers, so it was not a freak case of one 800 pound gorilla buying up tens of smaller ones.
In India, RE sector acquisitions are rare due to a typical lack of specific saleability. In my opinion, the number of acquisitions in the green space will increase significantly in the companies as large companies try to consolidate smaller renewable assets. Such consolidations through acquisitions could especially be expected in sectors such as small hydro where you have a number of small players operating in specific regions of the country. Some green acquisitions that have occurred so far:
- Dubai Group announced its acquisition of a 40 per cent stake in India’s Chiranjjeevi Wind Energy Limited (CWEL), a wind turbine manufacturer.
- Luminous Power Technologies, a US $130 million enterprise delivering high quality Inverters, UPS, Batteries & Renewable Energy products, acquired UD Energy Systems (P) Ltd, a Pune based company engaged in the design, manufacture, supply, installation and servicing of all types of Wind-Solar, only Wind and only Solar photovoltaic power plants
3. Subsequent Rounds of Funding
Azure, an Indian solar power plant operator, received Series B funding ($10 million) from clean technology & infrastructure investors Helion Advisors and Foundation Capital, which enabled smooth exit for IFC, the 1st round investors (1st round funding amount undisclosed).
4. Others – some of the less common exit routes
- Trade sale – A trade sale entails the disposal of a company’s shares or assets and even liabilities, in whole or in part. This may refer to a strategic buyer who intends to grow his business or to a financial buyer who wants to generate a financial return on his invested capital at the time of exit. Trade sales are used both in Europe and the US.
- Portal market – The recently announced Portal Market in the US, a trading exchange run by Nasdaq, is a venue in which shares in private companies can be traded in real time, in much the same way securities are bought and sold in the public markets. However, the cost to play in this is higher than average; investors must have $100 million in assets to participate. Such a market does not exist in India at present.
Risks to Exit Strategies for Renewable Energy Companies
There are obvious uncertainties in the context of exit routes for investors in renewable energy.
The Valley of Death – You will hear about the term “valley of death” many times over in the cellulosic ethanol industry today. Many cellulosic ethanol companies and their investors are caught in this valley. This typically occurs when the financing needs for a company are fairly larger than the amount invested in the initial rounds but there’s a reasonable degree of uncertainty (as is the case with the cellulosic ethanol), investors naturally get jerky of investing over a hundred million dollars. This could happen to some sectors of renewable energy in India as well, especially for those sectors that involve an element of R&D and consequently business or technology uncertainty (solar CSP, waste to energy…)
Uncertainties Posed by External Incentives – Many times, the timing of the incentives create uncertainties to exit strategies. Even if initially successful, what happens when incentives are gone? An example is in the history of the American government’s incentives for solar hot water heaters. These incentives were large enough to bring about a substantial number of new installations as well as the growth of a sales and installation industry. However, when the incentives were ended suddenly in the early 1980s – the demand for the systems vanished and the industries went out of business. Maybe even more damaging, however, was the fact that after the degradation of the solar water heater service industry, existing installations started to fail, seriously tarnishing the public perception of the reliability of solar hot water heaters – the industry’s road to recovery from this disaster has been very difficult. Similar horror stories can be seen in Spain’s pulling off the incentives for solar PV recently.
Lack of Upside – While I have not heard this point discussed anywhere, to me, it appears that most businesses that are into electricity or fuel production are into a PPA or FPA (fuel purchase agreement) type business where the business returns are almost fixed for many, many years, unless they could come up with large (and unlikely) operational efficiencies. Such a model doesn’t bode badly for exit routes per se, but more for valuations – I guess valuations get much higher when there is an expectation of supernormal future profits. This might not be a risk however for companies that are developing intellectual property (new battery technologies, for instance).