Renewable Energy in Turbulent Times Opportunity for Private Equity and Venturecapital

Renewable Energy in Turbulent Times Opportunity for Private Equity and Venturecapital

1 Intelligent Well Technology: Status and Opportunities for Developing Marginal Reserves SPE

[Renewable Energy in turbulent times – Opportunity for Private equity and venturecapital financing]

[Tomislav Prokopic, WU-Wien, 0680/1253947,

Overview

[Format: single space, 10 point font Times New Roman]

As a consequence of the financial crisis the renewable energy projects are facing the lack of credits for leveraging. Financial institutions do recognise renewable energy sector as a high risk investment and therefore newly established companies or capital intense R&D projects are no more accountable for a cheap capital. However, on the other side high percentage of co2 emissions and ongoing warnings from IPCC are ringing a bell for swift and decisive action, that is strongly promoted from the majority of the world leaders. Latly we hear more frequently that renewable sector supported with other so-called climate investments could play a decisive role in solving current crisis and that could give us a hope that renewable energy technologies (RET) will further enjoy strong governmental support. However, because the lack of debt capital caused by financial crisis the industry could face significant slowdown. Therefore, private equity and venturecapital (PE/VC) should be recognised as an alternative source of capital and play a crucial role in a further development of a renewable energy technologies (RET). PE/VC funds are not only important as a source of capital, but even more as a relevant selector for high potential projects and a facilitator for faster innovation and development of the RETs.

Methods

[Format: single space, 10point font Times New Roman]

In the first part of this paper, PE/VC funds are analysed. At the beginning terms private equity and venture capital have been defined and the funds structures analysed. Thereafter, it has been determined how PE/VC funds create value or/and generate value in companies they invest. Additionally, it has been examined how do the funds effect innovation in companies.

In the second part renewable energy technologies (RETs) growth potentials are analysed. The focus is on the 10 to 12 years period, because this is the common investment period of PE/VC companies. Additionally investment environment has been examined, with the special focus on Austria and Germany. Furthermore, technology has been assessed and energy and carbon markets have been analysed. At the end the situation on the stock exchange has been analysed and exit strategies for PE/VC funds have been evaluated.

The final section of the paper is divided into two parts. First part of the final section is empirical and there companies have been questioned, in order to determine the percentage of the dept capital used for their projects. In this part we wanted to get a feeling to witch extend do the companies, that are developing and selling renewable energies, depend on the debt capital. The method used was so-called problem-focused interview (see Diekmann 2007). The assessment of the interviews was qualitative, because only 10 interviews have been conducted. After that, with correlation analysis it was assessedwhich factorscorrelate most with the so called “The WilderHill New Energy Global Innovation Index” (NEX) and Renewable Energy Industrial Index (RENIXX). The most important factors analysed were amog others:prices of carbon emissions, oil prices, gas prices, increase in primar energy use and gross domestic products. At the end regression analysis was used to predict further development of the already mentioned indices.

Results

[Format: single space, 10point font Times New Roman]

So far RET industry has shown substantial growth figures. However as a result theconducted interviews have shown that this growth figures were supported through debt capital by huge extend. Especially project developers had an average leverage of 30/70 in favour of the debt capital. However due to the current financial crisis and lower credit rankings for not only renewable energy companies and start-ups but also for big utilities, the companies can no more rely on low-interest credits. Therefore, with further strong government support shown in feed-in tariffs and tax reductions, PE/VC could play animportant role in further fast development and innovation of the RET. Correlation analysis has shown that increase of GDP in EU, US and China strongly influence increase in primary energy consumption, and therefore an increase in prices of fossil energy sources. Furthermore this increase leads to higher carbon prices, and it strongly support further growth of companies within renewable energy industry. Therefore, investment of the PE/VC funds in the time of crisis, when renewable energy companies are to large extend undervalued and out of capital, could lead to substantial profits in times after the crisis, i.e. 10 to 12 years after initial investment, which is usual exit point of PE/VC. A final benefit for national econmies as well as the whole society would be that nowadays scarce financial resources are investedin high potential RE companies that could face bankruptcy and entrepreneurial failureotherwise.

Conclusion

[Format: single space, 10point font Times New Roman]

The final conclusion of the present paper is that RE development and a future financial profits is strongly linked with expected net present value that is again influence by economic development, oil price, carbon price etc. However, if we compare the present data we can notice that RE companies outperformed many blue-chip enterprises. Therefore RE-Investments of PE/VC funds could, on the one hand play an important role in overcoming crisis in terms of sustainable development and on the other generate substantial profits and know-how at the exit.

References

[Format: single space, 10pointfont Times New Roman]

Anders, G. (1992). The Barbarians in the Boardrooms. Harvard Business Review, 70(4), 79-87

Asbeck, F. (2006) Die Zukunft der Sonnenenergie. In: Schwanhold E. und KummerB. (Hrsg.): Nachhaltige Energiepolitik: Herausforderungen der Zukunft. Bad Honnef, S. 137-143.

Berg, A., & Gottschlag, O. (2004)a. Wertgenerierungshebel in Buyout – Transaktionen. M&A Review, May/2004, 207-210

Berg, A., & Gottschlag, O. (2004)b. Understanding Vale Generation in Buyouts. Paper: 1-44

Bergauer, D. M. (2007). Wie Finanzinvestoren Wert ihre Beteiligungen steigern: Operative Hebel wirken stärker als Finanzakrobatik. M&A Review 7, 338

U.S. Department of Energy (DoE) (2008). 20% Wind Energy by 2030 – Increasing Wind Energy´s Contribution to U.S. Electricity Supply.

Deutsche Bundesministerium für Umwelt Naturschutz und Reaktorsicherheit: „Wasserkraft – Kurzinfo“: geladen am 4.3.2009

Diekmann, A. (2007). Empirische Sozialforschung, Grundlagen, Methoden, Anwendungen. Reinbek bei hamburg: Rowholt Taschenbuch Verlag.

Droxner, S., Bohlen, A., Rehmet, H., Seeliger, W. (2008). Zukunft der Photovoltaik-Branche: Des „Unschätzbaren“ Bewertung. Equity Research Institutionals. Landesbank Baden-Württemberg.

Easterwood, J.C., A. Seth et al (1989). Impact of the Leveraged Buyouts on Strategic Direction. California Management Review. 32(1). 30

Haas, R., & Kranzl, L. (2006). Erneuerbare aus und in Österreich. Technische Universität Wien, Wirtschaftskammer Österreich Wien.

Jensen, M. C. (1986). Agency Costs of Free Cash Flow, Corporate Finance and Takeovers. The American Economic Review, 76(2), 323-329.

Jensen, M. C. (1991). Eclipse of the public Corporation. The McKinsey Quarterly , Nr.1, 117-144

Jensen, M.C. (1993). Presidential Address: The Modem Industrial Revolution, Exit, and the Failure of Internal Control Systems. Journal of Finance, Vol. 48 .831-880.

Jones, A., Jensen, M. C., Kaplan, S., Feldberg, M., Hoestery, B. & Cary, D.(2006). Morgan Stanly Roundtable on Private Equity and its Import for Public Companies. Journal of Applied Corporate Finance, 18(3), 8-37.

Peneder, M., Schwarz, G. (2006). Die Wirkung von Private Equity und Venture Capital auf Innovation und Wachstum der Unternehmen. Österreichische Institut für Wirtschaftsforschung (WIFO).

Peter, S., Lehman, H., iSuSI Sustainable Solutions and Innovations, World Council for Renewable Energy (WCRE) (2008) Renewable Energy Outlook 2030 - Energy Watch Group Global Renewable Energy Scenarios. Berlin.

Resch, G., Held, A. et al. (2008). Potentials and prospects for renewable energies at global scale.Energy Policy, 36(11), 4048-4056.