Credit crunch hits Q1 2008 investment in clean energy but fundamentals remain strong
The global drying up of liquidity has hit investments in clean energy, but with the fundamentals – rising energy prices, concern about climate change and supportive policies – remaining strong, sizeable funds have still found their way into the sector during the first quarter of 2008. This is the message of preliminary figures for Q1 compiled by New Energy Finance, the leading clean energy investment analysts.
Looking first at venture capital/private equity invested in companies, the impact of the credit crunch is clear. Whereas in Q1 2007, investments totalled $3.7bn, just $2.4bn has been recorded for the first quarter of 2008. There was a sharp divide between private equity, which was sharply down, and venture capital, where investment was up on a year ago. Private equity saw a 64% fall from $2.5bn in Q1 2007 to just $878m in Q1 2008. Partly, this was a reflection of the uncertainty and volatility in the financial markets and the drying up of credit availability.
But VC investors put $1bn into clean energy in the first quarter, against $668m at the same stage last year, an increase of 57%. Late stage VC investments saw a big increase, as companies unable to raise money from the public markets because of the ongoing turmoil, turned to VC instead. Solar was once again the biggest sector in overall VC/PE investment, at $879m, approximately the same as Q1 2007, but with a marked increase in money going into technology rather than expansion. Overall VC/PE investment in most other sectors contracted.
Turning to public market investment in clean energy firms, this has virtually dried up since the $7.2bn initial public offering of Iberdrola Renovables in December 2007 – a deal that now looks like it marked the top of the market. Just $807m was raised on public markets in the first three months of the year, compared with $5.2bn at the same time last year. The few deals that did take place were chiefly in the solar sector, where $667m was raised.
Chinese maker of photovoltaic wafers Renesola, which is already listed on London’s AIM, raised $130m through an offering of American Depositary Shares on the New York Stock Exchange in a deal that suggests some clean energy companies are now willing to accept more stringent US regulations to gain access to a larger pool of capital. The only other deals of more than $100m saw Solarfun, another Chinese group, raise $150m in convertible notes, and Evergreen Solar raise $150m through a secondary offering.
Sentiment in the US biofuels sector has, if anything, deteriorated, with high commodity prices adding to the general malaise caused by market volatility and it was unsurprising that biodiesel groups Imperium and Renewable Energy Group pulled their IPOs during the quarter. However, many companies are still planning to come to market when conditions improve, including a number of Brazilian ethanol groups, according to New Energy Finance analysts.
Asset finance new build investments reached $14.2bn, approximately the same as Q1 2007. The first quarter of 2007 saw the tail-end of the boom in investments in corn-based ethanol plants in the US – this quarter, the full impact of higher corn prices and fears over sustainability are being felt. US ethanol saw a sharp drop from $1.7bn in Q1 2007 to just $311m in 2008. However, outside the US, inflows into biofuels projects look solid, in Brazil as well as newer markets such as Hungary, Russia, Mozambique and Thailand, bringing investment in biofuels to $3.1bn, just down by 15% on Q1 2007
Investment in wind assets, at $6.6bn in Q1 2008, compared with $7.2bn in the same quarter last year, seems to be holding up despite the looming expiration of the US Production Tax Credit, suggesting that developers are confident a solution will be reached before the PTC runs out at the end of the year. Solar assets also attracted investors, with $3.2bn going into solar projects, compared with $1.9bn a year earlier. This investment is being driven partly by efforts to beat the deadline for projects to be covered by Spain’s current generous solar tariff, while solar thermal energy generation (STEG) projects are also receiving a lot of attention.
Corporate M&A activity surged in Q1 2008 compared to the same period last year, with total transactions of $7.7bn compared to $3.5bn. In fact Q1 2008 saw the second highest level of corporate M&A activity in any quarter, after Q3 2007. This was due to some large acquisitions, such as Scottish & Southern Electric’s $3.2bn purchase of Airtricity, the Irish wind farm developer. No doubt the impact of the credit squeeze meant that some companies became targets of corporate acquirers rather than private equity investors or the public markets. Other corporate acquisitions included VeraSun Energy’s take-over of US BioEnergy for $470m, SunEdison’s purchase of Renewable NRG, a PV installer, for an undisclosed amount, and AREVA Group’s stake in Koblitz – Renewable Energy, a Brazilian biomass project designer.
