Headwinds Fading for Cleantech IPO Market

Cleantech IPOs were among the many rained out by a stormy market this year, but analysts say better times are ahead.

“We still think this market is undercapitalized,” Morgan Stanley Managing Director Kevin Genieser told a recent conference in San Francisco.

“Companies with relatively small revenue bases and relatively modest gross margins at the time of their IPO are having successful deals out in the market,” said Genieser, "Investors are looking to put capital to work” in cleantech.

Tesla Model S
Source: Tesla Motors
Tesla Model S

So far, the last 12 months have been a choppy year for cleantech IPOs in the US.

Electric vehicle battery manufacturer A123 debuted in October 2009 at $20 a share, almost double its estimated range of $10-11. But the first day would be close to its 52-week high. It currently trades around $10, for a $1 billion market cap.

Then in June 2010, electric car builder Tesla Motors launched, beating its $17 target and closing at $19 on its first day.

The high-profile automaker rode a PR wave at its debut, including buzz around how the firm could help revitalize the manufacturing sector in its home state of California, at a time when Detroit's Big Three were still on government life support.

Tesla stock has since held near that level, trading around $21, for a $2-billion market cap, while the broader market has climbed since it's debut.

Finally, on September 28, biofuel-makerAmyris Biotechnologiesdebuted at $16, below its target of $18-20. Since launching, it has traded in the $16-18 range.

U.S. cleantech IPOs have raised $600-$700 million a year during 2008-2010 period, down sharply from a record $3.2 billion in 2007, according to boutique investment bank Greentech Capital Advisors, a trend no doubt exaggerated by both the financial crisis and the ensuing recession.

Uncertainty about government policy hasn’t helped the sector. Though there have been plenty green jobs photo-ops from campaigning politicians of all stripes this year, sweeping climate change legislation stalled in Congress, which has also generated little clarity about long-term subsidies for renewable energy, biofuels and electric vehicles.

Add that to a jittery equities environment overall, says Morgan Stanley’s Genieser, and you get a market that’s still “challenging” but improving.

“As we think about IPOs, when we look back historically, the best times [to launch an IPO] are when volatility is at its lowest point,” he told conference attendees. “Frankly, a lot of money managers out there say, ‘Look, I’ll just play the stocks I currently have; I don’t need to take new bets on new ideas.’”

The VIX spiked to 45 early in the summer, killing risk appetite, but has moved back into the 19-23 range that analysts say should peak investor interest in new companies.

Some markets aren’t waiting—Chinese cleantech IPO activity has been booming in the past year.

According to research firm The Cleantech Group, China accounted for over half the deals and 69 percent of all capital raised from cleantech IPOs in 2009—including LDK Solar and Yingli Green Energy compared to26 percent for the U.S.

"It's been fashionable to complain about poor cleantech IPO returns in North America, but large returns are being made in China,” says Dallas Kachan, managing director of cleantech research firm Kachan & Co.“All the largest cleantech IPOs for the past four quarters have been in China."But while the Chinese appetite for risk may still be outstripping domestic interest, that could be good news for the long-term viability of the sector.

"I think the focus should be on a steady stream of successful offerings. I think as the industry matures, you’re going to see that happen." -Founder, The Westly Group , Steve Westly

In this environment, investor attention may be turning away from capital-intensive, less-proven technologies from firms with no revenue—like somebiofuel technologies—and toward more established cleantech segments that are generating revenue, like energy efficiency, lighting controls and smart-grid technologies.

Also less likely to launch are companies dependent on government policy. Wind-farm developer First Wind shelved a planned IPO in late October, having cut the offering price from $24-26 to $18.

Reflecting the difference between the dotcom frenzy of the early 2000s and the maturity of the internet sector today, the gap between investor “headline awareness” of cleantech firms overall and determining what is actually working in the space may be shrinking.

While Tesla made a big media splash this year, another quieter IPO by smart-meter firm Elster Group has held its own since debuting in October at $14, albeit pricing at below its $16-18 target range, much like Amyris.

“The Tesla IPO was the closest we've had to a well-known consumer brand go public in cleantech, but the company's fundamentals were poor,” says Kachan, pointing out that as the investing public gets more familiar with the nuts-and-bolts of the sector, there should be more successful cleantech IPOs, as long as general market conditions warrant.

“The ‘Google’ cleantech IPO equivalent will be a company with strong financials that also manages to capture the imagination of investors,” he says. “Marketing will matter for the killer cleantech IPO."

Steve Westly, former state controller of California and founder of cleantech-focused VC fund The Westly Group, agrees.

“I think the focus should be on a steady stream of successful offerings,” says Westly, whose firm was an early investor in both Amryis and Tesla. “I think as the industry matures, you’re going to see that happen."