Executive Viewpoint
Investors change focus to downstream
3 February 2010
Only just 18 months ago, upstream solar looked good. But the dried up debt markets have put a massive strain on many upstream solar energy companies, which has had a knock-on effect across the entire supply chain, stopping many companies from meeting their growth targets. We speak to Franco Hauri of Climate Change Capital to see how he and his team are assessing the situation.
By Katherine Steiner-Dicks
“Eighteen months go upstream looked good. Demand was stronger than supply, but the value soon shifted to downstream,” says Franco Hauri, an Associate Director in the Climate Change Capital Private Equity Fund.
“The move to downstream has been driven by a shift from high demand of modules, but since the credit crunch producers are not finding finance to meet orders. Historically, companies were funded up to 80% from bank lending facilities and 30% by equity investors.”
But the second figure is rising out of necessity.
Money is becoming available for those companies in the downstream space with all major British banks back into the business, albeit at a slower pace. This is particularly the case for Barclays.
The high capacity of modules has made manufacturers take the tough decision of slashing prices up to 50% “They’ve tried to share the pain with suppliers, which has in effect squeezed margins,” says Hauri.
Large solar plans taken on by utility companies and large infrastructure funds in France, Italy, Greece, Germany and Spain, are however, still bringing in good returns since they have the buffer of high government subsidies.
Anything with high subsidies is currently meaning good returns since the investment asset is guaranteed by the government and perceived as low risk.
Maintenance outlay is also perceived as low risk since maintenance is minimal once solar is connected to the grid.
But CCC’s investment focus is now on downstream companies averaging five years old that have proven products or services and are looking for growth capital.
“We mostly do straight equity deals between €10m and €20m,” says Hauri. “But we can be flexible and do leveraged debt as well smaller deals between €5m to €10m,” he explains.
But the one thing CCC is looking for is a growth story. “If a company is ten years old, it’s more than likely going to be too big for us,” he says.
Tapping talent
And given the renewables sector is very young, management candidates don’t have 20 years experience, which means firms like CCC are looking for people who moved into the sector early with partially developed products with the view to move to the next level of growth.
However, the investment firm is also willing to help management along where they need it, especially if the product’s technology has an attractive market proposition.
But to get noticed target companies will need a solid business plan, one which is not afraid to point out the competition’s advantages.
Companies looking for funding will also have some form of market share, a relevant management track record; and a have a clear illustration of their financials.
They also must know their market better than any potential investor does. .
“We are happy when we meet high quality managers,” says Hauri.
“We hope the industry is going to improve product quality and efficiency while decreasing costs.
“Once the consumer sees solar energy as a competitive product the industry can only grow faster,” he says.
Open to opportunities
“Government cannot continue to pour money at its current rate for the next 10 to 15 years,” says Hauri.
“We would hope as the industry matures and grows more efficient, government will naturally reduce its exposure to subsidies with investment opportunities opening up to private equity.”
Climate Change Capital’s portfolio includes Sulfurcell, a German thin film (CIGS) PV module manufacturer, which is undertaking a significant expansion of its manufacturing capacity and has recently started production at a new plant in Berlin that eventually will have a capacity of 75MW.
The funding required for the facility expansion was secured through a €87m equity funding round completed in June 2008 that was led by CPE and Intel Capital.
CPE invested €12m in the round.
CCC’s other investment in the solar sector is Enerqos, an EPC (Engineering, Procurement and Construction) contractor in the Italian market with a growing presence in France and Greece.
The company is involved in the development and planning, technical construction and maintenance of solar PV plants, which it delivers as turnkey systems to customers including utilities and financial investors, with guaranteed performances.
The product offering includes solar farms, large industrial roofs and BIPV (Building Integrated Photovoltaics) applications.
Enerqos has installed more than 10MW in Italy, one of the fastest growing markets for PV in Europe, and has subsidiaries in France and Greece.
CPE invested €10m as the sole institutional investor alongside management and early founders.
