Clean Tech Investment Banking: Work in Finance Without Corrupting Your Soul?

Are you a sellout for reading this blog?

Bankers don’t have a great reputation, unless it’s a reputation for models, deals, pitch books, and the occasional memory of blowing their bonuses on one night at a fancy Manhattan night club.

But bankers in the clean technology sector are of a different breed – you might call them altruistic, artsy, and sometimes even Californian.

There’s a real collaboration between tech types and liberal businesses looking to exact change, one dollar at a time. If you’re in search of this intersection, look no further.

Much like how the metals and mining group is a cross between industrials and natural resources, alternative energy (or clean technology as it’s called at some firms) is a cross between technology and natural resources (and sometimes industrials).

The sector encompasses i) Solar panel designers, ii) Energy storage/automotive makers, iii) Wind turbine producers, and iv) Geothermal coordinators. In this article, we’ll walk through the following:

• How to get into these banking groups without sellingyour soul
• How to save the world and make money at the same time
• The what’s what and who’s who on clean technology, and how it comes together
• The role of Project Finance if you don’t want to pay for what you own
• Your skill set when it comes to adding value, pitch book by pitch book
• Where to go after you’ve saved the world with some good deal experience

As with any other sector group we’ve covered, the opportunity is what you make of it.

Greenfield Opportunities

Q: Have you always had a green thumb?

A: Yes, actually!

I grew up following environmental topics, and was very active in my school’s lecture series on clean technology. It all started with my first internship, where I worked for free at a small fund focused on renewables and the like.

As you know, when you don’t have much experience, any experience is far more valuable than the compensation linked to it.

Going through the recruiting process, bankers saw I had built up a track record in the area, even if the track record consisted of just one or two internships and school leadership activities.

For interviewers, it was very clear that the analyst role was just the next logical step in my career trajectory.

I found my early positions after inviting my cold calling contacts to some Greendrinks networking events.

Who wouldn’t want an eager analyst who has what it takes and is willing to go the extra mile?

I know it sounds cliché, but at the end of the day the hungriest person always wins.

What made all the difference for me was that I actually added value to my contact before even becoming a formal employee (through event invitations, summarizing articles, etc.).

Q: Right, that sounds like a great story for clean tech groups. But are most of the people in your group actually like that?

A: Actually, no one in my group studied environmental science. Most people in my group are economics or finance majors.

Some background is nice, but it’s not a must-have – as you’ve seen with other banking coverage groups. If you don’t have work experience, you can always take classes on related topics such as energy economics.

On the subject of backgrounds, you do see the occasional former accountant or former transaction advisory services specialist who decided to switch to the banking path.

Clean Technology 101: How to Save the World

Q: So what’s your coverage universe look like?

A: The alternative energy space is pretty broad, very much like industrials in the sense that you have areas such as solar that really operate more like tech companies, but then you have wind turbine manufacturers that are really more like traditional manufacturing companies, and finally you have geothermal companies that are really morelike utility/power companies.

Governmental factors move the sector, including individual policies that facilitate or provide direct investment into emerging products, and of course companies. Tax credits, state grants, loan programs, and other incentives boost particular areas within clean technology as well.

As you follow the sector, you’ll hear of companies securing these items, which add to their ability to conduct quality research and development.

Market factors influence the sector and include the price of traditional forms of energy, end-user awareness of negative externalities associated with the use of these forms, and the ease of access to these clean technology resources.

To demonstrate a negative externality, consider what happens in a bar fight. Two people start fighting, but then objects could fly around the room, and people who have nothing to do with the altercation, get hurt. The objects flying around the room are the negative externality – an outside consequence that affects a third party that didn’t choose to be involved in the first place.

This concept of resource access is important because there have been malls in Southern California with stations to plug-in your electric car – but if you really have to scour the earth in search of a plug-in station, costumers will just go for what is convenient.

Progress continues to be made, with companies detailing the locations of these plug-in stations. There are even plug-in stations for the home, which are, of course, usually powered by traditional forms of energy.

Naturally, costumers are focused on the point at which alternative energy and traditional energy have the same price point. This is somewhat related to the concept of grid parity, where the cost of electricity generated by photovoltaics is the same as the price of electricity drawn from a traditional power grid.

That being said, on the generation side of things, where the setup is extremely capital intensive, this is how I see the world:

Downstream [Module] Solar: (ex: Trina, Suntech, First Solar)

• These companies are often vertically integrated, producing the individual photovoltaics as well as the frames that hold and direct anything that catches sunlight.
• One common misconception about this area is that solar power requires a clear day or that the products don’t work on a foggy day. Nothing could be further from the truth.
• As a banker, you’ll be staffed on assessing a product’s quality and a maker’s reputation (source: Canadian Solar) – such is the focal point of any due diligence process.
• From First Solar’s standpoint, the end user base includes buildings such as those used in warehousing, agricultural, commercial offices, or industrial sites. Other end users include utilities, public agencies, and financial investors.
• You can separate this sector by component (cell, modules, wafer, etc.) (source: Nomura) or you can separate it by business line: upstream, downstream, and equipment/inverters (source: Greentech Capital Advisors)
• Upstream refers to companies that engage mostly in distribution, manufacturing, and research. Downstream refers to the more end-user facing business line, including installation (source: Renewable Energy World).

Geothermal / Recovered Energy: (ex: Ormat Technologies, US Geothermal)

• These are firms with a collection of plants that tap directly into the ground and harness the earth’s heat; recovered energy firms focus on trapping waste heat. Customers for this segment include contracting companies and owners of power plants.
• Most of the time you’ll find these firms located next to geysers or oil fields, where heated water can be tapped into. These companies require a large setup cost upfront in order to tap into trapped heat– but they also have lower costs for actually procuring energy afterward.
• For those keeping track, geothermal energy levels experience some of the lowest volatility when compared to other forms of alternative or even traditional energy.

Wind [Turbine]: (ex: Vestas, Gamesa, Suzlon)

• Steel constitutes a very high portion of the raw materials cost and since this is a manufacturing sector, it is very labor-intensive. The high setup costs create a high barrier to entry, resulting in a highly concentrated industry. The clients of this sector include independent power producers and, of course, utilities.
• For wind turbine manufacturers, valuation is driven by regulation, project stage, and strategic fit. You might find that the manufacturer separates itself from the development process.
• Much of the controversy surrounding wind turbines revolves around aesthetics once a wind farm is in place. Expect any slowdown in the energy’s acceptability to reflect back in a headwind on cash flows and valuation.

Energy Storage / Automotive: (ex: Tesla Motors, A123 Systems, Valence, ENER1)

• Naturally, the main market is anything mobile, or transportation applications. Energy storage products, or batteries, are used in industrial carts, buses, and even as backup power supplies. You can conclude that the demand for these items goes hand-in-hand with the demand for their respective platforms. From A123 Systems’ perspective, these platforms are divided between heavy-duty and passenger. Defense policy will influence the former, and government mandates will influence the latter.
• Consumer applications mostly revolve around hand-held (ex: electronic tape measure) and power tools (ex: drills). Much like traditional battery-operated tools, these items are largely driven by housing starts and disposable income.
• Some firms are even involved in the development of a grid-wide backup or stand-by reserve solution that can add to the supply level where demand spikes occur, or can help to prevent regional power failures.
• These firms also carry out research on behalf of governments through partnerships with universities or other companies.

Smart Grid: (Key Players: Itron, Elster, Sensus)

• Some banks cover this area under the term “industrial technology.” These companies sell products that collect meter data and manage software for water, gas, electric, and alternative energy.
• Now you’re probably wondering what the deal is with metering companies…  information.  Armed with data on the usage of electricity and level of pricing, utility players can better predict where demand spikes will occur and allocate energy accordingly to prevent power outages and damage to the grid itself.
• Itron goes as far as to differentiate among standard (the usual deployed for tracking utilities), advanced (stores data and communicates with hand helds), and smart metering (engage in remote connections, disconnections, and two-way communication) units.
• Product demand focuses squarely on utilities companies and other clients in the market. Anything that moves utilities will move smart grid players: housing starts, customers’ access to capital, interest rates, weather conditions, and government policies (subsidies and incentives).

Q: That was a useful walkthrough, thanks so much.

It seems like one theme in this industry is that some companies have very capital-intensive businesses, whereas others operate more like software or Internet companies with low costs.

Is it possible for a clean tech company to still pursue projects like solar panels or wind turbine farms without huge upfront capital investments?

A: Two words for you: Project Finance.

Anytime a solar or wind company wants to distance itself from an engagement, it can use Project Finance and get other parties to fund the development instead.

Essentially, financiers, debt investors, and equity investors provide capital. As you might have guessed, loans and bonds are among the most popular financing approaches.

Power/utilities, infrastructure, and oil/gas see the lion’s share of project financing. Here’s a marketing pitch book from HSBC on the subject; here is a helpful intro on the financing aspect for your perusal.

Project [Finance] Evaluation: Should You Buy A Wind Turbine?

When it comes to evaluating a project finance investment, you need to think like a private equity investor, zero in on IRR, and determine whether this figure beats a set hurdle rate – or minimum required rate of return.

As you would learn in a corporate finance course, investment science uses several approaches to determine whether or not a project gets the green light:

• Payback Period: How much time is required to recover the initial outlay to begin the project?
• Internal Rate of Return

But the problem is that these methods can contradict each other – a project with a high IRR can have an awful Net Present Value (NPV).

However, there are specific situations in which you will want to focus on one method over other methods.

Project Finance Valuation: How Much Is That Wind Farm Located In …?

Just like how you’d value a normal company, the traditional method focuses on cash flow generation to determine intrinsic values.

You’ll also consider a range of discount rates and terminal growth rates via sensitivity tables.

Net Present Value is a key output of project finance models based on calculating cash flow (see page 55 here for an example of a model structure).

Now cash flow is calculated with earnings + depreciation + interest expense +/- change in working capital – capital expenditures. This represents the amount of cash generated before anything is paid to equity or debt holders, or the Unlevered Free Cash Flow.

You would then discount these numbers by the cost of capital, just as you would with a DCF valuation for a company.

The cost of capital is higher in project finance because there is only one source of cash flow supporting the debt pay-down – the placement of the solar panel field or wind turbine farm – rather than in a typical corporate setting, in which there’s a variety of products/services contributing to cash flow generation.

So it is incredibly rare that a company and a company’s project(s) have the same cost of capital.

These projects may be highly levered as well, as noted Ben Etsy from Harvard Business School.  Etsy also notes that a real option approach can be more useful, as the WACC approach assumes a constant debt-to-equity ratio over time.

The emphasis of credit analysis is slightly different here. While Corporate Finance primarily focuses on Debt / EBITDA, Project Finance is more about comparing the debt level against the cash flows available to pay down debt.

This calculation is similar to the calculation for Levered Free Cash Flow. Follow these steps: EBIT – Tax Expense + Depreciation & Amortization – Interest Expense – Capital Expenditures = Cash Flow Available to Repay Debt (NB: no mention is made for subtracting increases in working capital).

If you’re sincerely interested in Project Finance, be sure to check out Ben Etsy’s page.

How to Value a Wind [Turbine] Company… 

Q: It’s very interesting to see the valuation topics stacked against one another. So is corporate valuation similar to the methods that you might see in Project Finance?

A: Yes and no… it depends on whether you’re valuing something that behaves like a “project” or behaves more like an entire company.  The latter can be identified as an operation with multiple diverse offerings.

If you’re looking at acquiring a project or subsidiary, then you’ll look at how much energy you’re buying as a ratio.

So you might use something close to an NPV / MW approach with individual projects like wind turbines; you care a lot about metrics like $ per KW.

See Exelon’s acquisition of Deere Renewables for an example – in this case it was an entire subsidiary being acquired, but the acquirer still looked at the subsidiary’s individual assets and assigned a $ per KW value as an item of consideration for valuation purposes.

When it comes to company valuation, by contrast, you see familiar multiples and approaches: DCF, comparable company analysis, and precedent transactions. I’ve seen the following valuation metrics and multiples:

• Enterprise Value / Sales
• Enterprise Value / EBITDA
• P/E
• PEG
• P/BV: Common Equity Value / Total Book Value
• ROE

To learn more about metrics such as ROE, please see our tutorial on ROIC vs ROE and ROE vs ROA.

In some sectors, such as wind power, it’s difficult to project far into the future and so you may have to focus more on trailing multiples rather than forward ones.

Get more on Unlevered Free Cash Flow in our YouTube channel.

Q: Thanks so much for the technical walkthrough – do you have any pitch books or Fairness Opinions that would be good to look at?

A: Of course, here’s a solar example:

• TOTAL SA / SunPower: by Deutsche Bank

A pair of smart grid examples:

• Schneider Electric / Telvent SA: by Credit Suisse (see page 12)
• Melrose / Elster: by Deutsche Bank (see page 29) and Houlihan Lokey (see page 43)

And finally, here’s a windpower or Project Finance model example:

• Windpower Project Financial Model: by Corality Financial Group

Becoming Captain Planet?

Q: So what should our readers look at if they’re looking to follow in your footsteps?

A: Greentech Media and Clean Technica provide some good coverage of the sector as does Bloomberg New Energy Finance.

The usual suspects (WSJ, FT) don’t actually cover the sector in a dedicated channel in the same way that The Economist does. In terms of overviews, here’s one on wind power, and one on the overall sector.

Q: What are the most common deal types in your group?

A: Any emerging sector is mostly focused on capital raising (debt capital markets and equity capital markets). So IPOs, follow-on equity raises, and debt financings are the most common deals here.

Once a product is more stable and is no longer changing as much, then larger strategics will step in and commit capital, so you’ll see more M&A activity.

Q: Which are the top investment banks when it comes to the sector? I’m talking about what everyone wants to know about: M&A. And maybe capital markets…

A: Boutiques include Amperage Partners, US Renewables Group, Ewing Bemiss, THiNKGREEN! Global Advisors, Cleantech Group (NB: notice the list of capabilities / offerings), and Greentech Capital Advisors.

When it comes to middle market and bulge bracket investment banks, the leaders are those who consistently rank near the top of the league tables.

Credit Suisse and Citi are known for their advisory capabilities (read: M&A).

When it comes to equity and equity-linked offerings, BNP Paribas, RBS, and Mitsubishi UFJ all have a solid presence on the league table. You may also want to look at Canaccord Genuity, if you’re into middle market coverage.

On the buy-side, you can take a look at some infrastructure funds that include a focus on clean technology, such as Stonepeak Investment Partners and more specialized funds such as URGENT VC.

The smaller you get in terms of assets under management, the more likely you’ll get staffed on community projects that have a more direct influence on your immediate surroundings.

These opportunities are just another reason to sign up for clean technology coverage over other groups… like oil and gas (laughs).

Q: What can you do when you’re done being a planeteer-financier?

A: While some firms look for clean technology experience, it’s not a requirement. It certainly is helpful if you’re going to venture capital or start-ups in the clean technology space.

But I’ve also seen cases where, for example, a healthcare analyst moved into an electric automotive parts company such as A123 Systems.

I would actually consider the clean technology group to be more of a technology banking group, and less of a natural resources group or an industrials group due to how the universe is split up.

The mega-PE firms have not been super-active in the space yet because it’s still an emerging industry and companies are relatively small.

So you definitely steer yourself more in the “getting into venture capital” or start-up / normal company direction by joining this type of group.

Q: Anything else you’d like readers to know?

A: As compensation for my insight… please remember to recycle. :-)

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If you liked this article, you might be interested in reading Technology Investment Banking: Take Over the World with Zero Earnings and Negative Cash Flows? or Restructuring Investment Banking: The Perfect Panacea for Plagues, Pandemics, and Pandemonium?