A 2011 Tool Kit for Savvy Cleantech Investors

3/24/11

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private equity and venture capital funds in setting up RMB-denominated funds to access cleantech investments in the PRC. Renewable energy companies (to date, principally solar and wind) are an important part of the steady stream of Chinese-based companies executing IPOs in the U.S. and Hong Kong. President Hu Jintao and President Obama released a joint statement saying they view climate change and energy security as two of the greatest challenges of our time, and further announced a series of joint energy deals, including a $7.5 billion collaboration between Alcoa and China Power Investment Corp.

In short, it remains vital for investors and their portfolio companies to maintain their global reach, particularly by utilizing the “China price” of manufacturing to drive down cleantech costs.

—A comeback for IPOs. It is a fundamental maxim that a rising IPO tide lifts all investor boats. Though the market remains volatile, the IPO market has been strengthening, and 2011 could be a strong year for cleantech IPOs buoyed by a recovery of equity prices from their Great Recession levels. Some strong companies that are unique, first-of-a-kind plays coming to market, and cleantech startups on pace for IPOs in 2011 include Bloom Energy, Brightsource Energy, Enphase Energy, Opower, Silver Springs Networks, and Solar City.

—Government incentives. Government policy remains critical to the development of the cleantech market, and federal, state, and local policy driving toward energy security and renewable and sustainable energy production will continue. The Department of Energy loan guarantee program has been crucial in the development of innovative energy projects. Most of these loan guarantee recipients have been shining stars on the equity-raising side. We believe that the feds have found their stride with respect to this program and that the dollars will continue to flow for the next several years. The tax incentive and equity market will strengthen in 2011 as financial firms return to profitability. Investors must use the partnership-flip model, the sale-lease back model, and other innovative and creative tax structures to take advantage of investment tax credits, production tax credits, accelerated depreciation and other tax incentives. The extension of the Section 1603 cash grant (in lieu of investment tax credit) at the end of 2010 is a huge plus for cleantech project finance activity in 2011. This cash grant is “bankable” and forms a critical component of project finance structures. Finally, President Obama has recently launched his “Start Up America” program, which is a wide ranging public-private partnership designed to bring transformative innovations to market, with a focus on clean energy.

As you can see, the cleantech funding market will continue to be pushed forward by powerful economic and political drivers, but remains subject to technological, regulatory and market risk. We believe that educated investors with a proper cleantech tool kit will combine multiple solutions to these problems, utilizing unique and innovative structures to separate the wheat from the chaff and generate outsized returns.

Steve Rowles, a partner with the Morrison Foerster law firm, is chairman of the firm’s San Diego corporate group and former co-chairman of the emerging company venture capital group and private equity fund formation group. Follow @

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