It's just an early sign, but two recent IPO filings by biofuels producers illustrates what may be a growing trend of bypassing private equity providers to go straight to public markets.
- VeraSun Energy filed for a $150mm IPO, with the proceeds to be used to finance additional ethanol facilities. Interestingly, VeraSun is currently selling their ethanol to Aventine, but plans to stop doing so in 2007.
We've talked before about how VCs are finding it somewhat difficult to play in the biofuels market, despite an increase in interest in the space given high fuel costs and increased government support (at least verbally).
The major issues for venture capitalists seem to be a) the fact that most such new facilities are being built with very mature, non-proprietary technologies, which can limit scalability and open the possibility of strong price competition, eliminating margins over the long run; and b) putting "steel in the ground" is a highly capital-intensive investment which is also not the kind of scalable investment VCs look for.
Nevertheless, VCs continue to look for opportunities to make direct investments
in biofuels producers when they feel it makes sense, and even some indirect investments by providing capital to project finance
outfits. Well worth checking out is Vinod Khosla's take on the market and its potential
(note: link opens a HUGE 7.3MB powerpoint).
But the VeraSun and Aventine IPOs suggest that the flow of such private equity into biofuels isn't seen as being as efficient than normally costly IPOs can provide via public markets. This may reflect that there are as yet unmet capital funding gaps in the project finance side of cleantech investing, or that the appetite for biofuels stocks among public market investors is so great that companies can get dramatically higher valuations via IPOs, or both.
It certainly raises some intriguing questions:
- Will more private funders (not just VCs, but also hedge funds and traditional energy project financiers) jump into this market, chasing IPO exits, providing more capital and higher valuations?
- Alternatively, is this just a short-term window for high-valuation IPOs that will soon close?
- Will this fairly concentrated market (ADM supplies a quarter of total US ethanol production, followed by a short list of others like Aventine and VeraSun), with clear geographically-driven natural monopoly dynamics, experience continued strong entry by new players, driving down margins for all players? Note that there's already been strong growth from 50 US ethanol facilities in 1999 to 95 such facilities today, and an additional 31 are already under construction. On the other hand, ethanol remains only 2.5% of all US gasoline consumption by volume.
- When will breakthrough technology start to play a more important role in this market?
We'll have to watch these IPOs to see what comes out of this nascent trend; it's an intriguing situation.