‘The climate change crisis is like a huge chocolate elephant,’ says Adrian Hutchings, ex-British Nuclear Fuels (BNFL) man and now chief of alternative energy rising star Energetix. ‘It’s impossible to eat it all at once, but if you start nibbling you’ll get there eventually.’
Energetix is one of the most successful young companies in a fast-growing and fashionable sector. Just one year after Hutchings took Energetix onto the Alternative Investment Market (AIM), raising £6 million in August 2006, he was able to come back to market for further funds at three times the float price.
Having been in charge of developing alternative energy companies over 15 years ago when at BNFL, Hutchings is, despite his fondness for wild analogies, a sage voice on the subject: ‘I see the sector expanding enormously over the coming years. There’s this current obsession with searching for the silver bullet, the one technology that will solve the climate change problem, when in fact it’ll be lots of silver bullets.’
That’s welcome news for entrepreneurs with a penchant for saving the planet. Research by Growth Company Investor, in association with law firm Hunton & Williams, has found the junior market to be a hive of green activity, with a tally of 69 companies operating in the sector. Renewable Energy Companies on AIM 2007 reveals that a whopping £1.6 billion has been raised at IPO since 2000 for renewable companies, with an average fundraising of £22.5 million per company. This is more than double the £10.6 million that an average new AIM company managed to raise since 2000.
This year has seen a reduction in the number of renewable companies completing an IPO, as at the time of writing, only 13 flotations have succeeded. This year’s batch has raised £350 million, almost half the £690 million of new cash hauled in by the 21 IPOs in 2006. However, progress has been made with new energy companies raising an average of £27 million in 2007 (AIM average £21 million) and accounting for 6.4 per cent of the total funds raised on the junior market.
In share price terms, seven of the 13 new issues this year have fallen below their issue price, although given the tempestuous nature of the market this year, this is perhaps more a comment on the economic climate than their individual prospects.
Another renewables veteran, Mike Proffitt, formerly chief executive of the Manx Electricity Authority, which first invested in renewable technologies, is now in the same role at Renewable Energy Holdings (REH). This venture was floated on AIM in early 2005, attracting £10 million of new cash, and so far has seen its shares maintain a steady upward march of 14 per cent.
Proffitt thinks the best way of looking at the sector is to divide it into two distinct groups: ‘Usually, there are big companies like EDF and E.On, which own and operate only in proven renewable technologies like wind and solar, and then you’ve got small pure technology companies and their business plan is to prove their technology and make a significant business out of it.’ He claims that REH’s success so far is due to its balanced approach to the sector, combining the above two elements.
‘We’ve got proven technology in lower risk areas such as wind projects in Germany, then we’re upping the risk-reward ratio with more wind in Poland and Wales and landfill gas in Wales, and then we’ve got our wave project – much higher-risk but with big potential rewards,’ he says.
Go with what you know
By launching straight into areas where the results are more tried and trusted, REH is already generating revenues and was subsequently able to extract a further
£8 million from institutional investors and a 135 million (£97 million) debt facility with its bank to gear up its expansion. That said, many of the green enterprises on AIM are some distance from making money.
Over the past 12 months, fundraising for the 16 renewable energy companies that have come to market has been based purely on promise and speculation as opposed to a track record of profitability. This puts the sector, quite rightly, in a similar class to the exploration and biotech arenas. Of all 69 renewable ventures, only 11 have broken even; 14 recorded revenues of less than £1 million and 20 are yet to record revenues of any sort.
Fuel cell developer ITM Power falls into the latter category. It’s been working on its intellectual property for almost eight years and has been on AIM since 2004. CEO
Jim Heathcote explains: ‘We may have been quite late with taking the technology into commercialisation, but we’ve been concentrating on maintaining our long-term future by building barriers to entry, making sure we’re patent-protected everywhere.
‘It’s exceptionally difficult for a pre-revenue company to float on AIM. We were very lucky to get great backing from leading investment funds and hedge funds. Some hedge funds are long-term investors. They all seem to understand that we are trying to run a long-term business and that if we get the business right the share price should eventually follow.’
Know your investment
Heathcote, a former investment banker and founder of a fund investing in hydrogen technology, says that any frustration about the move into revenue-generating stages comes only from confusion or lack of specialist knowledge. ‘Most institutional shareholders haven’t been too frustrated as we’ve been very clear cut and always said this was how it would go. But for a lay person it can be difficult to differentiate between our technology and competitors’. The success rate of fuel cell companies is not good so obviously people are a bit wary.’
Similarly, Hutchings attributes the positive reaction to Energetix to a similar focus on staying out of the realms of esoteric science. The company’s main product, Genlec, a household boiler that produces not only heat but electricity, is a robust piece of engineering that most people already have in their homes. ‘Genlec is a fridge running backwards – all the components are mass-produced. Our industrial batteries are air conditioners running backwards. But it’s all engineered smartly.’
He adds that the way to succeed in this market is to avoid pushing a technology into anywhere it will fit. ‘Success comes about through establishing what the market needs rather than embarking on a “technology push”. We say: “This is a problem, let’s find the solution,” as opposed to blindly inventing a solution for an unspecified problem.’
A study released by the UN Environment Programme estimates worldwide investment into the renewable/green energy and clean technology sector to be above $100 billion (£48.6 billion) in 2006 – and conservative estimates predict the market will grow a further 25 per cent by 2010.
This growth is being driven by an array of political, social and environmental factors and, unsurprisingly, the increasing amount of money available has attracted all manner of ventures, speculative and otherwise.
Equally unsurprising is that AIM has proven to be a natural home for those operating in this nascent technological arena and, while the share price performance has been wide and varied, its emerging dominance as the public market of choice for the sector – in Europe at least – seems assured.