Corporate strategic alliances and initial public offerings will transform the biofuels and advanced biotech industry as investor appetite for equities sharpens on positive market sentiment.
Speaking on the side-lines at the World Biofuels Conference in Rotterdam, Michael Eckhart, managing director and global head of environmental finance at Citigroup, says the second generation of biofuels companies demand new forms of financing and, coupled with the recent record stock market highs, this will ignite new investment in an industry that needs billions of dollars of cash.
"We see the one of the best paths forward is through biofuel companies earning corporate alliances with major players in the energy and fuels market that can provide capital without the stringent conditions attached, as per project financing," says Eckhart, who is based in New York.
"In today's debt capital world, some of the most successful large corporate companies can raise money in the bond market at a lower cost of capital at even 3 to 6 percent interest rates, unlike project financing which can be substantially higher. This way, the biofuels projects place a balance sheet between investors and projects, thereby shielding investors from technology risks, and everybody wins," he adds.
Eckhart also emphasises how the stock market will play an important role in the financing of biofuels and advanced biotech companies from this year onwards, despite failed initial public offerings (IPOs) in the past.
"While listing on the public market is another very viable route, as several biofuels companies have successfully completed an IPO, their performance has fallen below expectations and we have seen declines in stock prices. As of the middle of 2012, the IPO window closed and biofuels companies doing IPOs stopped. In the onset of the global financial crisis, this backlog has widened in the US and already there are several companies waiting to launch," Eckhart says.
"However, this year there has been a major turning point in terms of the stock markets which we see will lead to more companies launching an IPO and investors coming back to the market. We are a lot more optimistic than last year as the stock markets has now crept up to all-time highs and investor sentiment has shifted," he adds.
According to Citigroup surveys, around 80 percent of investors say that they are more likely to move their capital into equities than other markets.
"We have also seen a dramatic shift from equity investment fund out flows to in flows in the past three months. While these do not guarantee a continuation of these trends, it has caught out attention," he adds.
The biofuels and advanced biotech industry is moving into, what market experts dub, the second generation because the processes they use to create different forms of fuel such as non-food cellulosic used in the commercialisation of chemicals, utilise radical and emerging types of technology.
"The second generation requires commercialization of entirely new and complex technologies and this is added to the market and economic risks that the previous generation also faced. But it also has the opportunity to attract a new class of investors, those that have already made money in the biotech field. The second generation's investment requirements are substantially higher than the previous generation. Bio-refineries will need hundred of millions per unit or billions over time for multi-plant strategies," says Eckhart.
"For the second generation, the financing environment is quite different and presents challenges we still have to work on. However, we believe that there are great business opportunities out there for investors, and the effectiveness of many of these new second generation technologies will be demonstrated in the next three years or so. However, this technology revolution will surely be around 10 years or more," he adds.
First generation technologies include distillation, which is a very well proven technology and has enabled growth of corn-based ethanol that has been prompted through government mandates.
There are usually four forms of financing for biofuels and biotech companies, which are private equity, IPOs, project financing and investments from large corporate strategic partners.
However, due to the increased investment needed to get operations going for the second generation of groups, Eckhart believes that the latter two are the most attractive for investors and companies.
"Seven biofuels companies have filed for IPOs and will be ready to launch this year if the IPO market reopens for biofuels and advanced biotech companies," says Eckhart. "Most of the industry's financing comes from private equity but at the moment the projects are on such a larger scale that it is more than most private equity firms can handle alone. Project financing is sometimes available in special situations. This often requires strong off-take agreements, fuel supply agreements and of course the technology has to be proven," he adds.
Despite Eckhart's positive outlook for the industry, he does emphasis that certain milestones will need to be achieved in order to keep investors on the companies' side.
"A string of successes will lead to renewed success. Some companies have already fallen short, which of course has created a more difficult environment for the rest of the industry. We need to see a consistent series of companies completing their projects on time and on budget in order to get a successful track record going. We are starting to see this already which is creating some cautious optimism about the sector again," says Eckhart.
This week ZeaChem, a biofuels company based in Colorado, became one of the first operational cellulosic bio-refineries in the world by producing a commercial-grade cellulosic chemicals and ethanol at its 250,000 gallons per year bio-refinery in Boardman, Oregon.
ZeaChem said strategic partnerships with companies such as GreenWood Resources Valero and Chrysler helped provide its financing.