Sunday, May 03, 2009

wsj: Jefferies’ Deninger Takes Aim At Energy Project Finance

"Paul Deninger has been very influential in persuading the National Venture Capital Association to launch an effort to promote small IPOs led by boutique investment banks as a way to generate liquidity.

Now the vice chairman at investment bank Jefferies & Co. has zeroed in on another key problem for the venture industry: how to come up with capital to finance cleantech power generation. Private equity firms, investment banks and hedge funds stepped up to provide project financing for solar and biolfuels deals that VCs backed before the financial crisis, but that money has mostly gone away.

Deninger says much of the thinking about project financing in the venture industry has been wrong-headed from the get-go. From the audience during a cleantech panel Wednesday at the NVCA’s annual meeting in Boston, he declared that VCs “don’t understand debt” and called venture project finance an oxymoron.

In an interview afterward, he had this to say (edited for clarity and space):

Clean technology has become the third leg of the venture capital industry. Between 10% and 14% of venture capital is going into cleantech. There are three primary areas as I define it in cleantech for investment: generation, distribution and the demand side, consumption.

Early-stage venture historically has been mostly on generation. By that I mean solar, biofuels, et cetera, things that are going to provide an alternative route for generating electricity, generating power in any way, shape or form. The problem on that side of the business is scale. Scale matters. VCs do not do scale well. Why? Because they provide equity financing and equity requires a very high cost of capital."


Marc Solomon said...

VC's are not good a debt financing, which is what is needed for scale in most cases. Private Equity can do this, but more likely it will need to be investment banks getting in the mix. However, they will need stronger credit counterparties to complete deals.

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