Are IPOs signaling biorefining market growth potential?

By Bryan Sims | October 05, 2011

In an industry that’s working feverishly to commercialize drop-in hydrocarbon biofuels and chemicals to diversify America’s technology portfolio and fuel mix for various on- and off-road applications, access to capital is certainly a critical component within a biorefining company’s scale-up strategy. A number of biorefining companies are finding that filing for an initial public offering is a viable finance mechanism for raising much-needed capital to achieve those objectives.

Certainly, there are a few other ways to obtain funding such as venture capital or through strategic partnerships, but within a week of each other, three biorefining companies filed IPOs—Mascoma, Elevance Renewable Sciences Inc. and Fulcrum BioEnergy LLC—all of which offered bids at or above $100 million, which brings the total IPO filings of biorefining firms to 11 so far this year. Biorefining Magazine caught up with Pavel Molchanov, senior vice president and equity research analyst for Raymond James & Associates’ energy group, to get a better picture of why biorefining firms might view the IPO market as viable capital-raising strategy and, if so, how this might affect the industry going forward.

Q: Are IPO filings an indication that the window for obtaining capital from other means may have shrunk, or is it simply a normal route of financing to obtain the capital necessary to build commercial biorefining plants?

Molchanov: These are early-state businesses that need to build production plants that cost tens of millions, if not hundreds of millions, of dollars each. Venture capital firms, which have traditionally funded these companies in their research and development phases, are not inclined to fund hundreds of millions of dollars of capital expenditures. What that means is that these companies need to raise capital from either, one, strategic investors like oil and gas companies or large chemical companies and, second, public investors. Those are the two sources of capital that are available to early-stage advanced biofuel developers right now.

Venture capitalists have historically funded these companies, and venture capital firms as a rule fund companies in the research and development stage. Venture capitalists aren’t in the business of funding $100 million production plants. To fund $100 million production plants, these companies are either bringing in strategic partners or they’re raising capital from public investors or a combination of both.

Parenthetically, when we’re talking about strategic partners and public investors, we’re talking about equity. For the debt component of financing these plants, government loan guarantees have certainly been available and some companies have pursued that process.

Q: In your view, how has the biorefining industry performed this year thus far under the cleantech umbrella?

Molchanov:  It’s worth noting that although cleantech stocks in general have underperformed in 2011 because of factors such as bear markets, risk aversion and so forth, the best performing subsector within cleantech has been the biofuels and biochemical space. Why have these stocks like Amyris, KiOR and so on performed better than solar, wind or battery companies?

First, you get direct leverage to the price of oil and, although the price of oil hasn’t obviously come off of its highs amid the economic weakness, it’s still relatively strong and investors appreciate that point.

Secondly, unlike, for example, the solar industry, with biofuels and biochemicals China isn’t a competitive threat. If anything, it’s actually more of a benefit. What I mean is that China today is eating the lunch of many Western solar manufacturers. In the case of biofuels, China is just not a factor. If anything, the faster the Chinese economy and its oil demand grows, the better it is for oil prices and, indirectly, the better it is for the economics of biofuels.

The third reason is that for advanced biofuels and biobased chemical companies, government policy isn’t a major issue. Certainly, it helps that we have RINs, the cellulosic credit and so forth, but none of those things are anywhere near as central to the economics of advanced biofuel developers as solar subsidies are for the solar industry. There’s generally less policy risk.

Q: When will we see institutional bank lending become a significant finance component for biorefining companies during their commercial scale-up efforts?

Molchanov:  I think there will be commercial bank lending, but at the early stages of production commercial lending isn’t likely to be significant. Generally speaking, commercial banks tend to lend to projects that already have proven track records. Once the first one or two commercial plants are built for any given company and their economic matrix has been demonstrated, then I think commercial lending becomes a more viable option. But from the get-go, to build the first couple plants for any given company, those are going to be heavily equity funded, coupled possibly with government backing.