Enervation Advisors' Tantillo featured on general session panel

By Erin Voegele | January 17, 2012

Attracting investment is a primary concern for all biomass technology development companies, whether related to biobased power, fuels or chemicals. On Jan. 17, attendees at the 2012 Pacific West Biomass Conference & Trade show in San Francisco had the opportunity to learn about current trends in financing mechanisms during the event’s opening general session. The panel, titled “Financing Strategies for Biomass Derived, Energy, Fuels and Chemicals in a Tight Capital Market,” offered those in the industry three very different investment perspectives.

Bill Lemon, senior vice president of investment banking at Source Capital Group Inc., opened the discussion by noting that biomass developers are in the big leagues now, and attracting investment will be a challenge. “There is a lot of money at stake, lots of technical complications, political complications, and lots of headaches,” he said. “But, the basics of good projects haven’t changed.”

One of the most important things a biomass company can do is derisk their projects in any and every way possible. You must also find quality parties and partners to work with. “In classic project finance style, this is about execution over innovation,” he said.

During his presentation, Lemon described a variety of different investor types and their role in a project’s development process. “There are private investors, and there are technology venture investors,” he said. “There really are very, very few private equity venture investors. It’s an animal that basically doesn’t exist. [For this reason], putting risky technology in a project you hope to get financing for is not a winning strategy.”

Rather, Lemon said, different types of investors are attracted to different aspects of a project. You need to understand the type of investor you are hoping to attract, he explained. For example, project debt investors are not going to want to invest in a risky project that has the opportunity to be stupendously successful. This is because even if the project becomes very successful, the debt investor will only get the principle and interest back as a return. Alternatively, if the risky project fails, they don’t get anything. In other words, the potential risk is not outweighed by the potential payoff.

Tax equity investors, on the other hand, are not looking for cash returns. They are looking for opportunities to make use of credits or special deprecations that a relatively small project with a modest profitability can’t efficiently use in a timely fashion, Lemon said. For that reason, tax equity investors are generally mid-term investors. As tax related incentives for biomass projects draw down, however, Lemon said that classic private equity investors—who understand energy and have been good investors in the fossil fuel sector—now have a more even footing to play on.

Lemon also addressed the potential of loan guarantee and grant programs. “To an extent over the last year or two, they liked the transformative technologies,” he said. “These days I think the three most important criteria are jobs, jobs, and jobs.”

Overall, when trying to attract investment, Lemon said biomass companies need to take advantage of their strengths when trying to attract funds. To do that, they need to understand what the strongest points of a project will be when looking through an investor’s eyes. “We also need to figure out what the investment looks at as a potential weakness in a project, and o what we can to mitigate that,” Lemon said.

John May, managing director at Stern Brothers and Co., also participated in the general session discussion. According to May, biomass projects have traditionally trailed behind other types of renewable energy when it comes to access to capital. He also noted that the bond market is wide open. “It’s a trillion-dollar market, it’s very liquid…and it’s a market that will look at projects that are trying to get technology commercialized…or trying to scale,” he said.

New biomass conversion and energy projects will seem risky in an investor’s eyes, May said. “The issue is how can we attack the perception of that risk, and how do we mitigate that risk,” he said. “I think [the reason] why we haven’t gotten that many biomass projects financed with nonrecourse debt and with traditional institutional equity is we haven’t solved that problem yet.”

The risk associated with biomass feedstock is the bane of investment bankers, May said. They are nervous that the margins of the developer are going to be impacted by some aspect of the feedstock component and that the developer is not going to be able to pay debt service. He also noted that there are significant challenges associated with the formation of offtake agreements for fuels and chemicals.

Technology risk can be dealt with in several ways, May added. For example, programs like the USDA’s loan guarantee program can help mitigate that risk. Technology risks can also be mitigated by the burgeoning market of insurance, May said, noting that some insurance companies have been doing this in the solar and wind sector for some time.

One trend that May said he has identified is that some biofuel and biomass projects are transitioning to biochemical production because the margins are much higher. “We’re seeing that with a lot of clients,” he said. “The whole idea of the biorefinery is you can produce a bunch of products from your technology. The idea is to have the ability to go to the highest value project and make the economics work.”

The general session also featured a presentation by Paul Tantillo, managing member of Enervation Advisors LLC. Tantillo’s firm focuses on the purchase of distressed assets, and recently began significant work within the biodiesel industry. He describes what Enervation Advisors does as rescue lending, and noted his firm acts as a partner to get these operations back up and running.

When taking on a new distressed asset, Tantillo said the first step is to go over the technology. “We like to fix it, if that’s the problem,” he said, but the firm actually hopes money—not technology—was the problem. After a significant amount of due diligence, the company puts a plan together to save the asset, exclusively using its own capital whenever possible. After finding success in the biodiesel sector, Tantillo said his firm is now entering the biomass space.

During his presentation, Tantillo described several ways in which a company can better attract interest from his firm and other potential investors. Most importantly, he said it is imperative to be bold, but to also be honest and direct. Don’t sugarcoat the situation, he said. If your pitch seems too good to be true, it probably is.  



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