When Will We See the Next Big Solar IPO?http://www.fool.com/investing/general/2013/08/20/when-will-we-see-the-next-big-solar-ipo.aspx Travis Hoium
August 20, 2013
Earlier this month there were rumors floating through the industry that downstream solar company Sunrun was for sale. Power Intelligence reported that Goldman Sachs had been hired to do a "strategic evaluation" of the company, sparking hope that another downstream solar company may come public after the solid success SolarCity (NASDAQ: SCTY) has had on the market.
Alas, Sunrun isn't for sale or planning an IPO. Yesterday, I had a chance to talk to co-CEO Edward Fenster about the rumors, what may prompt the company to go public in the future, and how the company is different from other companies participating in the residential solar market in the U.S. Let's start with the beginning and learn a little bit about how Sunrun is -- and isn't -- similar to its public competition.
Just who is Sunrun?
The big difference between Sunrun and other solar companies is its level of vertical and horizontal integration. SolarCity has taken a vertical integration path by doing financing, design, and installation while SunPower is vertically integrated by making panels, financing, and training installers.
Horizontally, SunPower and the other big finance company, Clean Power Finance, have taken the approach that they'll work with a broad range of installers. Sunrun works with just 30 companies to help them originate and construct installation. In short, Sunrun is highly focused on a smaller segment of the market than many competitors, but they think this specialization creates a better experience and lower costs for customers, which will result in higher returns.
So, is Sunrun for sale?
One of the reasons Fenster said he's not looking to sell the business is that their venture capital investors -- who have pumped $150 million into the business -- aren't eager to sell right now. The company expects the residential solar business to grow between 30% and 70% over the next decade -- as long as it doesn't need the capital there's no big driver to sell.
When might an IPO be attractive?
The advantage for Sunrun is that it's a pretty capital-light business model. It doesn't "own the trucks" the way SolarCity does or make panels like SunPower, and it doesn't need to hold inventory either, a big capital drain for growing businesses. That model will allow the company to grow without needing capital that other solar models need to expand. But eventually the operating cost growth may still force an IPO.
The other driver may be the ability to attract and keep top management. For example, the company just hired Thomas J. Holland as COO from Bain & Co. and Anne Brennan as CFO from Unwired Planet, two high-profile hires that normally come with stock options (their compensation package wasn't disclosed or discussed). To liquidate stock grants or options often requires an IPO. This dynamic eventually forced companies like Microsoft and Facebook to go public despite not needing the capital to expand their businesses.
Venture capitalists also won't have an infinite timeline, so in time they'll want an exit plan. But if the company can grow 30%-70% annually without needing new investors, why sell?
In short, Sunrun isn't going public now, but it will likely do so sometime in the future. What may be attractive is finding ways to use public markets to lower financing costs.
Could securitization, MLP, or REIT structures bring Sunrun's assets to the market?
Securitization is another interesting option. Like many others, Fenster thinks SolarCity will likely lead the way there. The chal