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SolarCity’s acquisition of Common Assets points to a new investment strategy

By Marianne LeVine | 10 Mar 2014

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When SolarCity bought Common Assets, a web-based investment platform designed for retail investors, some analysts began to wonder: why would a solar installation company with investors like Draper Fisher Jurvetson turn to crowdfunding?

“The acquisition of Common Assets will allow SolarCity to reach beyond its core investment group of institutional investors,” Tim Newell, the former chief executive officer of Los Angeles-based Common Assets and SolarCity’s vice president of financial products, said in an interview with the Peninsula Press.

Common Assets — like other crowdfunding financing options that rely on large amounts of people to contribute smaller amounts — will provide the option to invest in SolarCity’s projects, on a long-term basis. In a statement, released on Jan. 15, Newell explained SolarCity would allow customers to participate in debt investment, where investors would loan money that would be used for SolarCity’s projects and receive interest payments.

According to Steve Eglash, executive director of Stanford University’s Energy and Environment Affiliates Program and former president and chief executive officer of Cyrium Technologies, Inc. — a solar energy start-up — the Common Assets acquisition highlights a common trend in the solar industry: alternative funding models.

In recent years, investment in clean tech has “fallen out of favor,” according to Eglash. He referred to a period around 2008, when venture capitalists invested in clean tech, simply because it was clean and not because of the company’s business model.

Errol Hunter, the former senior counsel for Solyndra, Inc. — a company that manufactured solar panels that used cylindrical modules and thin-film technology — said he thinks the failure of that particular company also contributed to the decline in clean-tech investment. Solyndra secured a $535 million loan from the U.S. Department of Energy, but subsequently went bankrupt. “It was very politically charged and it left a sour taste around the idea of clean tech,” Hunter said in an interview.

Newell compared using Common Assets to opening up an e-trade account. The Common Assets investment platform is designed to appeal to investors with both large and small amounts of capital who want to invest in the renewable energy industry.

The company said details about the size of minimum investments and who can qualify as an investor will be disclosed when the offering documents are released. Individual investors can begin using the platform in June of this year.

Reaching out to smaller investors is not new for the solar industry. Community solar, in which utility customers can own or lease solar panels, and receive credit on their electricity bills, is another form of funding smaller investors interested in solar can tap.

Nor is SolarCity the only company using the Internet to reach smaller investors in an effort to increase investment in solar.

Mosaic Inc., an Oakland-based company that connects investors to solar projects, also uses an online investment platform.

While Newell acknowledged the similarities between SolarCity and Mosaic Inc., he noted a fundamental difference: Mosaic focuses on investment in a single solar project, while SolarCity’s model allows for investment in many projects at once.

“Investors will get from us investment in a pool of thousands of solar projects,” he told the Peninsula Press. “And that is a fundamentally different approach. Both have their place but ours is about large, scalable financial opportunities.”

Exposure to multiple projects can reduce risk. According to Newell, the investments will be subject to oversight from regulatory organizations, including the Securities and Exchange Commission.

Common Assets is SolarCity’s third acquisition in the last twelve months. In 2013, SolarCity acquired Paramount Solar, Inc., a solar sales and marketing firm; and Zep Solar, Inc., a solar-module mounting start-up. Common Assets is the first acquisition that addresses investment strategy. The purchase price was not disclosed.

The new investment platform could appeal to younger, socially conscious investors, according to Mike McGehee, an associate professor of Materials Science and Engineering at Stanford University and a senior fellow at the Precourt Institute for Energy.

“There are 28-year-olds who don’t own a home but who want to make an investment for the environment,” he said. “There are a lot of people with thousands or tens of thousands that they would like to invest and they were looking for an opportunity. SolarCity recognized that.”

Eglash shares that view. He cited two primary motivations for investors to participate: philanthropic interest in helping the environment and profit. He also indicated that crowdfunding could be appealing for “ego and entertainment reasons, similar to the reasons people crowdfund new technologies.”

But for some industry specialists, the acquisition of Common Assets raises questions. Marie Watanabe is a solar analyst for CleanTech Group, a market intelligence organization focused on clean technology. She described Common Assets as a start-up that was “very under-the-radar,” saying she was unable to even find the company’s website.

Hunter believes the Common Assets acquisition could signal SolarCity is having trouble raising money for solar projects.

“Raising money from a large number of small individual investors is painful,” he said. “I think this strategy may be a reaction to lack of interest from the larger institutional investors.”

Hunter indicated that solar investments can take a long time to see returns. As a result the individual investor model for the solar industry may not be effective. He also remains skeptical about Common Assets, in light of SolarCity’s recent acquisitions. Hunter cited two common reasons for acquisitions: complementary business models and absence of organic growth potential.

Although clean-tech investment has been on the decline in recent years, Eglash doubts the decline is affecting SolarCity.

“SolarCity’s value in the eyes of investors continues to be very strong because they appear to have found a good, profitable business model,” he said. “My impression is that they have plenty of support from investors who believe in them and they’re doing fine.”

SolarCity went public in December 2012. The 52-week range for the stock was $15.88 per share to $88.35 per share.

Both Eglash and Watanabe view the acquisition of Common Assets as an attempt to vertically integrate, another trend in the solar industry. Vertical integration allows companies to increase efficiency and reduce costs by housing elements to production, as opposed to depending on outside companies for their services.

Eglash interprets the new platform as a way to expand SolarCity from a solar installation company to a “one-stop shop” for everything solar, aside from solar panel production.

Watanabe thinks the acquisition was a response to competition from other solar companies like SunRun Inc., which is also trying to vertically integrate. She indicated there are few differences between SolarCity’s services and its competitors’ services. Watanabe said she understands the acquisition as a strategy to maintain the company’s dominance in the solar industry.

“That was pretty big news to add that new service,” she said. “They had a head start in the market — they secured a huge market share [but] I think they still have to keep finding innovative ways to offer more services to clients because other players are catching up.”

SolarCity does not only face competition from other solar companies. Hunter indicated that natural gas, which dominates California electricity, and the increasing production of shale gas will continue to put downward pressure on energy prices, as well as the economics of solar.

Whether or not retail investment offers a long-term funding strategy for solar remains to be seen.

“For about five years or so, lots and lots of people have been talking about innovative finance schemes around renewable energy,” Eglash said. “What SolarCity wants to do is explore lots of options so they can continue to win in this market. It’s not clear to anyone how this will all shake out.”

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