28
Mar
2016

Unintelligent Energy

I’ve noticed that many people who don’t normally pay much attention to the financial system, are getting excited about FinTech and Peer to Peer lending.  Someone I spoke to suggested that the new entrants to banking were hugely significant for attracting investment in “Green” projects, like solar and wind power, nuclear fusion, hydrogen fuel cells etc. 

I think this is rubbish.

There is no conspiracy.  Bankers don’t sit around in their towers in Canary Wharf deciding not to fund renewable energy, starving the sector of capital, while lending out billions to build oil refineries.  The truth is that bankers only lend money when they have high certainty of future cashflows.  Banks never have financed innovative, risk taking projects.  They might lend money to build oil pipelines and refineries. But riskier ventures such as exploring for oil and gas are financed with equity, not with debt. 

It seems odd to me that most valuable companies have very uncertain, intangible assets.  Companies like Google, Microsoft, Facebook, and the various unicorns weren’t created by the traditional banking system.  Yet in our modern economy we rely on banks to lend money, secured against property, to drive economic growth and productivity improvements.

Of course, many of these speculative equity financed companies fail. There wasn’t much difference between Facebook and MySpace.  Except that the former is valued at a third of a trillion dollars.  And the latter isn’t.

The oil companies which are listed on AIM are also a good example.  Many turned out to be poor investments even when the oil price was over $100 a barrel.  But if most of these ventures fail, there is no systemic risk.  New businesses can still receive equity funding because when they do work, the potential gains are substantial.  ASOS, the online clothes retailer listed on AIM after Boo.com had failed.

Similarly there are environmentally friendly companies that have already received equity financing on AIM.  Though they were speculative, they could still raise money.  These include Clean Air Power and Intelligent Energy.  Sadly they haven’t been good investments either.

  • Clean Air Power made engines for trucks, which could be switched between diesel and natural gas.  The shares came to market in 2006 at 120p a share, and has now delisted having fallen more than 99%.
  • Intelligent Energy makes hydrogen fuel cells.  Fuel cells convert chemical energy (normally hydrogen) into electricity, for an electric motor.  If successful, fuel cells have the ability to greatly reduce carbon emissions.  The shares came to market in 2014 at 300p a share.  By the last week of March 2016, they were worth 8p a share.

I rather liked the idea of both of these.  If they had worked the upside to be gained would have been very large.  But I didn’t invest in any of these companies.   A lucky escape.

 

Intelligengent energy Graphic

Source: Intelligent Energy

I don’t really understand either companies technology.  But that was not the reason that I did not invest.  Instead, I didn’t invest in Intelligent Energy because it had a 16 page remuneration report that I didn’t understand.  A complicated 16 page remuneration report for a company losing over £50m a year. 

According to the report, the Chief Executive, Dr Henri Winand was paid £6m in 2014, which seems excessive to me given that the company had yet to prove it had a successful business model.  Most of this would have been in shares.  But still £6m worth of shares for running a company that was making huge losses.

This level of pay raised my eyebrows when compared with how much the company was losing: over £50m in both 2015 and 2014.

Compare for instance with Elon Musk at Tesla.  He is wealthy and can afford to take risks after making lots of money with PayPal.  But when Tesla was loss making he put more money into the business, rather than taking it out.

I used the simple heuristic of “the pay looks excessive compared to what management have actually achieved so far”.  It seems to me that to avoid investing in duds, you don’t need to understand complicated technology.  It can be enough to simply understand human nature.

2 Responses

    1. Bruce Packard

      Agree. High yield debt used to finance shale boom. But arguably these businesses had certain cashflows when price of oil $100 a barrel. The fall out has been because lenders / debt investors underestimated the probability that oil price would fall so dramatically.
      Different to the E&P stocks on AIM, many of which were unsuccessful when oil was over $100 a barrel.

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