A conversation with Mark McGovern, General Manager, Clean Technology Group, De Lage Landen Financial Services, a fully owned subsidiary of the Rabobank Group.
Over the past two decades, the development of alternative energy sources has gained tremendous visibility. The requirement to create efficient and sustainable energy alternatives to reduce dependencies on non-renewable sources of energy has and will continue to be a major focus globally.
In the U.S., demand for clean energy technology continues to grow exponentially. Much of this growth has been fueled by the various tax incentives and subsidy programs implemented to stimulate the development of clean energy projects. These incentives, such as the 30 percent investment tax credit program and the extension of bonus depreciation, are anticipated to continue driving short-term demand for these large projects for the foreseeable future.
This clean energy expansion has created global demand for technologically advanced energy-producing equipment as well as opportunities for its financing. To gain a foothold in this energy segment, a number of equipment finance companies and banks have been expanding into the energy market by building highly qualified and specialized teams of energy finance specialists.
To gain a clear understanding of this clean energy market and its many nuances, we turned to Mark McGovern of De Lage Landen, a leader in the financing of clean energy technology, to explain how and where equipment financing fits in this explosive equipment sector. In the following Q&A, he explains how De Lage Landen has approached this market since the Clean Technology Group was formed three years ago, and the opportunities he sees for growth in this highly specialized segment of finance.
EF Advisor: What is De Lage Landen’s goal in entering the U.S. and global market for clean technology?
Mark McGovern: Our ambition in any of our businesses is to provide a strategically valuable relationship to our partners, and to accomplish this in as much of our geographic footprint as possible. Our intent is not to build a clean technology group in order to be a leader in one or two markets. Rather, we wish to optimize the De LageLanden value proposition by becoming a clean technology leader in as many countries as possible. Today De LageLanden is active in 36 countries, giving us multiple geographies in which to expand our Clean Technology business.
EF Advisor: Do you anticipate clean technology finance becoming a major focus for De Lage Landen in the coming years?
MM: I wouldn’t say more or less than any of our other business lines, but sustainability and clean energy are core tenets of Rabobank, so the De Lage Landen clean technology business holds a strategic place within the Rabobank family. We recognize that we need to grow fast in order to be relevant – so our push is not only to get ourselves on the map quickly, but also to make the Clean Technology Group a key contributing business within Rabobank, much like our sister organizations within the De Lage Landen group.
EF Advisor: What defines a good target relationship for De Lage Landen in the clean technology sector?
MM: We look to partner with proven industry leaders in all business lines. Our partners must have financial health and the ability to survive the continuing shakeout in the industry. But we don’t look solely at financial strength; we also consider the application of a company’s technology, their market share and the positioning of their products in the marketplace. So our approach in the Clean Technology Group is really no different than the approach De Lage Landen takes in the other segments in which we do business.
EF Advisor: Currently, De Lage Landen is managing 233 solar energy projects globally. Is De Lage Landen focused only on solar energy finance at this time, and do you see De Lage Landen establishing a foothold in wind, biomass and geothermal technologies in the future?
MM: Currently, our activities are dominated by solar and wind, because those two segments have mature, proven technologies and are therefore driving demand for financing. We are certainly looking toward other newer technologies as they develop. In Europe, we are currently seeing more demand for wind technology financing, while the U.S. is a hotbed for solar systems.
EF Advisor: De Lage Landen is a vendor finance company. Are partnerships established with traditional manufacturers and resellers?
MM: Many different players drive these deals, particularly in solar. Not just the manufacturer or dealer, but also developers and integrators, and much of this business is considered project finance. We are building a vendor finance model around this today. It may not be considered “traditional” vendor finance, but we anticipate that a form of vendor finance will emerge in this space.
We take a “vital organ” approach to this business as we do in all our businesses, meaning our attachment to our vendor partner is vital and the partnership becomes so important that we cannot be optimized without each other. This also means that we will attempt to embed as many De Lage Landen products as possible into the relationship in as many countries or regions as possible. So what may look like one-off project finance deals are not, because we target relationships with partners that will provide ongoing financing opportunities. Having project finance expertise in clean technology will definitely assist us in achieving our vendor finance goals.
EF Advisor: The Tioga Energy/De Lage Landen relationship to provide long-term financing for a solar power project for Oceanic Time Warner has attracted some attention. Can you describe why the Tioga Energy relationship is attractive for your company?
MM: As a business, our desire is to establish relationships with developers that will provide opportunities to do business on an ongoing basis. Tioga Energy’s role as a developer means it is working directly with the host or the off-taker. Under such partnership arrangements, the developer is structuring and pricing a particular transaction with our assistance. This particular transaction operates as a power purchase agreement under a sale/leaseback structure. It’s this collaboration that provides a compelling reason for the deal to be a “go” or “no go” decision. It’s heavily based on structure and pricing – things we bring collectively to the relationship with Tioga.
EF Advisor: How do you and Rabobank determine which group will pursue a clean technology transaction? Do you share information with each other regularly?
MM: De Lage Landen slots in underneath Rabobank at a price point a bit south of their target. De Lage Landen is looking at transactions that are typically less than $25 million, while Rabobank typically seeks to be in transactions greater than $25 million. We work very closely with Rabobank, as our strategies are aligned. We speak daily with our partners in Rabobank N.A. in California, and we also share information daily with the Rabobank Renewable Energy Infrastructure Finance (REIF) team.
EF Advisor: How would you describe the approach to the asset management aspect of underwriting such deals?
MM: Asset management is certainly looking at this technology and its application very closely. Remember that just because it’s a proven technology does not remove the equipment, asset or behavioral risk. The rapid decline in prices of the equipment absolutely factors into your view of the risk from an asset management perspective. In addition, the emergence of new players in the space as manufacturers and distributors, as well as the emergence of potentially disruptive technologies, must be monitored. Overall, this is a traditional risk assessment process that is modified by the immaturity of the financing of the technology, as well as the lack of historic trends and results.
EF Advisor: Some have described the explosive growth and subsequent decline in demand for clean technology in Europe as a “boom/bust” scenario. Much of the “boom/bust” has been attributed to multiple tax incentives and subsidy programs which have phased out in many European countries. Is what is transpiring in Europe an example of what may lie ahead for the U.S. if tax incentives and subsidy schemes are not maintained?
MM: It’s not that gloomy for me. What we are witnessing is a dramatic decrease in the price of solar energy solutions globally. For example, the cost of solar modules has decreased 40% from November 2010. At the same time, the cost of energy for many continues to increase. These two factors - the price of clean technology solutions declining while the local cost of energy is increasing - are what allow renewable technology demand and its requirement for financing to become “mainstreamed”. So, in some ways it’s a matter of whether we get there travelling at 60 mph or 30 mph. We’re going to get there one way or another.
Certainly the subsidy schemes are driving the urgency for the adoption of the technology today, but I don’t see the need for continued, long-term subsidies as a requirement for success. We are taking advantage of the market as it presents itself today, and gaining position in those markets using the subsidies to do so. Understanding the incentives and subsidies is critical in these markets. In order to be successful and capture market share, we must be expert at the federal, state and local level.
Summary
In wrapping up our conversation with McGovern it was clear that today at De Lage Landen, solar tends to dominate the focus in the U.S. But the De Lage Landen Clean Technology Group is not solely focused on U.S. solar. Clean technology comprises numerous applications across many different technologies in a large global footprint. And while De Lage Landen is currently underwriting primarily solar and lighting efficiency transactions in the U.S., the company is doing so because there is so much activity in those particular segments of clean technology today. Wind, lighting and other efficiencies drive the company’s clean technology activities in Europe.
But McGovern was clear in stating “we are also expanding our footprint and building out our parallel ambitions in clean technology for wider delivery in the future. For example, we expect to be a wind player in the U.S. as well. The key is to develop this group to be a leader in multiple clean technologies … not all of them, but to be the leader in selected areas.”
Mark McGovern is the General Manager of the Clean Technology Group of De Lage Landen, which provides equipment financing to the renewable energy and energy efficiency sectors. His responsibilities include management, strategy and continued expansion of the Clean Technology Group on a global basis. For the second year in a row, De Lage Landen was recognized as the “Green Lessor of the Year” by Leasing Life, an award that honors the lessor deemed to have made the biggest inroads into green technology finance, while also cutting the environmental impact of its own day-to-day operations.