One primary question that any treatment of impact investing if however brief must deal with is what is the role of government? In fact, impact investing in the eyes of many has arisen in part due to failures or opportunities as the case may be with respect to government actions, lack of actions, or characteristics. For example, one might argue that the gestalt of impact investing is in some sense about the repatriation of externalities that governments perhaps have failed on over time or have promulgated solutions in. We're going to very briefly treat two roles that governments can have. First, the role of basic research. And, second, the role of subsidies direct investment or their converse taxation. The role of government in impact investing then therefore is controversial. Most agree that governments can provide important support and their friendliness to the ESG concept is certainly significant. Some, for example, referred to the notion of PPP, public-private partnerships. However, government involvement is not always a net good. Governments are not necessarily good at allocating investment capital in the way the private sector does due to differing incentives and other potential challenges. One area of promise for government involvement is in the area of primary research. It may be the case that highly risky speculative research may be best born in a not for profit or governmental context in its risk. Basic research therefore may be one arena of government expertise and possibility. The US government has played important roles historically in the development of alternative energy technology, which we'll call generally Cleantech, to federal labs in subsidies for university research over decades. Government backing is partly responsible for the recent tech leap, in fact, in impact investing that has made solar panels and batteries dramatically cheaper, transforming the picture of electric power generation. Solar and wind now comprise more new capacity worldwide than fossil fuel. However, it's challenging to specify a return on investment for government research money, some is useful, some is wasted, and this is unlikely to change or become obviously clear. For example, consider subsidies. Subsidies in favorable regulation can give an important boost to promising tech with impact potential. For example, changes in tax laws can spur flows of private capital toward investments that government wants to prioritize. However, there are pitfalls. Capital allocation directed by governments is often misdirected for various reasons not having to do with the initial incentives. There's a possibility for corruption, cronyism, and specific exposure to the outside shocks. A number of famous examples have arisen in the modern incarnation of impact investing with respect to the challenges of government supported government investment. For example, Washington backed solar panels, electric cars, and synthetic fuels in the 1970s, all had an ignominious end in some sense. Today, however, all three are back, all with government backing and finding flight in the private sector and could potentially do even better or maybe not. We know that today Tesla has not yet earned any profits, although many investors are certainly imputing quite a bit of value to the current discounted value of future expected cash flows. Mismanagement and bad planning have examples abounding where government has lavishly funded private sector efforts that failed to deliver, and one often referred to case is the well-known case of Solyndra, an example of Cleantech subsidies from the Obama administration that went bankrupt, in part identified as having wasteful spending by an entrepreneur or management in unexpected changes of the market for the product, namely a drop, in fact, some would say a crash, in the price of solar technology. Some even have referenced to the possibility of foreign entities sponsored by governments that flooded US markets with cheap solar. This has been identified in the press by no less reputable sources 60 Minutes, which aired a segment called The Cleantech Crash in January of 2014. The report by 60 Minutes, reported on by Lesley Stahl, described how federal purse strings loosened under the Obama administration committing upwards of 100 billion dollars in loans, grants, and tax breaks, generally to Cleantech. Leading ultimately to what, as Stahl described, Cleantech as a dirty word. Some points that have emerged out of the press's examination of it is that in developing new technology in the energy field, in particular the impact energy field, payoffs tend to come over a very long horizon, say 20 or 30 years, after initial investments, which is fairly traditionally in accord with infrastructure investing versus what we might say traditional Silicon Valley venture capital, which might find fruition between three and five years. Private equity limited partnerships often have 10-year terms with potential extensions. Critics have suggested that government subsidies compensating for a cost of new technology that has persistently higher than legacy tech is equivalent to a recipe for disappointment and, possible, taxpayer dismay. The US natural gas boom has disrupted domestic energy markets, for example, and overthrown economic assumptions of many Cleantech ventures. Of course, perverse outcomes abound. For example, once again, foreign firms haven't been buying up now at fire sale prices failed ventures subsidized by the US government. In the famous Solyndra example it represented a firm founded in 2005 to design manufacture and sell solar voltaic cells for local power generation on the top of commercial buildings. It was described as an innovative technology with panels absorbing sunlight from any direction, so there's no need to move the panels during the day to track sun. What we know is that the timeline is fairly clear. Shipments began in 2008, in 2009, the company received more than $530 million in the form of a US loan guarantee. In 2010, business was expanding, it exceeded 1,000 installations worldwide with $140 million in revenues. However, in 2011, executives delivered bad news to the Energy Department telling them that the company faced liquidation. Investors being asked then to commit an additional $75 million in doing so. However, in August 2011, the company filed for Chapter 11 bankruptcy, closing its plants and laying off employees. Today, the US Bankruptcy Court presides over its ongoing restructuring. Interestingly enough, the capital structure here in a simplified context saw 70% of its holding company owned by private equity firms, including a foundation. Eight series of preferred stock were issued between 2006 and 2009, raising just under $7 or $10 million dollars, accompanying a US loan guarantee for plant construction requiring the last stock issuance, which was a series issuance for nearly $200 million. It also received a $25 million California tax break. In 2010, it issued $175 million in convertible debt, and so by 2011, the company had just under $800 million in senior secured debt with a corresponding negative cash flow from operations. Again, some suggest that the business model failed not in a way having anything to do with the government subsidy, but with competition from lower tech, lower cost panels, source overseas, for example, in China, lowering market prices by more than 40%. Solyndra's product was ultimately priced in that market below production costs. And by the way, Chinese rivals reported to have received subsidies as well. In 2010, the Cody's net loss was about 330 million, the burn rate was too fast. There was no market turnaround in 2011 and we saw lights out. Raising once again, the question of, A, whether Cleantech should be subsidized by the government and what the role of the government in impact should be. On the one hand, it might be well seen to be as a long term supporter of technology, social mandates, energy policy, and so on, intervening or supporting market development, while at the same time, being ultimately a risk taker in an arena where perhaps risks should be better shared with those who are specifically targeting those levels of risk like venture private equity or traditional infrastructure investors.
