Every week, I write on 3 interesting happenings from the world of distressed investing, in a short and digestible manner.
Here is what I found intriguing…
Private Equity thinks that it's time for the Solar Power Industry to shine in the spotlight and they are bringing money to help.
According to energy.gov, the US generated 97.2 GW of solar power in 2019 vs. just 0.34 GW in 2008 (see chart below - sorry a bit hard to see the axis). This has resulted in a 70% drop in the average cost of a solar PV panel. Solar panels on just 22,000 square miles (or about the size of Lake Michigan) could generate enough power to for the entire country!1
I had to do a double take on that stat to make sure I read it correctly.
Despite some interesting tailwinds that have created alpha-like returns for investors, many have been disappointed over the long term with the industry performance. Take one of the largest firms, First Solar (NASDAQ, FSLR)…
The stock has been trading in a tight range since 2013, after the initial euphoria from it’s late 2000’s IPO. Solar City, which had the backing of Elon Musk, didn’t create much traction either for investors and was eventually rolled into Tesla.
So where does Private Equity see opportunity? We’ll it’s not in the previous business model of large sized solar farms but in smaller, community projects, which is expected to be “the fastest growing segment in the solar sector”, according to Todd Bright, a Partner at Swiss based PE Firm, Partners Group Holdings. The $110B AUM firm, has made investments into this segment recently including a $400M stake in Dimensions Renewable.
Other opportunities exist in the community solar space like Sunrun (NASDAQ, RUN) and SolarEdge Technologies (NASDAQ, SEDG) are both trading in the 10x P/S ratio so could be an option for other PE Firms to jump into this space. As costs for PV panels continue to come way down from just 10 years ago, the thesis here is an increased adoption at the residential level which will propel these companies over the next 5-10 years.
The 5 hour workday was the perfect concept to attract and motivate top talent, until it wasn't. A productivity test went wrong.
Tower Paddle Boards, founded in 2010 by Stephan Aarstol, had enjoyed 2 years of growth and profitability before a 2012 appearance on Shark Tank. Marc Cuban decided to invest and enjoyed what he called “the best investment in the history of the show”.
Stephan’s goal was to create a $100M brand and had found that other successes, such as Patagonia, lived their brands. So how does a beach/ surfing lifestyle brand adopt such a principal? We’ll just rethink the typical 9-5, offer a 5 hour workday and allow staff to go surf, hence “live the brand”.
Here’s how it worked…
No Lunches
No Breaks
8am - 1pm workday
Hyper productivity expected by the company
These rules worked initially - employees found new tools to do their job in fewer hours which coincides nicely with the quote from Bill Gates…
“I choose a lazy person to do a hard job. Because a lazy person will find an easy way to do it.”
After a 50% revenue increase, the program was expanded for another 2 years. However, this was the high water mark for the 8-1pm workday. What happened?
“It broke company culture” according to Aarstol. Strong bonds that formed during the start - up phase no longer existed since people left at 1pm. Tower Paddles experienced a mass exodus of experienced staff as life outside of work became bigger than life at work.
The pivot was to scale the program back all the way to a Christmas bonus, which is fairly common in a lot of companies. I’ve worked at corporations that would give “summer hours” if annual projections were met.
Why this is profound & timely is because many employers are having a hard time getting staff to return who have become accustomed to free time + living off government benefits forcing many companies to become as creative as Tower had been. I believe this case study is a canary in the coal mind - the perk can’t be permanent and must be earned for it to be effective. Otherwise, more cases like Tower Paddles will be written about.
Severely underperforming enterprise software company, Splunk (NASDAQ; SPLK) is being courted by Private Equity. Is the stock a buy here?
Since it’s high of $211/share in October 2020, the shares of $SPLK are down 33% at the time of this writing versus a 25% increase in the NASDAQ, over the same time period. The data log management and monitoring software company has severely underperformed expectations, which has led the markets to punish the stock.
Enter Silver Lake Partners who infused $1 Billion into the company ($23B market cap), giving $SPLK cheap capital as it comes in the form of 0.75% convertible notes & $160 strike, maturing in July 2026. This investment doesn’t come without strings attached though, as Silver Lake earns a board seat and guarantees against future equity dilution.
However, this gives Splunk a significant bump in cash as it routinely burns $800M - $900M in free cash flow annually compared to $1.6B in net liquid assets, remaining on it’s balance sheet. For a company that needs to rethink it’s strategy; transforming away from legacy IT systems to a cloud based enterprise, 18 months of operating cash wouldn’t have given $SPLK enough time to make that transition. I’ve done ERP integrations on sub- $10M revenue firms that took about a year, so I can imaging the challenge awaiting $SPLK.
As you can see by the above P/S comparison, Silver Lake sees incredible value relative to it’s like competitors. Splunk’s major challenge and what Silver Lake is betting on, will it’s ability to push it’s 2 year old transition to a “cloud centric” strategy. The emphasis will be on preventative cybersecurity and investors will be looking to see how strongly the broader market adopts this strategy. You bet that Silver Lake will be influencing, from a board position, to ensure that $SPLK is hitting it’s numbers as the market is already weary.
Note: I do not have any position in $SPLK before the publication of this article but will be acquiring shares in the near future.
https://www.energy.gov/eere/solar/solar-energy-united-states