Investors suffer as US ethanol boom dries up

By Kevin Allison in San Francisco and Stephanie,Kirchgaessner in New York
Published: October 22 2008 03:00

Investors, such as Microsoft's Bill Gates, are sitting on billions of dollars in losses after buying into the corn-based ethanol industry that George W. Bush embraced as the answer to US energy woes.
Six of the biggest publicly traded US ethanol producers have lost more than $8.7bn (£5bn) in market value since the peak of the boom in mid-2006 and the beginning of this month, according to an analysis by the Financial Times. The boom followed a 2005 law requiring refiners to mix billions of gallons of the biofuel with petrol.
Investors who bought and held shares in hotly anticipated market listings of Aventine Renewable Energy, VeraSun Energy and other ethanol producers that have gone public since 2005, have seen the value of their holdings plummet as much as 90 per cent from their flotation price, in spite of billions of dollars of government support for the industry.
The losers in the ethanol investment frenzy, which some have compared to the dotcom mania of the late 1990s, include famous names, such as Mr Gates, Microsoft founder. His private investment firm has lost millions on its 2005 investment in a company called Pacific Ethanol. Mr Gates's firm, Cascade Investments, did not return calls seeking comment.
Other private equity firms and hedge funds that piled into the ethanol industry in the boom years of 2005 and 2006 have put in a mixed performance. Those who bought into ethanol and sold out at the earliest stages made substantial sums. Metalmark, the former private equity arm of Morgan Stanley, the US bank, reaped a 10-fold return on its 2003 purchase of Aventine when it went public in 2006.
Meanwhile, Thomas H. Lee Partners, a Boston-based private equity group, was forced to pull its planned float of Hawkeye Renewables, an ethanol producer it bought at the height of the ethanol boom. One person close to Thomas H. Lee defended the group's investment, arguing that Hawkeye was producing strong cash flow in spite of a difficult business environment that has dragged down the share prices of publicly traded rivals.
Both Metalmark and Thomas H. Lee Partners declined to comment.
Investor losses come as taxpayers have paid billions to support the ethanol industry. More than $11.2bn has been spent since 2005 on tax breaks for companies that blend ethanol into petrol. Billions more have been spent on direct state and federal subsidies for US ethanol production.
"We're looking at an industry that's cost $80bn to get to this point," said Bob Starkey, a fuels analyst at Jim Jordan & Associates, a research group in Houston.
However, ethanol has disappointed many who saw it as a wonder product that could reduce the US's dependence on foreign oil while cutting down on pollution. Worse, a growing number of influential critics now say ethanol is helping raise the price of food.
The industry's supporters still defend ethanol. Bob Dinneen, head of the Renewable Fuels Association, the industry's main lobbying group in Washington, said the fuel represented an opportunity for Americans to invest "here at home" rather than continue to "haemorrhage money ... to the Middle East".
"I'd challenge you to find any energy resource today that isn't dependent on government support," Mr Dinneen said. "If domestically produced energy is something that you want to have, then some of these subsidies are going to be necessary."
Hope to husk, Page 13 www.ft.com/ethanol
Copyright The Financial Times Limited 2008