People on all sides of the argument about climate change agree that fewer resources and a growing population necessitate changes in the way our economies function at every level. The markets too have woken up to this, via the convergence of four very specific drivers:
- Resource constraints - including the purely economic desire to reduce energy bills;
- Technological advance - especially in the application of information technology to optimise resource use;
- Government incentives - such as feed-in tariffs;
- Government penalties on noxious emissions and landfill.
This shift is evidenced by the tenfold increase in cleantech investment globally between 2003 and 2008.
Growth areas may not need technological breakthroughs
Meeting this demand will be a huge range of new technologies, systems integration and putting existing technologies to work in new ways. There is no technological breakthrough required, for instance, for the WHEB portfolio company Bowman Power to generate power from the waste heat of diesel engines using turbo-generators.
At WHEB, we divide the opportunities into the following sub-sectors:
Energy Efficiency and Storage – including the development of smarter grids that allow consumers to pool renewable micro-generation capacity and sell it back to the grid at times of peak demand. This in turn leads to a demand for energy storage technologies that will allow the temporary storage of energy around the home, for example in the batteries of electric cars.
Energy efficiency is attractive because the return on investment is quicker than more capital-intensive areas of cleantech, such as renewable energy generation. Passiv Systems is an example of a WHEB portfolio company addressing this area.
Clean Industrial Processes – notably the recycling and reuse of polymer-based materials such as PET (polyethylene terephthalate), plastic and rubber; and the development of new composite-based industrial substitutes using recycled or renewable sources. WHEB companies in this area include Petainer, FriedolaTECH and Watson Brown HSM. Such companies signify the transition of our economies from linear to cyclical resource models.
Waste – especially as software and telemetric systems are developed that allow a more granular approach to waste disposal and recovery, for example AMCS Group
Water – similarly, data systems can be applied to reduce water usage and wastage, an approach that is being developed by AquaSpy. We also believe that treating dirty waste water will be a growth area, as industry seeks to pre-empt environmental legislation by seeking solutions in this area
Energy generation – in some respects the greatest challenge, but also the most difficult to navigate from an investment perspective due to the capital-intensiveness and high level of risk in developing and deploying prototypes.
Intensifying international demand for cleantech
We have just witnessed the publication of the 12th Chinese Five Year plan, where for the first time the country has set a target for CO2 reduction, of 17 per cent, and pledge to reduce energy intensity by 16 per cent. This neatly illustrates the two-pronged opportunity for low-carbon investors in any market. In the case of China, this kind of top-down, long-term policy framework offers a scaling-up opportunity that cannot be compared to any other territory.
Meanwhile in the US, the non-appearance of the expected Environment Bill should not be allowed to overshadow private sector growth – with initiatives such as that by the retailer Wal-Mart which seeking to ‘green’ its supply-chains – and a multitude of incoming state and federal legislation that will stimulate appetites. New Environmental Protection Agency regulations on commercial pollutants alone will require a substantial percentage of coal powered generation in the US to be retired or become controlled – that is low-emitting – by 2016.
Even something as simple as the US military’s desire for its bases to be off-grid for contingency reasons creates a large opportunity for distributed power. The US economy is not a planned economy like China and so change is harder to map. But when it does reach tipping point, the opportunity will be huge.
India’s rapid growth in the past decade has, meanwhile, left it with a growing energy gap that the country is now seeking to address by issuing thousands of megawatts of Power Purchase Agreements a year to both renewable and non-renewable energy companies – although even the non-renewable segment will require the latest in emissions-reduction and clean-burn technologies.
Development hobbled by financing constraints
Although the overall trend is indisputable, the details of how cleantech products are to be brought to market are less clear. The issue crystallises around who finances the early, pre-revenue stages of commercialisation for a new technology following, for example, a university spin-out.
Both public and private sectors are financially constrained; the former by well-publicised budget cuts, and the latter by the terms upon which they themselves have raised money from their investors, including pension funds and family offices. Such investors are in general more knowledgeable now – and recognise greater potential in the sector – than when WHEB raised its first cleantech fund in 1995. But some still view it as a relatively immature market without the track record of returns they normally require for a sector or an individual fund.
This generates a risk aversion that steers investors away from early-stage venture funds towards more mature growth and buy-out strategies. This is both lower-risk and means investors are not faced with the need for frequent follow-on rounds that beset early-stage companies (particularly in the present economic climate).
The result is that most private-equity investors in Europe that have recently been able to raise new funds into the sector – including WHEB – are looking for companies that are profitable, or very close to profitability, with proven technologies where the investment is provided to help the company expand into the global market.
The shortage of money for early-stage investments creates a financing problem for early-stage companies. The main sources are a few family-backed funds which are ‘stage agnostic’ and will invest at any stage, along with business angels or government-backed funds such as the Carbon Trust in the UK and Germany’s High-Tech Gründerfonds. In the US, meanwhile, the Department of Energy recently announced that its grant programme of $23.6 million had created the conditions for over a $100 million of follow-on investment from the private sector, while Sustainable Development Technology Canada has used public money to encourage a similar leveraging of private investment into the cleantech space.
The view from across Europe
Apart from the presence of early-stage investors, the attractiveness of different European territories is determined by three main related factors – the industrial heritage of that country, the business culture, and the availability of competing sources of finance. The ‘perfect storm’ is a territory with a well-diversified industrial base that has not had access to abundant natural resources; an open business culture focused on growth; and a financial logic for selling equity to a professional growth investor rather than bringing in another type of equity investor, or simply relying on bank debt.
The size of the domestic market is also a factor, but can be two-edged sword – a healthy domestic market allows a company to mature and generate revenue before looking overseas, but too large a market can also cause a company to plateau for too long at that level.
[This is the first part of a two part series. Next week Joerg Sperling takes a country-by-country look at prospects in cleantech]
WHEB Partners: www.whebpartners.com
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