In 2000, when Sustainable Asset Management raised money for SAM Sustainability I – a €90 million private equity fund dedicated to investments in energy, materials, water, and agricultural technologies – it was not an easy sell. At the time such investments looked far from sexy and were considered a small niche mainly of interest to the likes of energy companies such as Ontario Power Generation and Hydro Quebec.
What is cleantech?
Some savvy marketing has gone along way towards legitimising the cleantech sector. The credit goes to private equity veteran Nick Parker, who in 2002 coined the phrase “cleantech” to describe “technologies developed by biological, computational, and physical scientists and engineers that enable more valuable use of natural resources and greatly reduce ecological impact”, according to the website of Cleantech Ventures, the consulting and research firm founded to support the fledgling industry.
Cleantech is thus a broad moniker that can include anything from ways to make solar, wind, and wave power more efficient, technologies for cleaning up hazardous wastes, or the use of enzymes to replace more harmful substances in food and industrial processes.
Cleantech subsectors, according to the Cleantech Venture Network, include: energy generation; energy storage; energy infrastructure; energy efficiency; transportation and logistics; water purification and management; air quality; materials and nanotechnology; manufacturing/industrial; agriculture and nutrition; materials recovery and recycling; environmental IT and enabling technologies.
“We’ve seen investor interest grow tremendously” says Scott Macdonald, principal with SAM private equity in Toronto, although he cannot say who invested ahead of the close.
What has changed? For one, climate control talks in Kyoto and emission control requirements dominate the headlines, highlighting obligations to clean up the environment. And soaring oil prices in the wake of the Iraq war – which today hover around $65 a barrel – have reminded investors that alternatives to oil are not only needed, but increasingly economical.
It doesn’t hurt that large corporations appear to be finally taking environmental concerns more seriously. Oil giant BP has announced plans to invest some $8 billion in alternative energy over the next decade, for example, while BASF’s recent bid for Engelhard is believed to be mainly to gain its emission controls business.
European food distributors are also getting in on the act. German sugar producer Südzucker is investing in biofuels, and the venturing arm of Danish food distributor Danisco has made numerous investments in industrial biotech technologies, in which naturally produced enzymes are used to replace more environmentally harmful industrial processes and materials.
“The move from a petrochemical-based economy to a biologically-based economy is under way,” says Gunter Festel of Switzerland’s Festel Capital, which is raising a first-time fund for industrial biotech investments.
Billions looking for a home
Festel is hardly alone. Claire Skinner, managing director with Ruston Wheb, a London-based headhunter specialising in cleantech, estimates that between €700 million and €1 billion is looking to be invested in the sector, ranging from early-stage up to large leveraged buyouts and project finance.
Chart courtesy New Energy Finance [click here for full chart].
And, while the overall amount of VC investment is still small, it is gradually increasing. According to the Cleantech Venture Network, cleantech investment makes up about 8 per cent of overall VC investing in North America – latest figures show $425 million in 69 cleantech deals in the third quarter of 2005 – and the firm predicts that will rise to 10 per cent of overall investing by 2009. Cleantech is also the sixth-largest investment sector after software, biotech, telecommunications, medical devices and equipment and semiconductors.
A number of speciality VC houses have sprung up or refocused on cleantech, including Expansion Capital Partners, Wheb Ventures (sister company to Ruston Wheb), Nth Power, Conduit Ventures and the UK government-sponsored Carbon Trust Fund. But mainstream US VCs such as Draper Fischer Jurvetson and Kleiner Perkins have also embraced the investment category. DFJ is raising money for a dedicated cleantech fund, to which the California Clean Energy Fund has committed $8.5 million, for example.
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Still, in Continental Europe, cleantech as an investment category isn’t quite yet the flavour of the month. “I don’t think it has been on the radar for German VCs until quite recently,” says Waldemar Jantz, principal with Target Partners in Munich. Target recently led a €5 million second-round funding, along with Conduit and Tech Fund Capital Europe, for P-21, a Munich-based fuel cell company focused on the telecommunications industry.
In the “white biotech area”, Germany’s TVM has investmented in firms such as Cologne-based Direvo Biotech, which develops screening tools for developing industrial enzymes and has collaborations with Danisco and Novozymes. But Leipzig-based competitor c-LEcta recently had to turn to the government-sponsored High Tech Gründer Fond and a business angel for its initial €600,000 funding. CEO Marc Struhalla says he isn’t aware of a single investor in Germany focused on the area.
And SAM’s Macdonald believes that interesting cleantech investments abound in Europe, particularly in the German-speaking region. He points to a an Austrian company SAM is eyeing that makes RFID tags that could help companies track inventory and save energy. If the company was in North America, he notes, “it would be well funded and probably overvalued”.
Public markets catch fire, but buyer beware
Certainly, public investors in Europe have caught cleantech fever. On German exchanges, shares of new solar market entrants Q-Cell and Ersol have soared more than 20 per cent since the beginning of the year, in particular since the state of California announced it would invest billions in solar energy.
AIM’s investors also appear ready to take on untried alternative energy companies. AIM has seen IPOs from a host of alternative energy and biofuels companies over the past year, including Acta, CMR Fuel Cell, D1-Oils, Novera Energy and Clipper Windpower. “Two years ago, these companies would have had to turn to venture capital and would have been funded on much less generous terms,” says Liebreich.
Investors have shown enthusiasm for selected stocks, such as Acta, which has seen its share price jump from 121 pence per share to over 147 pence.
To help track the field, New Energy Finance and WilderShares also is launching a global clean energy index on the American Stock Exchange. The index will include 86 companies from 18 countries and will encompass investments in: wind energy and solar energy; biofuels, biomass and waste energy; marine and geothermal energy; hydrogen and fuel cells; power storage, generation efficiency and smart distribution; energy-saving technologies; and related services and suppliers.
Too frothy?
Participants disagree as to whether there is too much froth in the market. On the VC side, SAM’s Macdonald still thinks there is room for growth. “We don’t want to be another nanotech story with too much hype and not enough return, but I don’t think we’re near that yet,” he notes.
Disappointments on the public markets could sour the mood, though. Participants point to AIM-traded firms such as D-Oils, a loss-making company developing the Jatropha seed as an alternative to fossil fuel. The company’s stock has proved quite volatile, recently losing half its value after a merger with competitor Biofuels failed to materialise. And fuel-cell developer Intelligence Energy recently cancelled its float without comment.
It wasn’t that long ago that investors put their hopes in solar and wind titles, only to be disappointed, notes John Townsend, director of Generics Asset Management, the early-stage technology investment arm of Generics Group. “Is it really different this time around? Or is it just fashion or fad?” he says. On the investing side, he thinks mobilising funds for cleantech investment will still be far from easy, as the appetite for risky, early-stage ventures is still extremely limited in Europe. Says Townsend: “I’m not sure the first-time funds will succeed.”
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