Cleantech Q&A: Capital Dynamics

Q:  How much of a commitment of capital and human resources does it take to develop in-house direct investment expertise in clean tech?

A:  Having direct investment capability requires a considerably deeper and broader human resource commitment right across origination, deal structuring, legals, due diligence, and then asset management. Capital Dynamics already has the existing infrastructure.

But, it's a labor-intensive process. And the skill sets are quite specific. Thus, there's not a huge pool of talent you can draw upon for clean energy investment at the moment, relative to the scale or the capital demand.

Q: What is the firm's view of the cleantech opportunity set worldwide?

A:  The financial community these days is grappling to a certain extent with definitions in this space. Properly defined, cleantech is in part commercializing new technologies; things that are not proven, nor currently commercialized, nor bankable. We, on the other hand, are more interested in the asset financing around technologies that are proven and bankable.

If you just start with the numbers currently forecast by analysts worldwide, they work back from renewable energy targets that have already been implemented globally, plus the targets around carbon reduction in the context of certain climate change goals. In terms of capital spend. Just the clean energy component is projected as roughly $500 billion p.a. in ten years time. Last year, there was about $150 billion invested in assets including wind farms, biomass plants, geothermal plants, solar plants et. al. – proven and operating equipment. In fact, more clean energy was installed in the US and Europe than conventional fossil fuel energy for the first time ever. So it's already significant.

The point is that most of this equity is invested by industrial companies, utilities companies and so on. Institutional capital really hasn't been directed toward this asset class in any meaningful way.

Q:  How would you characterize the ‘nuts and bolts' of the opportunity set?

A:  The figures that we're quoting on the clean energy build-out are based on addressing targets already implemented. So this year's $120-odd billion is expected to growth to $225-230 billion next year, simply to address regulations that have already been passed: for example, 29 states in the US have implemented a Renewable Portfolio Standard (or RPS), which is a mandatory requirement imposed on electric utilities to buy increasing amounts of renewable energy as a proportion of their total load for their customers. In the UK, that same target stands at 15% by 2020; in Europe, 20% by 2020, with Australia following suit.

At the same time, if you look at how institutional investment has been organized, or from the perspective of the investment products offered so far in the asset class, there are only a handful of funds of any scale; three or four focused exclusively on renewable energy.

Q:  What's the Asian angle on this?

A:  There is a "Tale of Two Cities" aspect. On the one hand, you have a country like China that is doing more in renewable energy than any other country. And it has adopted mandates similar to those in the West, e.g. to stimulate solar power, wind power etc. And India is now doing much the same.

Other parts of Asia are different, however. Singapore, for example, wants to make itself a cleantech hub. But that's more around sponsoring technology development. It's not a major market for renewables, given its small size. Other jurisdictions, like Indonesia, Malaysia, Korea, and Taiwan, are to various degrees gradually implementing domestic investment incentives for more renewable energy in one form or another. But overall, it's fairly modest.

What's driving clean energy more in those Asian markets – which are regarded as developing economies for the purposes of the Kyoto Protocol – is the generation of carbon credits; so what happens beyond Kyoto is the main issue.

Q: What are the most significant areas of cleantech that you are looking to invest in?

A: Capital Dynamics is pursuing an overall investment thesis with a primary focus on the US, the UK and Australia. Most investments will be in assets or projects that are expected to generate clean and low-carbon electricity, employing proven technologies and equipment. 

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