Counting on cleantech

RENEWABLE ENERGY IN CHINA REMAINS a key investment target for private equity players globally - exhibited through the launch of several sector-focused funds in the past month alone. Yet industry insiders preach caution: investor-friendly narratives don't equate to guaranteed returns.

Although opportunities are certainly available, the track record for private equity exits has been sparse, according to Terence Tan, managing partner at IPV Capital, a China venture capital firm. "If you speak to Silicon Valley investors, they would say that cleantech has been the flavor of the month for quite a few years, and yet they cannot claim that it's been a successful industry in terms of fantastic returns," he tells AVCJ. "If you ask some LPs about it, they'll give you a statement that China's cleantech has not taken off as well as they hoped."

IPV has responded by adopting a broader focus. Its first fund, launched in 2006, looked for investments in China's technology sector as a whole rather than in cleantech specifically. A second fund, with a similar investment mandate, closed last week having drawn $134 million, well above the $125 million target. Several LPs that participated in the first fund returned, including UBS, RWB and an unnamed leading Asian endowment, alongside new entrants Axiom Asia - which led the group - Tokio Marine and Morgan Creek.

"We wouldn't say that we're a cleantech fund - cleantech is one of many industries that we think there are opportunities," Tan says, noting that IPV's has three cleantech investments and eight in outside areas such as semiconductor technologies. "We're happy to not invest anything in cleantech if the financial returns aren't there. We're not going to invest because investors think we need to justify a cleantech mandate."

The firm intends to use its newly raised capital to strengthen core investments in early-growth technology targets, and expand into new areas in clean energy and medical technology.

Private equity's commitment to cleantech

Regardless of IPV's more pragmatic approach to China cleantech, other private equity investors continue to enter the sector, attracted by huge government commitments to renewable energy. According to AVCJ research, 77 clean energy, technology and renewable utility deals have been brokered in the country since 2008, worth $4.6 billion in investments. Around 24 cleantech-focused funds have been launched over the same period.

Last week, the Asian Development Bank (ADB) announced that it would invest $60 million to set up three venture capital funds - Aloe Environment Fund III, Keytone Ventures II and VenturEast Life Fund III - targeting new climate change technologies predominantly based in China and India, the two most active markets in the promotion of clean energy developments. It anticipates that private-sector investors will contribute an additional $600-$700 million.

In April, the International Finance Corporation (IFC) set a target of $350 million for the China Environment Fund IV, L.P. The 10-year fund will be managed by Tsing Capital Venture Capital Management.

Meeting expectations

However, cashing in on the China cleantech story is not as straightforward as it might seem. Early investors in Chinese manufacturers of solar and wind energy equipment have seen strong returns but renewable energy credentials are no longer a guarantee of success.

Xinjiang Goldwind Science & Technology, China's second-largest wind turbine maker, raised $916 million through a Hong Kong IPO in December 2010, with the International Finance Corporation and VantagePoint Venture Partners coming on board as cornerstone investors. But the amount raised was less than half the company in an aborted listing six months earlier, and its stock is currently trading around 40% below the IPO price.

Goldwind, whose valuation dip has been attributed to market conditions and a slowing demand for wind-energy assets, isn't an isolated case. Jetion Solar cancelled its plans to list in Hong Kong in September of last year and Datang Renewables struggled on its market debut a couple of months later.

Pick another segment of the industry, though, and sentiment remains positive. It was reported in March that Affinity Equity Partners and Unitas Capital planned to sell their stake in energy-saving firm Beijing Leader & Harvest Technologies Co. for as much as $500 million. Reuters reported at the time that the firms were considering exiting the asset via an auction and a dual-track IPO, which could deliver a return of more than 100% on their initial joint investment of $200 million for a 94% stake in the company in 2009.

Speaking generally of returns on investments, Alfred Chu, cleantech-focused Partner at IPV, says that VCs generally hope to receive a premium to the public market's rate for their IT and cleantech investments. As competition increases, industry specialization and value-add are important differentiators to maintain these high investment returns.

"Cleantech is a tremendously large space, and not all segments are suitable for VC investments," Chu says. "For earlier stage investments, we have seen good opportunities in areas that are at the cross section of cleantech and IT, material science, advanced manufacturing, biotech, etc."

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• Topics
• Greater China
• Cleantech
• Fundraising
• International Finance Corporation
• Unitas Capital
• Affinity Equity Partners