The cleantech sector: renewable?

The reasons for the reversal are various, ranging from the inability of participants in the UN-backed process dating back to the Rio summit to achieve any meaningful agreement, to credibility scandals first triggered by emails leaked from the Climate Research Unit at East Anglia University in November 2009 that inferred that scientists had colluded to withhold dissenting scientific information, dubbed ‘Climategate’. This was followed in early 2010 by hard fact checking of claims that Himalayan glaciers were well on the way to melting away. As well, however, the extent of the GFC fallout left little appetite – not to mention capital – for forging new economic sustainability frontiers. More recently, the US mid-term elections and the triumph of the tea partiers has again stalled progress on the setting up of an effective carbon market in the US, a benchmark that many have ushered in broad scale investment in a new global green and sustainable economy.

So has the surge of two years ago come full circle? Not according to some seasoned players polled by AVCJ, and certainly not in Asia. But the room to grow is part of the impetus for investment.

By the numbers

Regionally, the number and size of deals (mostly in renewable energy) has never been huge. But there is a consistency about them.

In 2005 there were 27 transactions valued at an aggregate $51.6 million. The following year, 41 deals were notched up, collectively worth $104 million. This total edged up a little further to 44 in 2007, though the valued halved to $54.2 million. But in 2008, the value spiked to $2.9 billion via 41 transactions. And in 2009, 56 more churned $798 million. This year, by the end of September, deal numbers had plummeted again to 25; but their aggregate value was still pegged at a very respectable $566 million. Clearly the lights remain lit. Signs that this will continue are not hard to find.

Last month, global private equity house Silver Lake, a leader in technology and technology-enabled industry investments, announced it had taken its first stake in cleantech in the region, in a front-runner Chinese company: Shanghai-based Nobao Renewable Energy Holdings. The latter provides energy efficiency management solutions utilizing Ground Source Heat Pump geothermal technology.

According to Managing Director of Silver Lake Eric Chen, the cleantech sector in Asia, and in China particularly, is attractive for three reasons: First, the technology surrounding green energy has largely proved to be as sophisticated as the capabilities developed in the West, thus making the sector competitive and more compelling for international investors.

Second, while government support has been strong, governments have not been over-subsidizing the industry, allowing private backers to have the autonomy to execute their own best strategies. And, third, Asia houses some of the world’s most Herculean populations – such local markets understand the “urgent challenge” to provide workable energy solutions.

“Here versus the rest of the world, the concept of the supply chain is still very important,” Chen adds, speaking about the benefits of investing in the region. “One often finds that the design and technology for this sector comes from Asia, and if an investor is able to identify where all the opportunities lie within the supply chain, that can be leveraged.”

More than meets the eye

One of the difficulties in coming to grips with the status quo on a subject as vast as clean/green technology and the various kinds of investment that enables it, is the breadth of the subject.

As a result, it’s mostly the spectacular that tends to reach a non-expert audience. But Ron Mahabir, co-founder and MD of Asia Cleantech Capital, has not only developed deep roots in the business aspect of the subject in Asia, but is a frequent source of cogent comment on it. He admits that the factors previously noted have had a real impact on its development: “Most politicians are more worried about jobs right now than what deceptively appear to be longer term issues like climate change. The negative fallout has primarily hit the earlier stage, higher risk part of the value chain. But overall, we still believe that the sector has reached a tipping point.” In 2009, more than $150 billion in renewable power capacity was added, or more than half of the newly installed power generation globally. This is up from just $30 billion in 2004, and it marks the second year in a row in which more and more renewable power outstripped fossil fuel-driven capacity. As well, more than half of renewable power capacity is in the developing work. “The sector is no longer viewed as a short-term trend, and in fact is posed for continued high-growth rates and opportunistic returns.”

Much has been made by detractors of the sector, broadly speaking, being dependent on government laws, regulations and taxes to underpin its economic viability. Mahabir points out, however, that while globally renewables get about $100 billion in subsidies, comparatively fossil fuels receive an estimated $500 billion.

“Nevertheless, when you factor in the reality that any new sector requires improvements in technology and scale to reduce costs, it might appear that renewables are less attractive,” he told AVCJ.

“We believe strongly, however, that natural resources are fundamentally mispriced on short-term supply and demand, and not on medium-term shortages and externalities, namely environmental impacts and resource security issues. That said, many technologies in the Asian region today are competitive without any (or at least very minimal) subsidies. Some examples include small hydro, wind, off-grid solar, energy efficiency, certain electric vehicles, re-cycling and so on. And if you take a three to five year view, even more technologies will become viable.”

Fundraising and investment question marks

In the here and now though, when viewed from a fundraising and investment standpoint, a certain double vision becomes obvious.

Nicholas Parker, founder & CEO of global green consultancy The Cleantech Group, summed it up this way at an industry panel, for a standing room only audience, during the recent AVCJ Forum 2010. “Looking at the innovation capital, excluding project finance, which is aimed at scaling cleantech innovation so that it can be adopted on a large scale, nearly $200 billion globally and a lot of M&A have already gone into the space,” he said. “And among venture capitalists, cleantech is now the largest single VC category, growth stage financing as well; it’s bigger than software, medical devices and so on. A lot of this has been fuelled by stimulus spending. But a potential capital gap is emerging, with $33 billion invested globally over the past five years and the potential for double that being needed over the next five.

“Fundraising for cleantech GPs has been a disaster over the past 18 months, especially when contrasted with the spike up until 2008. It echoes the dot com boom/bust of a decade ago. And in the West at least, this could amount to a capital shortfall of $22 billion. That’s highly relevant in this part of the world, where there is surplus capital and an interest in the best Western technologies and solutions in this space. M&A is rising rapidly; projections are that about 8% of global M&A will be clean and green this year. Corporations who were buying wind farm portfolios are now buying technology which they can use for new business development and/or locking up supply chains for increasingly scarce resources like lithium. As for IPOs, Asia now dominates. Hong Kong and China took about 60% of the cleantech IPOs last year. And this can only continue.”

Ron Mahabir concurs, when queried about what he sees in terms of current fund raising from a private equity point of view. “Last year was definitely brutal. Most investors were shell-shocked and there was not that much activity. This, of course, makes the year-on-year numbers look good. But in our view they are still far from where they need to be. But this makes it an attractive investment environment for opportunistic returns, even though from an environmental and geopolitical perspective there is still the issue of a massive funding short fall. We remain bullish about more funds coming into the sector in Asia, and are starting to see a lot more interest not only from investors within the region, but also from European investors who have realized that the relative growth opportunities are significantly better here.” 

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• Topics
• Cleantech
• Investments
• Regulation
• Performance
• Fundraising