Q&A: SparkEdge Capital’s Linc Liu

Founded in 2015, SparkEdge Capital is a stage-agnostic investor in China's new energy space, primarily interested in the PV industry supply chain, energy storage, and hydrogen energy. Initial investments were from renminbi-denominated funds; a debut US dollar vehicle is in the process of launching. The firm claims a network of corporate LPs and partners such as Longi Green Energy Technology, JA Solar, Canadian Solar, and GCL New Energy Holdings. In recent months, it participated in rounds for three energy storage businesses – Xiamen Hithium Energy Storage Technology, JD Energy, and Fox ESS – amounting to more than USD 500m.

Q: New energy and cleantech have attracted a lot of capital in China, yet the space is said to be enduring a cold winter. What’s your take?

A: My feeling is that each day is better than the previous one. Cleantech has achieved power grid parity and no longer relies on subsidies, which has put it in the fast lane for growth. When people talk about a cold winter, they are referring to the supply surplus, most visible in areas like PV cells. I’ve been active in this sector for over a decade and our senior team has experienced several cycles – and they have become progressively gentler. Fierce competition leads to price wars, but lower prices can stimulate new demand and help offset the surplus. In addition, competition in the PV materials supply chain can benefit companies focused on auxiliary materials or equipment because they can expand at lower cost.

Q: What is the market positioning of those three energy storage portfolio companies, Hithium, JD Energy and Fox ESS?

A: All three focus on battery energy storage, which has grown rapidly in recent years and provides the most opportunities for PE and VC investors. In contrast, pumped water storage and air compression energy storage tend to involve large-scale individual projects. Investments can be infrastructure-like, and therefore perhaps not a good fit for private equity and venture capital. Hithim produces large ampere-hour cells; it is a supplier to JD Energy and Fox ESS, both of which make end-products, typically battery-based systems. JD Energy specialises in distributed energy blocks for large energy storage projects that improve safety and energy efficiency. It achieves this by integrating three key aspects of energy storage – battery management, power conversion, and energy management systems – into small modules. Fox ESS [also known as Maitian Energy] focuses on household energy storage solutions for the consumer segment, using 25-50 ampere-hour cells.

Q: Could Fox ESS target overseas markets as well as China?

A: Overseas are a focal point. Tesla launched Powerwall [an integrated battery system that stores solar energy for backup protection] in 2015, but it’s only relatively recently that the market for household energy storage has gained momentum. Growth post-2021 has been significant, and it is driven by demand from homeowners looking to reduce their reliance on the grid and save money. Internally, we’ve invented a term, “large energy home appliances,” which ranges from household power generation to power storage to charging piles. The concept might be viewed as a kind of new energy vehicle. While US and Europe are more mature markets for energy home appliances, we see huge growth potential in South America, North Africa, the Middle East, and Southeast Asia.

Q: Does household energy storage represent the biggest cross-border opportunity for Chinese entrepreneurs in the sector?

A: No. Power generation and storage solutions for the 2B market – PV cells, power plants, energy storage facilities – is a much bigger opportunity. We have seen Chinese companies play a major role here. There is a trend towards local production in many overseas markets, but in terms of cost, reliability, and practical delivery, the optimal solution is to import the bulk of this infrastructure from China and supplement it with limited local manufacturing. I think we will see a lot of Chinese players establish manufacturing joint ventures with local partners in different geographies. For years, China has been very competitive in areas like PV cells. Decoupling from China would result in countries struggling to develop domestic solutions with the same kind of competitive edge.

Q: How is SparkEdge Capital addressing overseas markets?

A: We are preparing to launch our first US dollar-denominated fund to make such investments. We’ve studied developments in overseas markets ever since we were established because a lot of new energy applications originated from foreign geographies. Oftentimes, China catches up on the technology and then builds strong supply chains for product delivery – starting overseas and then expanding into the domestic market as well. This means overseas markets may present an entirely different set of investment options. For example, currently we don’t see any technology leapfrogging opportunities in China’s main PV manufacturing value chain, so it’s not for us. However, we would invest in this area overseas as Chinese companies look to build local manufacturing capabilities. In addition, for scenario applications such as energy internet and micro-grids, I believe overseas landing will come earlier than in domestic markets, so there should be attractive investment opportunities.

Q: What’s your typical investment stage and ticket size?

A: We don’t deliberately target a certain funding stage – we can invest from pre-Series A all the way through pre-IPO. What we care about is the internal development stage of a company. This can be divided into three main stages: zero to one, where there is proof of concept and small-size orders; 1-10, which is characterised by rapid growth in orders; and 10-100, where companies achieve meaningful scale and strong market share. We don’t invest in the first stage. We focus on the moment immediately prior to the inflection point. And our ticket size varies a lot depending on whether it’s the second or the third stage: 1-10 could involve cheques for tens of millions of renminbi or CNY 100m (USD 14m); for 10-100, we might put several hundred million renminbi to work. Invariably, these large commitments go to companies we have already backed at the earlier stage.

Q: How do you identify the inflection point?

A: We start from the demand side and assess whether the inflection point is coming. Studying a new energy storage solution, for example, we would need to see strong demand among downstream players for lower-cost solutions. Additionally, the industry should have formed a reasonable level of consensus on product direction. Absolute consensus doesn’t interest us; it means there is no longer an investment opportunity. We also look for evidence of ecosystem development, and the emergence of significant players, rather than just one or two links in the supply chain.

Q: What will be the next big thing in new energy?

A: Solar and wind energy technology, as well as end-products, will continue to evolve in the coming decades. Even now, investments are still at an early stage. While we don’t see significant technology iteration opportunities at present, there are plenty of smaller iterations involving auxiliary materials, equipment, and electronic devices. We monitor these emerging sub-sectors, while also looking to anticipate the next significant technology leapfrogging moment. Within energy storage, as the lithium battery supply chain matures – due to the continued rise of electric vehicles – there are many interesting openings around flow batteries for energy storage. This area is currently in the incubation phase, but it could be the next big thing. Demand will not expand rapidly at first, so we will keep on monitoring it, waiting for that inflection point.

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• Topics
• Greater China
• GPs
• Industrials
• Technology
• Cleantech
• China
• energy
• Cleantech
• SparkEdge Capital