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11 June 2007
Private capital flowing, but there''s still room for growth
Source: www.ft.com, www.wbcsd.org
Five years ago clean energy was an investment backwater, the concern only of environmental alarmists and obscure academics. Now it has entered the mainstream and is set to enjoy even more growth in years to come, according to the Carbon Trust, the government body charged with cutting carbon emissions.
“The last two to three years has seen an influx of private capital to the sector,” according to a new report from the Carbon Trust. “New fund management groups backed by new investors have appeared. The public markets in Europe and the US have seen an influx of clean energy companies, many exploiting new technologies, some exploiting new business models created by the low carbon economy, others the emerging markets around emissions.”
European venture capitalists invested €1.96bn in 300 companies between 2003 and 2006, with 10 per cent earmarked for clean energy investments. This put the sector on a par with biotech, semiconductors and IT, although clean energy companies tended to raise more money per round.
“As industrial technologies, clean energy companies are often rather capital intensive,” the report says. As a result, “transitioning to full scale production will be a challenge for many clean energy companies”.
But New Energy Finance, the clean energy analyst, says Europe is being left behind in the race for technological leadership in clean energy as venture capital and private equity investors focus on opportunities in the US and Asia. Venture capital and private equity investment in the US rose 138 per cent in 2006 and deals in Asia saw growth of 45 per cent, but activity in Europe dipped 2 per cent.
North American venture capital investment surged at the end of 2005 and the start of 2006 as a number of large, sector-specific US funds placed their bets, particularly in the biofuels sector. European deals remained flat, partly owing to innate caution on the part of European investors but also because of the easy availabil ity of funds from the public markets, particularly London''s Alternative Investment Market and Frankfurt – a total of €2.5bn was raised on public markets between 2003 and 2006.
This contrasts with the onerous conditions and cost of listing in North America, which gives companies there little choice but to turn to venture funding. Nonetheless, New Energy Finance''s chief executive Michael Liebreich says: “The evidence is that US venture capital investors have simply reacted more quickly than the Europeans to the rapid emergence of clean energy as a mainstream investment opportunity.”
Some of the “fizz” has now come out of European markets, the report says, while a number of pan-European VC funds have been raised that focus on the sector, leading to a better balance of VC funds and public market activity.
“Investors are becoming more selective,” says Adam Workman, investment manager at the Carbon Trust and author of the report. “There is still money out there to be invested, but the quality threshold has increased.” However, he adds that the situation is not the same as the dotcom boom at the turn of the century.
“We have not seen a crash, even if valuations have eased somewhat, and that is because this sector is based on real market drivers rather than hype.”
The UK was the prime source of venture deals, followed by Germany, France, Sweden and Finland, while there were clusters of clean energy companies receiving funding in the London area, and close to Oxford and Cambridge universities, as well as Berlin, Munich and Paris.
There were few investments in southern and eastern Europe, the report notes, but that is expected to change as “more southern and eastern European governments harmonise with EU legislation on climate change and energy policy, as venture capital markets in these regions develop and as talented entrepreneurs gravitate to the clean energy segment”.
Energy generation – in particular solar (€292m), fuel cells or hydrogen-based generation (€149m) and wind (€165m) – took a large slice of the funds raised, but there was also substantial investment in consumption and energy efficiency technologies.
Building technology com panies raised €240m, while industrial and manufacturing technologies saw inflows of €359m. These amounts were significantly more than was raised in North America, suggesting this could become an area of European leadership.
Future investment areas are likely to include offshore wind and wave energy, bio fuels, fuel cells and energy efficiency, the report suggests. It also highlights the emergence of a growing number of specialist clean energy funds, such as CDC Ixis, Emerald Venture Partners (formerly SAM Private Equity), Zouk, Low Carbon Accelerator, Environment Technologies Fund and Capricorn Ventures.
Nonetheless, most investments were made by generalist funds, suggesting “we are still seeing . . . investments into this sector on a case by case basis rather than developing a sector strategy”. It does add, though, that companies such as Apax, 3i, SEP and Amadeus are developing strategies as a result of building portfolios case by case.
Mr Workman concludes: “While we found significant amounts of capital being invested in European clean energy companies, we still think there is room for substantial growth.”
North American funds have raised record amounts of clean energy investment in the past year, but Europe has lagged behind. “Only now are we seeing significant funds being raised in this space.
“This may mean . . . European clean energy companies face difficulties in gaining access to the capital they need to grow and succeed.”
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Sustainable Investment Research Platform
Provided by Webforum