Private equity: Specialist funds are keen to invest in clean technology

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Private equity bosses were dubbed the masters of the universe a few years ago for their apparent ability to acquire almost every company, however large, during the debt-fuelled leveraged buy-out bubble.

Now the credit crisis has shattered this superhuman image. But some private equity bosses still believe they can help to save the world, this time by investing in one of the hottest areas: clean technology.

The number of funds investing in private-equity clean tech – including renewable energy, recycling, anti-pollution, conservation and power supply – is up more than fivefold from 90 five years ago to 530 this year, according to Preqin, the research house.

“These businesses are growing at 20 to 30 per cent a year,” says Shai Weiss, a London-based partner at Virgin Green Fund, a $220m fund backed by Sir Richard Branson and other big investors including Macquarie, Credit Suisse and Calpers.

“There are structural drivers of growth, such as regulatory limits on landfill in Europe, which are driving demand for resource-efficiency products and services and which are completely separate from the economy in general,” says Mr Weiss.

While the financial crisis has taken some froth out of clean tech, most specialists believe it is emerging stronger from the crisis than other parts of private equity.

James McNaught-Davis, managing partner of UK-based clean-tech investor WHEB Ventures, says the shortage of financing from banks and other sources may be creating more opportunities for specialist funds in this area. “There are quite a few clean tech businesses that need capital to develop and have owners who can’t or won’t provide the money, and these are being sold quite cheaply,” says Mr McNaught-Davis. “It is currently a buyer’s market.”

As in all areas of venture capital, he says protecting intellectual property rights in the fast-moving world of clean tech is crucial. “A core asset is intellectual property. When it comes to selling a business or even taking it public, if you have some crown jewels in the form of patents, or at least proprietary industrial know-how, that increases the value of a company materially.”

While total venture-capital investment fell 9 per cent from the last quarter of last year to the first of this year, investment in clean-tech deals increased markedly. Renewable energy and green technology companies received six of the 10 biggest venture capital investments in the first quarter.

Global venture capital investment in clean tech reached $773.5m in the third quarter, an 87 per cent rise from the previous quarter and more than treble the year-ago period, according to a report by Thomson Reuters, PwC and the National Venture Capital Association.

Yet governments say more is needed. Total clean-tech investment needs to reach $500bn a year to hold global warming to less than 2 degrees celsius, beyond which scientists say climate change becomes irreversible and catastrophic, according to the consultancy New Energy Finance.

Last year, 77 clean-tech funds raised a total of $26.9bn, down sharply from the 104 funds that raised $48.5bn in 2008, according to Prequin.

However, there are currently 91 clean-tech-focused private equity funds on the road seeking to raise an aggregate $26.7bn, which is an increase from the 78 funds seeking to raise $19.9bn a year ago.

Private equity’s role in clean tech is hard to quantify, partly because it comes in various forms.

First there are venture capitalists, such as Kleiner Perkins Caufield & Byers and Element Partners in the US, or WHEB Ventures in Europe, which have raised funds to invest in early-stage clean tech companies.

Second, there are private equity groups looking to make growth capital investments in more mature clean tech companies, such as Climate Change Capital in the UK and Ambienta, a new Italian group that raised €217.5m ($266m) last year.

Third, specialist infrastructure groups, such as US Renewables Group, Triodos Investment Management in the Netherlands, and HG Capital Renewable Power Partners in the UK, are developing wind, solar, hydro and biomass projects.

Finally, generalist buy-out groups are investing more in clean tech. Blackstone, the world’s biggest private equity group, in 2008 announced a €1bn investment in a wind farm off Germany’s North Sea coast, while last year Terra Firma, the UK buy-out group, invested $350m in Everpower, a US wind farm developer.

Mr Shai at Virgin Green Fund says that, like many investors in the sector, he is approached by many entrepreneurs too early – before they have real revenues or even a saleable product. “We are about backing proven companies and helping them grow,” he says.

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