As Governments Exit, Private Investors Return to Cleantech

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What a week!

At the start of the year we forecasted that one of the big trends in 2012 would be the return of the private equity markets to the fuel cell and hydrogen industry. In fact, this trend has been far larger and is now having an impact on the entire cleantech sector.

The last week has seen an announcement from Goldman Sachs that it plans to invest a $40 billion fund in clean energy and Pangaea Ventures Ltd. achieving a first close of Pangaea Ventures Fund III, LP, having attracted the initial $50 million into the target $100 million fund. The Pangaea Ventures Fund will also be targeted at energy storage, energy efficiency technology, and energy generation. In Europe, the United Kingdom’s $5 billion bet, the Green Investment Bank, became a commercial reality. (It was also the week though when T. Boone Pickens, the U.S. industrialist and of late clean energy supporter, pulled his backing of wind power development in the U.S. citing low natural gas prices that have reduced his profit margins in wind.)

Does this mean we are in for a new hype cycle with government R&D being replaced by easier to acquire private equity? And if so, is this a bad thing? Although it’s unlikely that we will see a return to the days when investors lily-padded across the supposed Next Big Thing en masse, we should see the average deal increase in dollar amount as well as the number of deals increase.

Series A funding is likely to remain the largest hurdle for cleantech companies, with more and more emphasis being placed on commercial viability of the product, rather than on a concept. But once through that gate, the pool of available investment is growing and the number of companies investing larger. Investors are still looking for the same things as in any other sector, including a good management team. If the startup is small and stacked with R&D types, but with strong intellectual property, we are more likely looking at acquisition by a large corporations rather than investment by the private equity sector. For companies that are clearly on the commercial track, with a viable and well developed business plan, getting the next level of funding should be easier.

So what has changed to bring investors back into the sector? The clear major shift in the last twelve months has been the exit from the market in many countries of government based intervention. The second factor is the increased number of technologies that now fit into a standard private equity model of a five-year exit strategy. Fuel cells, wind, and biopower, as well as a range of energy efficiency technologies, now all are strong enough markets to sustain the traditional investment and exit model.

Finally, if we do have another hype cycle, will it be as counterproductive as the last? Unequivocally yes. The cleantech market cannot sustain another boom and bust. To be a sustainable, growing part of the global energy market, cleantech cannot afford another gold rush.

Article by Kerry-Ann Adamson, appearing courtesy the Matter Network.

About Author

Walter’s contributions to CleanTechies over the past 4 years have been instrumental in growing the publications social media channels via his ongoing editorial and data driven strategies. He is the founder and managing director of Sunflower Tax, a renewable energy tax and finance consultancy based in San Diego, California. Active in the San Diego clean technology community, participating in events sponsored by CleanTech San Diego, EcoTopics, and Cleantech Open San Diego, Walter has also been a presenter at numerous California Center for Sustainability (CCSE) programs. He currently serves as an adjunct professor at the University of San Diego School of Law where he teaches a course on energy taxation and policy.