A clean tech sweep

In many parts of the world – emerging markets included – the growing demand for clean tech and alternative energy is sparking interest among private equity and venture capital funds. Judy Kuan reports.

VC presence in clean technology companies continues to build, with industry tracker Cleantech Venture Network (CVN) announcing late last month that a six-year high of $513 million had been invested into clean tech companies within the first quarter of this year, representing an increase of 52.9 percent year on year. 

Clean tech, defined by CVN as “knowledge-based products and services that optimise the use of natural resources, reduce ecological impacts and add economic value”, is not only gaining momentum in North America and Europe, but also in a growing portion of the world’s middle-income economies, such as China, India, and Brazil.

Clean tech: gaining momentum in emerging markets

In these rapidly expanding economies, the key drivers for adopting and investing in clean tech solutions are not only cost-related, but propelled by the growth-threatening disparity between demand and capacity – particularly within the energy sector. The power crisis suffered by Brazil in 2001 sent shockwaves through the country’s industries, as the government was forced to ration power to prevent massive blackouts, and the country’s growth rate slowed to an average of 2.2 percent per year between 2001 and 2003. More recently, China hit a major power shortfall in the summer of 2004, when a heat wave, capacity shortages, and economic growth combined to result in what was reported as China’s worst energy crisis in the last 20 years. During the power crisis, authorities in Shanghai approached local companies, asking them to reduce production to cut back on the city’s energy consumption.

In extreme cases, power and clean water shortages have set off violent protests, such as the nearly daily clashes between demonstrators and police that were reported in Bangladesh last month. Even in the so-called more-emerged China, “the issue of pollution has become a ‘blasting fuse’ for social instability,” posted Zhou Shengxian, director of China’s State Environmental Protection Administration on the agency’s website. Evidence of such unrest includes the riots that took place at an industrial complex in Wangkantou in April, where dozens of people were injured as local residents protested that their crops had been decimated by chemical plant pollution.

With these pressures in mind, some countries within the emerging markets are buying and implementing new clean technologies even before companies in the US have applied them, note private equity GPs such as Global Environment Fund’s (GEF) H. Jeffrey Leonard, president and founding partner of the Washington, DC-based emerging markets clean tech-focused firm, while speaking at a clean tech-focused panel discussion at last month’s IFC/EMPEA Global Private Equity Conference.

At the same time, the universe of clean tech focused-GPs – such as GEF, Axial Par in Brazil and E+Co in Latin America, Asia and Africa – within the emerging markets continues to grow, as do their scale and breadth of activities.

On the LP side, some of the more nimble and forward-thinking investors – such as the California Public Employees’ Retirement System (CalPERS) – are building up their exposure to the clean tech space as well, by investing in private equity and VC funds focused on this sector. To date, CalPERS’s Environmental Technology Program within its private equity program has committed $185 million – out of the pension’s total private equity portfolio of $27 billion – to six private equity and VC funds, although these funds primarily focus on the US and the more developed markets. The rationale for CalPERS’s inclusion of clean tech within its investment programme, said CalPERS’s Environmental Initiatives portfolio manager Winston Hickox at the same panel discussion, is the institution’s perception that the externalities generated by climate change and peak oil prices will likely affect the global economy.

One of the continuing challenges with clean tech and alternative energy outside of the US and Europe is that the enforcement of intellectual property rights is still relatively weak, according to Don Ye, president and CEO of the China Environment Fund. Ye, who also spoke at the clean tech panel, nonetheless sees cause for optimism – at least in the case of China, given the country’s recent drive to improve IP laws and regulations, stemming from foreign direct investment requirements, China’s entry into the World Trade Organization, and the criticism the Chinese government has received from the international community regarding the topic.

In general, attracting foreign investment to help develop the clean tech industries of some of these “emerging” countries is still a tough sell, as low government-set tariffs for power supplies and corruption can deter potential investors. However, those GPs that are knowledgeable of both implementing these technologies and operating in the local investment environment are well-placed to take advantage of the vast demand for the fruits of such technologies in these high-growth countries.