Cleantech has been a buzz word in the private equity industry for several years now and there is no doubt this buzz has been steadily translating into investments.
Venture capital and private equity funds invested more than $10 billion in cleantech globally in the first half of 2010, up from $5.6 billion in the corresponding period last year, according to data from Clean Energy Pipeline, a division of London-based data and research service VB/Research.
Notably, according to the VB/Research statistics, Asia accounts for $854 million of the investments made in the first six months this year, compared to only $241 million in the first half of 2009. This means venture capital and private equity investment in cleantech in Asia has more than tripled year-on-year, while overall global investment has not even doubled.
However, the proportion of PE/VC investment in cleantech remains relatively small compared to corporate mergers and acquisitions. While PE/VC investment in cleantech worldwide reached $5 billion in the second quarter this year, corporate M&A activities were valued at $14.5 billion, according to an earlier study by VB/Research. A similar story can be seen in Asia, according to Carolin Öhrn, associate director at VB/Research.
“Investment is taking up in Asia, but I think there’s still a lot to do on the venture capital and private equity side. We’re seeing here at VB/Research very strong activity in M&A and project finance, but it’s not necessarily driven by private equity investors,” Öhrn told PEI Asia.
So what is holding the private equity industry back? According to Nikunj Jinsi, chief investment officer for cleantech at International Finance Corporation (IFC), the private investment arm of the World Bank, a knowledge barrier remains one of the key challenges facing private equity and venture capital investors in Asia.
It takes “a combination of understanding of local regulations, local capital markets, the industry value chain, and financial products in general” to invest in cleantech, Jinsi states. At a micro level, he adds, you have to understand a specific technology and be able to assess what the long-term benefits would be of deploying that technology into a specific sub-sector in a specific country.
When it comes to Asia, this means there is often another level of complexity, given that the region comprises a collection of very different markets in terms of economic development, entrepreneurship, and business practices. Therefore, Jinsi says, private equity firms often tend to look for the few obvious plays and he sees “a lot of, perhaps too many” of them crowding round the same deal opportunities.
Another reason why it is important for GPs in Asia to deepen their knowledge of the cleantech industry is that they lead LP appetite for the sector, says Andrew Pidden, managing director of CRA Management at CLSA Capital Partners, which is currently raising a Clean Resources Asia Growth Fund.
“There is [LP appetite for cleantech investments in Asia], but it is tempered because a large number of generalist funds are trying to represent themselves as having capacity in the clean resource space as well,” he says.
“Generalist funds tend to talk mainly about renewables, which leads LPs to think that is the only market in Asia,” he adds.
In fact, renewable energy accounts for only one of 11 segments in the cleantech industry, according to the Cleantech Group, a San Francisco-based industry market intelligence provider. Nonetheless, renewable energy is usually the first thing people think of when you start a conversation on cleantech, and it has gained much investor attention as regional governments are playing a weighty role in pushing the industry forward.
Government support still key
One example is China, which announced in 2007 its Medium-to-Long-Term Development Plan for Renewable Energy, which aims to increase the share of renewable energy in total energy consumption to 15 percent by 2020, compared with 7.5 percent in 2005. In addition, China’s 11th Five-Year Plan for Renewable Energy set targets, guarantees and incentive measures for the development of renewables in China during the period of 2006 to 2010.
“The Chinese government and the regional governments in China are some of the most progressive in the world in terms of encouraging development of ways to be more environmentally and economically efficient,” Pidden says.
“I think the five-year plan that we’re just finishing and the next five-year plan are very clear in that desire to see more adoption of energy efficiency, pollution control, and cleaner energy opportunities across China,” he continues.
In fact, governments including Australia, India, Korea, Thailand, Philippines and Malaysia have all been putting in place national targets and policies to support renewable energy, according to Paul Curnow, partner in the Renewable Energy and Clean Technology practice of global law firm Baker & McKenzie.
“Whenever a country announces a new policy and puts it into law, you’ll typically see a lot more interest coming from the investment community. Clear and sustained government support is certainly a strong reason why you’ll see investors choose one jurisdiction over another,” Curnow says.
“Governments that have not been able to put an attractive renewable energy policy in place, for example Indonesia until recently, have really not seen the growth in clean energy investments that some of their neighbors have seen,” says Anand Prakash, managing director at US-based private equity firm FE Clean Energy, which invests primarily in Asia and closed its fourth fund on $250 million in November 2008.
However, government support and subsidies are not sustainable from a long-term perspective, and bring with them an element of uncertainty and risk. One recent example has been seen in Spain, where the government has unveiled controversial plans to retroactively reduce special tariffs to photovoltaic energy operators.
“I like to invest in a sub-sector where there is both a market driver and a policy driver,” says Sylvia Chan, managing partner and co-founder at Hong Kong-based Entropy Ventures, a specialist cleantech manager in the final stages of closing its maiden fund, Amadeus Asian Clean Energy Fund. “We don’t like investing in companies in particular that are late followers or were developed in reaction to a particular policy, [and therefore are] dependent on that policy continuing.”
Paradoxically, it may be the uncertainty around the longevity of government-originated financial support for cleantech initiatives in many countries that convinces private capital to stay in the game longer term.
“Looking forward, I would say [private equity investors are] still looking at this market, and are looking at improving or increasing the investments they committed to this market. They’re already playing a very active role, and they will be even more so in the coming years,” says Jun Ying, country manager for China at Bloomberg New Energy Finance, which provides industry information and analysis in clean energy, low carbon technologies and the carbon markets.
However, putting future predictions aside, right now the cleantech investment story is a long way from proven for private equity investors – even the specialists.
“Everyone will tell you cleantech is one of their top, two, three or four key priority areas. That’s what they say, and that’s what the intention is. Whether they’re able to then translate that into profitable deals done is a question that all of us are still waiting for an answer to,” says Chan.
And one thing that the private equity industry as a whole must go through before that question can be answered satisfactorily, maintains the IFC’s Jinsi, is a steep learning curve.
“One of the issues [private equity investors] have to work through is bringing in-house real industry expertise, people who really know the underlying value chain of specific sub-sectors that they would have never looked at before,” he says.
“Is it happening? Hopefully gradually, but I don’t see it happen in a large scale yet.”
Cleantech in Asia: deal snapshot
Deal opportunities in Asia usually revolve around a proven technology, rather than the early stage of development of that technology, say investors. This stands in contrast with the US, for example, where investors typically look at cleantech at the venture stage.
According to Jun Ying, country manager for China at Bloomberg New Energy Finance, which provides industry information and analysis in clean energy, low carbon technologies and the carbon markets, opportunities in China are limited due to the lack of technological innovation and R&D in the sector.
Take solar for example. “Disruptive new PV (photovoltaic) technologies are most likely to be developed in the US, new machines and plant engineering will come from Germany, while China will lead the world in terms of perfecting processes and upgrading manufacturing knowhow,” Ying says. “This explains why a large chunk of private equity and venture capital money is chasing the manufacturing opportunities in China.”
H1 Top three private equity and venture capital cleantech deals in Asia
1. Himadri Chemicals & Industries
Bain Capital Partners invests INR5.8 billion in January to acquire a 35 percent stake in Himadri Chemicals & Industries, marking the firm’s first deal in the country since setting up in India in early 2008.
Kolkata-based Himadri Chemicals is a chemical products manufacturer focused on coal tar and its derivatives. Its products are used in the making of aluminium, steel, tyres, building products and lithium batteries. The capital will be used to increase the company’s coal tar production capacity and its power generation capabilities. It will also be used to help the company expand in China.
2. UPC Renewables China Holdings
Global Environment Fund, the US-headquartered environment- and cleantech-focused investment firm, invested $30 million in February in UPC Renewables China Holdings, which has a specific focus on wind energy development in China, for an undisclosed stake. The investment gives GEF two seats on the company’s board of directors.
UPC Renewables is a global energy developer with operations in Asia, North Africa and Europe. The company develops, owns and operates wind farms and solar facilities. In all, UPC Renewables has more than 2,300MW of wind and solar projects under development.
3. Krishidhan Seeds
Boston-based Summit Partners, a global growth equity investor, acquired a minority interest in India’s Krishidhan Seeds (KSL) for $30 million in April, in what was the firm’s first direct investment in Asia.
KSL develops, produces and distributes proprietary hybrid seeds and selections for Indian farmers. The company reported consolidated revenues of about $61 million for the year ended September 2009 and is on track to generate returns of more than $88 million in the current financial year. It has a portfolio of more than 120 products in field crops, vegetable seeds and crop nutrition categories.