Cleaning up

Investment in “clean technology” companies in the UK is growing at 30 percent year on year. With VCs accounting for half of the £1 billion invested in the last five years, Colm Gilmore explores the attractions of this growing sector.

 

A long-lasting and deep-felt concern for the environment isn’t necessarily the first thing that comes to a private equity professional’s mind when approaching a new deal opportunity. It’s clearly not for purely philanthropic reasons therefore that venture capital and private equity investors are currently turning to the clean technology sector. Attractive investment opportunities, a surge in energy prices and increasing public awareness mean that investors are slowly beginning to view clean technology as a discrete investment sector worthy of attention.
 
A new report commissioned by The Carbon Trust, an independent company set up by the UK government to help the UK meet its climate change obligations, looked at investment trends in the UK clean technology market between 2000 and 2004 and found that investment in the sector is growing at 30 percent year on year. Of the £1 billion (€1.45 billion; $1.83 billion) invested in the period covered by the report, over half of the total investment came from a wide range of venture capital investors.
 
The majority of that VC investment has come in the form of early-stage funding (classed by the report as transactions between £500,000 and £10 million), mainly from syndicates of investors and usually including at least one technology specialist. Commenting on funding trends, investment manager at The Carbon Trust Adam Workman said in an interview: “Previously deals had been done on a largely opportunistic basis or where the sector happened to intersect with a portfolio company’s requirements. Now we are starting to see some firms building up some knowledge in the clean technology sector.”
 
Repeat investors are still relatively thin on the ground, partly because the sector is so diverse. “Clean technology” covers not just clean energy, but also a whole range of developing products, services and processes including renewable technologies, fuel cells, energy storage devices and energy-efficient electronic equipment.
 
Certain private equity firms have already been exploring one of the more recognised parts of the renewable energy sector – wind power. Earlier this year Nordic private equity firm CapMan acquired wind turbine manufacturer Metso Drives, while Allianz Capital Partners set up a dedicated alternative energies investment division late last year. In 2004, UK-based Englefield Capital completed one of the largest deals in the sector to date, investing in a £400 million UK wind farm project, RWE Innogy.
 
Workman believes that, while historic levels of investment in wind opportunities have been quite high, it is now a more mature, regulated sector that will yield fewer opportunities going forward.
 
The energy consumption side on the other hand – process efficiency, energy storage and power energy management for instance – will provide openings for educated investors in the future, he predicts: “I think the level of deal flow [in these sectors] is starting to increase. It’s quite different from other technology plays and investors need to really understand the market drivers to succeed.”
 
It’s a message that appears to be getting through to the right people. Several hundred delegates at the inaugural European Cleantech Venture Forum in Paris last week showed that investors are keen to find out more about the benefits of, and opportunities within, this developing sector.