The rise and rise of flexible capital

If you have ever spent time talking to first-time clean energy fund managers in the US and Europe, there is one thing that becomes immediately obvious: while the latter will probably get meaningful buy-in from large-scale institutional investors for their debut efforts, the former will almost always have to find a different route to market.

That route to market will probably involve fundraising from high net worth individuals, family offices, and other sources of what is increasingly known as ‘flexible capital’. The good news, then, is that this so-called flexible capital was one of the key highlights of President Obama’s announcement that government had garnered $4 billion in private capital for clean energy investment.

A veritable army of endowments, family offices, foundations, charities, and other philanthropic institutions answered the President’s call and committed to invest across the clean energy risk spectrum.

Importantly, the Obama administration is aware there is significant capital to be mobilised from these investors and is doing more to channel it. A case in point is the Treasury’s plan to release new guidelines offering more examples of permissible programme-related investments (PRIs).

PRIs may not be well known outside the foundation world, but they essentially allow foundations to back for-profit companies that advance their charitable goals, but may not generate a market return. They hit the headlines not long ago when the Shell Foundation used a PRI to provide a $2 million first-loss piece that helped catalyse a $30 million first close for Swiss manager responsAbility Investments’ debut clean energy debt fund.

Shortly after, Justin Guay, programme officer for climate at the Packard Foundation, wrote an article noting that PRIs were being woefully underused. Citing data from 1998 to 2010, Guay said fewer than 5,000 PRIs worth $4.4 billion were made, accounting for a mere 2 percent of total foundation grants. But the numbers get much worse when it gets to energy. During that period, only 75 PRIs were channelled to energy, amounting to some $40 million of investment.

POLITICAL CLOUT

Fortunately, someone at the White House probably read Guay’s article and thought it might be a good idea to change that.

The flexibility theme did not stop with foundations and family offices though – it also extended to traditional large-scale institutional investors. A consortium of pensions including the University of California, TIAA-CREF and the New Zealand Superannuation Fund, to name a few, joined forces to start a platform to target clean energy investments that do not easily fit in traditional fund structures.

Details were vague, but the non-profit platform is to start with $1.2 billion to invest in projects and companies that need help crossing what was described as the innovation and commercialisation “valleys of death”. Reading between the lines, it seems the pensions want to create a non-profit general partner to do the type of cleantech investments previously attempted by venture capital funds – but without the constraints and return expectations of the venture capital structure.

Ultimately, private capital’s forceful response to Obama’s call for investment – it committed twice the amount the President originally called for in February – is excellent news. And further proof, if any were needed, that investors will commit to clean energy if they feel governments are behind it.