Cleantech Investor

Alex Jones of private equity data and research provider, Preqin, reviews the state of the cleantech venture capital industry and profiles ten fund managers.

An exclusive feature for Cleantech magazine, April 2011

Notwithstanding the priority of stabilising the world economy, cleantech and renewable energy remain on the global community’s agenda as efforts are made to reduce emissions, attain energy security and move to a more sustainable future. As a result, Preqin has recorded a notable uptake in interest in cleantech investments within the private equity space over the last five years. While the cleantech industry is relatively young, there are already a significant number of private equity firms active in the sector. Owing to the nature of cleantech as an emerging industry with a focus on the development of new technologies, it is unsurprising that 65% of all currently active private equity managers in this area are venture capital-focused firms.

A notable characteristic of the private equity cleantech sector is the geographic diversity seen in both the private equity players and the investments they are making. As the pie chart shows, active firms are now spread relatively evenly throughout the world, with the proportion of cleantech firms located in Asia and Rest of World growing from 19% in 2010 to 28% of the global share in 2011. Alongside traditional hubs such as Silicon Valley, New York and London, a number of new centres of activity have emerged recently, such as Mumbai and Singapore.

Source: Preqin

Although we have seen increased interest in cleantech investment from both institutional investors and fund managers, the global economic downturn had a significant impact on fundraising across the private equity asset class. The cleantech sector has been no exception. Although cleantech-focused funds did not see a decline in capital raised in 2009 (unlike the majority of other sectors), 2010 was more disappointing, with overall fundraising dropping back to 2006 levels. Prior to the crisis, the average cleantech fund spent less time in the market raising funding than the average for private equity funds overall. For funds closed in 2008 this difference was around three months. For funds closed in 2009 and 2010, however, cleantech funds took longer on average to raise funds than the overall private equity industry. The difference reached five months for funds which closed in 2010. In recent years the time spent on the road raising funds by all private equity players, including cleantech funds, has increased as the economic climate depressed institutional appetite and fundraising conditions. 

In spite of the problems in fundraising, there are currently 223 private equity vehicles that include cleantech investments as part of their industry focus (including 80 dedicated cleantech vehicles) on the road seeking funding, looking to raise an aggregate $80 billion in capital commitments. This represents 14% of all private equity vehicles currently raising capital in terms of the number of funds, and 13% in terms of total capital being sought. As of March 2011, the estimated dry powder available to private equity funds focusing solely on cleantech amounted to $11.4 billion, of which cleantech venture funds had $7.1 billion available for investment. When also taking into account the total amount of dry powder currently available for diversified private equity funds that have some exposure to cleantech, there is clearly a substantial amount of capital ready to be deployed in the sector.

The nascent stage of the cleantech industry makes it difficult to assess with any accuracy the performance of venture capital cleantech funds. Most funds with a focus on cleantech are still in the early stages of their investment cycles and there were only a small number of cleantech funds established before 2006, which means that there are no long term performance metrics. Most of the current performance data is not yet meaningful, making it impossible to create comprehensive benchmarks for the industry across all vintage years. 

Despite a lack of long term performance metrics, there exists considerable support amongst the institutional investor community for cleantech investment via the private equity route, underpinning the future prospects for venture capital cleantech investment. The industry has drawn an increasing amount of interest from institutional investors in the past few years as a result of a growing awareness of the issue of climate change and other environmental concerns. Some institutions have already introduced a component of corporate social responsibility (CSR) into their investment strategies; for many of these investors, private equity funds present an attractive method of gaining exposure to the cleantech sector. With a good stock of both specialist and generalist funds and a growing investor base with an interest in cleantech, there is clear potential for the industry to resume the expansion it was experiencing prior to the financial crisis. In the following section we profile ten cleantech-focused venture funds worth keeping an eye on.