Private Equity Yanks the Clean Energy Reins

As big investors like Warren Buffet doubled down on clean energy projects in 2012, companies including BrightSource and Smith Electric Vehicles Corp. decided to ditch their public offerings as venture capitalist and private equity interest in cleantech continued to wane, according to new research by Bloomberg New Energy Finance.

Wary of big deals that went sour, and planned IPO exits that never happened, private equity firms and venture capitalists continued to shy away from clean energy projects last year, New Energy Finance found.  Investment by VC’s and private equity dipped to $1.1 billion in both the third and fourth quarter of the year, a level unseen since the beginning of 2006.

“There have not been the kinds of highly successful exits that would support broad ongoing investment,” Martin Lagod, a managing director and co-founder of Firelake Capital Management LLC, told Bloomberg. “We are seeing a very high degree of selectivity by the investors who remain in the market.”

The results reported by New Energy Finance closely mirrored those of Pike Research, both of which found that global investment in cleantech dropped 11 percent in 2012, to $269 billion. The pullback included big reductions in spending on wind companies and solar projects, New Energy Finance found, the latter prompted largely by investors looking to avoid exposure to risk from Chinese solar manufacturers, according to Bloomberg.

Other problems abound. Between IPO’s that failed to happen, and “successful” biofuel IPO’s including Gevo Inc. and Kior Inc., both of which were followed by major slumps in share price (76 percent and 37 percent respectively), investors did not see many opportunities in 2012 to reach their expected gains.

“There have not been the kinds of highly successful exits that would support broad ongoing investment,” Lagod said. “Venture investment is down in large part due to a number of firms pulling back or leaving the space altogether.”

Still, the total number of deals and amounts invested were far from trivial. Solar companies raised $18.3 billion in 158 deals, New Energy Finance found. The 129 deals in the wind sector attracted $21.4 billion, and investors completed 16 deals in biomass and waste for a total of $1.9 billion.

Even as big deals in China absolutely dominated global investment totals, with 125 deals resulting in a total of $16.8 billion, venture capitalists and private equity funds maintained their focus on the United States, completing 57 deals for a total of $800 million. Europe came in second, with $300 million spread across 17 deals, while VC and private equity investment in China was negligible.

The American deals included funding from Dutch Royal Shell, which participated in a funding round that brought $26 million to GlassPount Solar Inc., a California-base company that is creating solar-powered steam power for the oil industry. Warren Buffet recently committed his MidAmerican Energy Holdings Co. to spend up to $2.5 billion building two solar energy farms in California, Bloomberg reported, and created a separate business unit for its solar and wind investments.

Major investments from establishment players were not enough to staunch the flow of smaller players out of the market, however. Governments stepped in to partly fill the gap, according to Pike Research, which found a growing movement of countries using quasi-independent funds to prop up nascent green energy sectors. That included $103 billion in clean energy investments from India, plus Wednesday’s announcement by the U.K. Green Investment Bank that it may spend its entire $4.8-billion fund by 2015 to stimulate private investment in recycling, wind, energy efficiency and waste treatment.

“The role of government in innovation seems to be shifting and so does the role of private equity,” Kerry-Ann Adamson, Pike’s research director, told CleanTechIQ by email. “The PE markets seems to be getting more risk adverse and some governments are stepping in to early innovation markets.”

Governments also are playing a major role in responding to black swan events, Adamson said. For example, the Japanese government attracted $2 billion in just two months as it works to build a more secure and greener power grid in the aftermath of the 2011 tsunami. Improving power grids and electrifying sectors long dominated by the petroleum industry, especially transportation, will lead investments from Europe to China to South Africa in 2013, Pike Research found.

Looking even further ahead, the ebb of 2012 may have prepared renewable energy sectors for sustained growth in coming years, Sheeraz Haji, CEO of Cleantech Group, said during a recent presentation. “I’m quite optimistic that the last few years have built some foundations” for a more profitable 2013, he said.

The biggest opportunity lies in bringing Big Data to agriculture, one of the last industries to incorporate data-driven solutions, Haji said. Investors with the patience for exits far into the future may also want to investigate water, including wastewater and new ways to bring efficiency to industrial water use. One recent example: BASF’s leadership in a $40-million investment in NanoH20, which sells reverse osmosis membranes for seawater desalination. Companies in the mining, oil and natural gas industries “are really aware of the need to become more efficient in their water use.”

Such large-scale funding rounds aside, the trend in for 2013 is for venture capitalists to bring new focus on risk avoidance. By partnering up with other investors, following the lead of corporate investors, and placing bets on companies that eschew capital-heavy infrastructure change in favor of capital-light software and services, private investors may find they complete just as many deals in 2013 as they did in previous years, but with far less money on the line.

“Venture capitalists and others have gotten burned from big capital investments, so they’re looking at more capital efficient deals,” Haji said.

To read the full Bloomberg article mentioned in this story, click here








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