#3: Consultants See Uptick As Institutional Investors Eye Non-Traditional Cleantech

Investments in clean energy are on the rise among U.S. institutional investors, though they have a long way to go before they catch up with their European counterparts, investment consultants say.

After a drop-off in demand over the last several years, institutional investors are starting to dip their toes back in the cleantech market and are expanding their interest beyond the traditional solar, wind, and power funds. Consulting firms Mercer, Segal Rogerscasey, and Hewitt EnnisKnupp say interesting opportunities exist in agriculture efficiencies, water use and technology, waste management, pollution prevention, and anything related to the more efficient use of resources.

“We think cleantech could have interesting opportunities for clients,” said Donna Rosequist, director of private equity and alpha investment research at Segal Rogerscasey, adding that there is more interest in cleantech now than there way a year ago. “From a negative perspective, many investors backed away after the mid-2000s due to a lack of exits or proven technology. Based on this, some investors are still very skeptical about clean energy.”

On the positive side, there is less competition for the deals that are around today in the venture capital cleantech space.

But competition looks to be picking up as the definition of cleantech expands. “The definition of ‘cleantech’ has expanded greatly,” said Craig Metrick, leader of the U.S. responsible investment practice at Mercer. “There is still some perception that when you talk about cleantech, you’re talking about a technology risk on solar, wind, and biomass.” But opportunities exist in energy efficiency, pollution control, water, and waste management, he says.

“Clean energy is more than wind and solar,” Rosequist said. “What is driving this are issues with global population growth and demand for fuel, clean, potable water, and grains for food. From a world perspective, at some point the demand for these will be more than the supply. So the availability of water and grains is really something that needs to be looked at, rather than just solar or wind.”

Shari Young, senior consultant in private equity for Hewitt EnnisKnupp, said she has seen increasing interest in agriculture. “The area we find most interesting is agriculture,” she said. “We’ve seen a number of traditional venture funds that think outside the box and are doing food-related deals. Agriculture takes a lot of expertise in biology and technology and there is a lot of innovation going on there.”

This more expanded definition of cleantech has brought in interest from non-traditional investors, the consultants say, as endowments and foundations become more involved in the market. Generational shifts in family offices are also allowing a younger group of investors to become more interested in these investments.

“We are seeing more of our endowments and foundations and family office clients interested in this area,” Metrick said. “There is a fossil fuel divestment campaign that is focused on higher education endowments and that is moving to foundations.” In family offices, younger generations are much more interested in the clean energy space than older generations, he added.

Rosequist said most of the interest in cleantech comes from investors with an interest in environmental, social and governance (ESG) funds. “For an institution with a large private equity portfolio, an ESG fund is a good play and a good way to get active in the space,” she said.

Rosequist cautions that an investor with a smaller private equity allocation, such as an endowment or foundation, may be more negatively impacted if an investment turns sour. “They are less likely to make that commitment unless they have an ESG slant.” A smaller investor or a family office that has a slant towards the environment may prefer to access this space by investing in a fund of funds that has an allocation to clean tech, she said.

As investors become more interested in cleantech, more investment opportunities have arisen and cleantech investing has moved beyond just the private equity and venture capital space.

“We have been talking to clients about opportunities in sustainable environmentally-themed investments in private markets and also across other asset classes like private equity infrastructure, sustainability considerations for timber and agriculture, as well as more interest in green bonds,” Metrick said. He added that there is also interest in public equity environmental strategies that focus on water, clean technology and renewable energy.

Still, some consultants think the U.S. is behind its European counterparts and has some distance to go to catch up. Private equity and venture capital firms find it easier to raise money from European investors, Rosequist said. “The idea resonates more with countries that understand the need for clean energy, such as many of the European countries that have emissions standards that need to be met by a specific date. The U.S. is a little behind these countries.”

At Hewitt EnnisKnupp, investment managers say most of the money comes from Europe. “On the private equity side, our U.S. clients still have waning interest in that area,” Young said. “But in private equity and even non-private equity, there has been a pickup in interest from European institutional investors. There is a little money from high-net-worth individuals, family offices, and foundations in the U.S., but most of the interest is from Europe.”

Global and multinational corporations and insurance companies are able to take advantage of the international growth in the cleantech space. “Multinational corporations have invested directly,” Rosequist said. “They have a long-term view and can wait until an exit occurs. Funds are forced to exit the investments so their returns may suffer from exiting too early. A long-term strategic investor can hold onto the investment longer.”

From an investment management perspective, the increased awareness around clean energy has boosted interest. “Certainly the public profile of these issues of water scarcity, food shortages, and climate change point to a potential growth opportunity to investors,” Metrick said. “We see investment managers in this area getting longer track records, more experience, and higher-quality strategies as we’ve moved along in time.”

Other investment managers are changing the structure of their firms in order to raise capital. “Sometimes we see people who have no background on this and it’s challenging because they suddenly become experts,” Young said. “You need someone with a technology background who has an understanding of the scientific side. Firms are getting creative by hiring people who understand government policy.”

Even over the last few years, portfolio managers of renewable energy funds are able to find attractive opportunities without taking on as much technology risk in the solar and wind space. And the reduced technology risk has helped grow the sector.

“Funds are getting away from technology risk and we are seeing more funds that are investing in the later stage or a buyout of a growth-oriented company,” Rosequist said. “Firms are now looking at companies that are already generating revenue, have a solid management team in place and have prior profitable investments.”

Investment managers who focus more on the growth side than the venture capital side have also found a way to protect against technology risk. “Some companies have found ways to take derivative plays in the space to offset technology risk,” Young said. “It is structured so you’re protected on the downside.


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