Private equity sticks with clean tech

Despite tumultuous global financial market conditions, private equity investments in the clean technology ("cleantech") space showed resilience last year. Investors are reconsidering their overall exposures to private equity -- and this includes cleantech -- but they are still operating in the space and remain open to the right opportunities, according to a new report by Private Equity Intelligence, Ltd. (Preqin).

Since 2003, the story in the cleantech sector of the private equity space has been one of aggressive growth. From only seven funds involved in cleantech investments in 2003, the number swelled to 30 in 2004 and nearly quadrupled -- to 117 -- by 2008. The number of strictly cleantech funds grew aggressively, as well, from nine in 2004 to 41 in 2007. The pure-plays fell slightly to 39 last year, suggesting that the market was holding steady.

Even with the volatile economic climate, there continues to be action in this sector. Seventy-eight cleantech funds are in the market seeking investment, and Prequin reports that 2009 could be a record year (for funds "commencing investment in the cleantech sector"). The number of firms managing cleantech investments reached 357 by the end of April, from seven in 2003. This year alone, 86 funds have either become involved or expressed interest in cleantech this year.

And interest is becoming action -- and bearing results.

In 2007, 28 funds focused solely on cleantech achieved final closes, with $6 billion in capital commitments. The number reached 29 funds last year, though the amount of capital secured fell to $5.3 billion. Despite the tough market conditions last year, the total value of funds raised increased by a factor of six from 2005 to 2008, with the largest fund, IEV Capital Renewable Energy (closed in 2007) raising $1.83 billion.

While 2009 remains difficult to forecast, there are signs that indicate some potential. Private equity commitments as a whole are being reexamined around the world, though some funds are open to attractive opportunities – both broadly and in the clean technology space. First Arrow Investment Management has decided to lower its overall private equity exposure, though it is still open to cleantech investments, and Swiss Investment Fund for Emerging Markets made its first commitment to the sector early this year.

More than 75 percent of private equity fund managers playing in the clean technology space primarily manage venture capital funds, with 13 percent focusing on infrastructure funds, seven percent in buyouts and three percent elsewhere (e.g., mezzanine and balanced funds). Nearly half (45 percent) of private equity fund managers investing in cleantech are based in North America, with 36 percent in Europe and 19 percent in the rest of the world. Research and development in this space began in the United States, and the relative decrease in private equity investment share in the U.S. suggests that it's becoming a worldwide endeavor.

For the investor community, that trend is even further along. Close to half of clean technology investors (48 percent) are from Europe, with only 34 percent now coming from the United States and 18 percent from the rest of the world.

"The growth in the private equity cleantech market ties in with the increasing consumer and investor awareness of climate change and environmental issues, growing levels of regulations and incentives provided by national governments and the ever-increasing global demand for energy and improvements in technologies within the cleantech sector," says Preqin's Tim Friedman, Editor, 2009 Preqin Private Equity Cleantech Review. "These factors have assisted in improving the potential profitability of the market," he continues, "with increasing numbers of private equity and venture capital fund managers seeing suitable opportunities opening up for investment, and a high proportion of investors in private equity now seeking to gain exposure."

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