Clean-tech investing littered with mines

Institutions learn to tread carefully to find the few winners among many managers

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Winning: David Fann says successes can be found in clean tech by being careful to invest only in specific areas.

Clean technology managers are redoubling their efforts to attract capital, but investors will have to pick through a landscape of failed offerings to find the managers with winning strategies.

Six years ago, institutional investors began making large commitments to the sector. They bet that rising fuel costs and dwindling natural resources would create a huge investment opportunity in alternative energy.

The California Public Employees' Retirement System has made $1.1 billion in private equity commitments to the sector, including $480 million through its CalPERS Clean Energy and Technology Fund, $500 million in clean energy and technology funds and $200 million in its environmental technology program; the California State Teachers' Retirement System has about $667.5 million invested in clean tech; and the New York State Common Retirement Fund has more than $500 million committed to the sector.

So far, not all investments have worked out as planned, industry insiders said. Investors are still waiting for their clean-tech portfolios to produce expected returns. The reason is that many clean-tech investments are still sitting in managers' portfolios waiting for an exit.

Some venture capital managers will not be able to continue supporting these companies, sending executives at these firms off in search of other sources of capital, said Tracy Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers U.S. who is based in the firm's San Jose, Calif., office.

“I think there is a lot of interest in clean technology but not enough of profitable liquidity events to maintain a high level of investment or to attract new money,” Mr. Lefteroff said.

But not all clean-tech investments are expected to fare the same.

“I think clean-tech performance will be a function of the areas that they invested. For instance, solar cells/panels investments will be challenged in large part by the huge volume of low-cost Chinese imports,” said David Fann, president and CEO of TorreyCove Capital Partners LLC, a La Jolla, Calif., private equity consulting firm.

“Large-scale energy production — wind, solar farms — might do well because certain state public utility commissions have mandated purchase from or production of energy from clean-tech sources,” he added.

Uneven returns

Returns have been uneven. The 5-year old CalPERS Clean Energy and Technology Fund, a fund-of-funds-type program, had a net internal rate of return since inception of -10% on $331.7 million invested as of Dec. 31. But while only $172 million of its $300 million commitment to Riverstone/Carlyle Renewable and Alternative Energy II in September 2008 has been invested, the pension fund reaped a since-inception 12% net IRR from the investment as of Dec. 31, the most recent data available. CalPERS' $25 million commitment to VantagePoint CleanTech Partners LP, made in 2006, has earned a 12.4% net IRR. (Some $20 million has been drawn so far.)

Much of the investments of the $239.3 billion Sacramento-based CalPERS are in venture capital and the pension fund's environmental technology program has a “particular emphasis” on solar power and biofuels. Twenty-two percent of the portfolio is invested in biofuels and 21% is solar, according to a recent CalPERS report on sustainable investing.

By comparison, 80% of the clean-tech portfolio of the $152.1 billion West Sacramento-based CalSTRS is invested in buyouts with the rest in venture capital funds and co-investments, according to a recent report. So far, CalSTRS' $122 million venture capital portfolio earned 1.16 times the pension fund's initial investment as of June 30. The $349 million buyout clean-tech portfolio earned 1.04 times CalSTRS investment, the report indicated.

The Albany-based New York state fund has invested $350 million total in clean tech in public equity, private equity and fixed income. Close to 30% of the total is in private equity; a $100 million commitment to Hudson Clean Energy, which invests in renewable energy infrastructure, according to a July 2011 report (its most recent) on its Green Energy program.

Managers are still raising capital for clean technology, but now as part of broader energy funds. Blackstone Group, for example, expects its first energy fund — the $2.5 billion Blackstone Energy Partners, which closed Aug. 31 — to invest in renewable energy as well as other aspects of energy investing including transmission and natural gas, said Christine Anderson, spokeswoman for the New York-based alternative investment firm, in an e-mail.

“In general, clean technology has become a part of a broader energy play. Its uniqueness has diminished,” TorreyCove's Mr. Fann said.

(TorreyCove's predecessor firm, PCG Asset Management, managed a clean-tech portfolio for CalPERS.)

Set for comebacks

Andrew Musters, managing director and global head of private equity for money management firm Robeco, based in the firm's Zurich office said some regions of the clean technology-sustainable investment landscape are in good positions for comebacks.

“From our perspective, clean tech is definitely a good investment,” said Mr. Musters, who is also on the executive committee of Robeco's sustainable asset management unit, the division focused on sustainable investing. “The main reason for that is that the growth drivers of clean tech are still intact: whether it's that natural resources are scarce or consumer preferences are shifting or the increase in environment forces.”

Robeco's SAM unit manages funds of funds, separate funds that invest in the secondary market and makes direct investments in clean-tech companies, he explained.

Robeco focuses on 3- to 4-year-old companies that do not rely on government subsidies, which are affected by regulations, Mr. Musters said.

Unlike some venture capital investments, Robeco and other managers with growth equity strategies have found buyers for more mature clean-tech companies with proven products.

According to a soon-to-be released Robeco white paper, private equity investment in clean-tech companies, which includes majority-stake investments, takeovers or private equity in public investment deals, stood at $12.3 billion in 2011, with $35.6 billion invested since 2001.

The white paper noted that 121 disclosed mergers and acquisitions had a total value of $41.6 billion in 2011 and another 335 transactions did not publicly disclose values, according to information obtained from CleanTech Group Database. Since 2006, the total disclosed value of clean-tech mergers and acquisitions was $132 billion, the paper stated.

These companies are being acquired by multinational corporations such as Siemens AG, ABB Ltd., Schneider Electric SA and General Electric Co. For example, Schneider Electric acquired 20 clean-tech companies in the smart grid and energy efficiency area since 2006, the paper said. GE was involved in 15 mergers and acquisitions in this sector, and ABB and Siemens each in 12 transactions, the paper stated.

But venture capital investments in clean tech are another story so far. In the second quarter, there were $1 billion U.S. clean-tech venture capital deals, an 11% drop in funding from the second quarter of 2011, according to the Cleantech MoneyTree Report by PwC and the National Venture Capital Association based on Thomson Reuters data.

Going older

Most venture capital funding went to older companies and existing deals, the report noted. The average venture capital clean-tech deal size increased 50% to $18.9 million in the second quarter over the second quarter of 2011.

Clean-tech sectors receiving more capital include wastewater treatment and recycling companies, solar energy and energy transportation companies, according to the CleanTech MoneyTree report.

U.S. venture capital firms with multiple strategies are rebalancing into other sectors where returns are higher and there is more liquidity, which until recently included social media companies, PwC's Mr. Lefteroff said.

Clean tech is very capital-intensive, and there is only so much money venture capital firms can spend before the companies need to find other sources of financing, such as larger non-venture capital investment funds, he said.

“The disappointment is that there hasn't been a huge clean-technology breakthrough, and the cost curve hasn't come down significantly,” Mr. Fann of TorreyCove said.

“And like most sectors in which there was lots of capital chasing opportunities, there will be a few winners but many more losers.”

This article originally appeared in the September 17, 2012 print issue as, "Clean-tech investing littered with mines".