Skip to main content
MENU
Subscribe
  • Sign Up Free
  • LOGIN
  • Subscribe
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Face to Face
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2023 Defined Contribution East
    • 2023 ESG Investing
Breadcrumb
  1. Home
  2. ALTERNATIVES
February 09, 2015 12:00 AM

Clean tech loses power in energy portfolios

Once-promising niche gives ground to shale boom, falling oil prices

Arleen Jacobius
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Bloomberg

    Once positioned to be a star of investors' portfolios, clean technology has been reduced to bit-part status, morphing into an opportunistic investment in a broader energy infrastructure strategy.

    The $296.5 billion California Public Employees' Retirement System, $188.8 billion California State Teachers' Retirement System and $178.3 billion New York State Common Retirement Fund are among the U.S. pension funds that have clean- or green-technology portfolios stretching across asset classes including venture capital, private equity, public equity and fixed income.

    Investors bet big that rising fuel costs and dwindling natural resources would create a huge investment opportunity in alternative energy. According to data at the time from New Energy Finance, now a subsidiary of Bloomberg L.P., global private equity and venture capital clean-tech assets under management totaled $23 billion in October 2007, up from $15.9 billion in October 2006.

    Things have changed.

    Last year, global clean-tech funds raised $2.9 billion, compared to $42.4 billion for global energy private equity funds, according to London-based alternative investment research firm Preqin. So far this year, clean-tech funds have raised $400 million vs. $2.9 billion for traditional energy funds.

    “Clean technology was a tremendous investment thesis 10 years ago, but the world changed in unexpected ways, leaving clean-tech investors with many unfulfilled promises,” said David Fann, president and CEO of private equity consulting firm TorreyCove Capital Partners LLC, San Diego.

    Global clean-tech had a gross internal rate of return of 4.4% on a total of $15.4 billion in investments from 2008 to 2012, down from 11.1% gross IRR from 2004 to 2007 on a total of $9.2 billion in investments, according to the most recent data from Boston-based consulting firm Cambridge Associates LLC.

    And then there's shale oil and gas. The “game changers” of hydraulic fracturing, horizontal drilling and widespread use of three-dimensional seismic technology for exploration, and now much lower oil prices, all led to the displacement of clean technology, Mr. Fann said.

    “We think clean tech may still be an interesting long-term macro play, but faces many short-term hurdles of which much lower oil prices is one,” Mr. Fann said. “With lower priced and seemingly plentiful gas and oil, there is no near-term urgency for clean energy.”

    Despite billions invested in clean-tech startups in the past, there's been a dearth of technological innovation recently, he said.

    Uneven interest

    U.S. venture capital investment in clean tech has been uneven. It skyrocketed to $4.1 billion in 288 deals in 2008 from $592 million in 91 transactions in 2005, according to the MoneyTree Report by PricewaterhouseCoopers LLP and the National Venture Capital Association based on data from Thomson Reuters. That investment rose to an industry high of $4.2 billion in 308 deals in 2011, but has been falling ever since.

    Many investments made in alternative energy today, even in a private equity fund, appear to be, in essence, infrastructure investments in established solar plants, wind farms and hydroelectric plants. Few private equity firms make selective investments in companies that service the alternative energy industry, insiders said. Infrastructure investments have lower expected returns than venture capital or private equity investments.

    “There are two ways to invest in clean tech: either early in the venture capital stage or later when the technology is proven and it's being deployed, which provides more of an infrastructure return,” said James Korczak, a partner in the Chicago office of private equity direct investment and fund-of-funds firm Adams Street Partners LLC.

    On the venture capital side, the potential risk-return profile is greater in other sectors, said Mr. Korczak, who is a manager on Adams Street's energy and natural resources strategy team.

    CalSTRS' officials made the same point in their most recent Green Initiative Task Force Report. That report cited an investment analysis by Cambridge Associates showing that from 2006 through 2011, when 75% of worldwide clean-tech investments were made, clean tech substantially underperformed the biotech and information-technology sectors.

    “The clean-tech learning curve has been impacted by lower natural gas prices, and shifting of regulatory incentives coupled with bankruptcies of large and well-funded clean-tech companies such as Solyndra, A123 Systems and Fisker Automotive, and the underperformance of the biofuels market,” the CalSTRS report said.

    “Infrastructure is a better investment asset class for clean technology because the type of returns and structures in infrastructure are better than private equity,” said Brian Rice, portfolio manager in corporate governance at CalSTRS, West Sacramento.

    CalSTRS is continuing to invest in clean energy across its portfolio. Its green initiative includes $966 million as of June 30 in its global equity sustainable investment program and $696.4 million in private equity commitments to clean-tech and clean energy.

    Mr. Rice said CalSTRS' officials expect clean-energy use to increase, but it's hard to say at what pace. The most need for alternative energy sources in the future likely will be in regions where there is expected population growth.

    “The clean-energy investment opportunities will continue to grow as we see the need to transfer to lower-carbon energy sources,” Mr. Rice said. “We want to be in a position to evaluate those opportunities whether green bonds, infrastructure or private equity.”

    Even in infrastructure, much of the money invested in energy in the past several years has been poured into shale and gas infrastructure, said Brandon Prater, partner and global co-head of private infrastructure in the London office of private markets manager Partners Group AG.

    “Energy infrastructure is a very strong (investment) story, and a lot of money is going into that, given the large needs for new generating capacity and replacement of existing capacity,” Mr. Prater said.

    But alternative energy has a ways to go before it can compete for a larger slice of investor dollars.

    Few grid-parity markets

    There are only a few markets where renewable sources produce energy at so-called grid parity, which means they produce energy for the same price as it could be purchased from conventional energy sources, Mr. Prater said. “Therefore, for alternative energy to be competitive with conventional energy in most markets there needs to be some sort of subsidy such as an additional payment for power produced or tax credits,” he said.

    A second problem for investments in renewable or alternative energy is that output has often been less than expected, as measured on long-term strategic models for wind and solar, Mr. Prater said.

    “Ironically, it has a lot to do with changes in weather patterns potentially driven by climate change,” he said. So, models for predicting the output of renewable energy resources such as wind and solar have had to be revised.

    However, oil and gas might not be king of the energy investment landscape forever.

    Global renewable energy capacity is 22% and is expected to grow to 25% by 2020, surpassing natural gas as the second most important global electricity source, behind coal, Mr. Prater said, citing statistics from the International Energy Agency, Paris.

    “I think it's important that in terms of us investing our clients' money, we have to be wary how sustainable subsidies are and how sustainable the investment is itself. We wouldn't make investments where we have to rely on the governments to bail us out,” Mr. Prater said.

    There are managers convinced that alternative energy has a bright future.

    “Following the peak of expectations and early promises of clean tech, there were failures and disappointment — the proverbial "trough of disillusionment,'” said Jeff Schrock, managing director of private equity firm Columbia Pacific Advisors LLC, Seattle, in an e-mail. “But we believe that clean tech has moved past these dark days and is now moving up the "slope of enlightenment.' Where Fisker Automotive died, Tesla thrives!”

    What remains to be seen is whether clean tech will provide the stable returns oil and gas investors have enjoyed, Mr. Schrock said.

    Related Articles
    Energy investors cautiously fill up
    Winners (and losers) of the oil price drop
    Investors sweat over oil decline
    BlackRock appoints new global head of impact investing
    Government subsidies are a deal-breaker for clean energy investors
    Wider implications of oil prices
    CalSTRS to discuss divesting from thermal coal companies
    New initiative to focus on challenging pension funds over climate change risk
    CalSTRS becomes lead investor on new energy productivity index
    AP2 breaks out green bonds into new stand-alone asset class
    Recommended for You
    NYSE-Traders-2021_i.jpg
    Investors expect to increase private markets allocations – survey
    Eurazeo names new CEO
    Ex-Goldman President Schwartz is top contender for Carlyle CEO
    The Institutional Investor's Guide to ESG Investing
    Sponsored Content: The Institutional Investor's Guide to ESG Investing

    Reader Poll

    January 25, 2023
    SEE MORE POLLS >
    Sponsored
    White Papers
    Show Me the Income: Discovering plan sponsor and participant preferences for cr…
    Morningstar Indexes' Annual ESG Risk/Return Analysis
    The Future of Infrastructure: Building a Better Tomorrow
    Outlook 2023: Opportunity in a volatile world
    Research for Institutional Money Management
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    December 12, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2023. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Face to Face
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2023 Defined Contribution East
      • 2023 ESG Investing