Investors to Pursue Clean Tech Private Equity Despite Challenges, Paper Says
(January 5, 2012) — Institutional investors and investment managers are increasingly interested in clean tech as a new offering in the private equity asset class despite challenges of technology and market risk, according to a new whitepaper.
The research paper by Eric Knight — a visiting research associate at the University of Oxford and a research associate at the Centre for Climate Change Economics and Policy at the Australian National University in Sydney, Australia — claims that little empirical research focuses on the strains and stresses facing clean tech investors, who seek technologies that generate low carbon energy.
“This article attempts to address the gap by consolidating the perspectives of 35 leading clean tech investment managers based in the Silicon Valley region; New York, NY; and London, UK,” the paper asserts. “Their experience suggests that successful investing in clean tech sector start-up companies requires a strong understanding of how this market differs from most other emerging technology markets.”
The paper concludes: “The outcomes of case studies involving in-depth interviews with leading practitioners in the field indicate that clean tech presents both unique opportunities and challenges that need to be well understood and carefully managed. The analysis provided in this article draws on the experience and mistakes of managers investing in clean tech private equity in the UK and the US. Importantly, these investors point out that clean tech is characterized by both high technology risk because of its capital intensity and high market risk because of its reliance on regulation. Also, estimates of any particular portfolio company’s potential market size are often exaggerated. The path to exit for these investment firms remains an area for development among investment management professionals. Despite these challenges, given that the long-term demand for alternative energy appears strong, persistence in getting over these hurdles will likely be rewarded.”
The paper follows a recent study by Switzerland-based asset manager SAM that showed that investors should target their investments to exploit growth in the clean tech private equity sector. The study — released in June — explained that the drivers of that growing demand include profits for higher cost competitiveness compared to conventional energy sources coupled with robust investor demand for clean energy solutions.
The report stated: “Moves toward a more sustainable use of resources and energy have gained momentum, and several countries have assumed a pioneering role in this effort, often facilitated by incentive schemes. However, investors remain reluctant to invest in what they regard as a heavily subsidized industry.” Yet, the report also notes that clean tech sectors will gradually become less dependent on government subsidies, which could benefit private equity investors. Furthermore, SAM’s study referenced an earlier report by Mercer, which worked with 14 major institutional investors to conclude that over the next 20 years, the uncertainty surrounding climate policy and associated adjustment costs can contribute as much as 10% of the portfolio risk of a typical asset mix. According to Mercer, renewable energy-related private equity and infrastructure as well as venture capital and buyouts focused on low-carbon solutions and efficiency can help improve portfolio resilience.
Without a doubt, institutional investors around the world have been more aggressive in keeping clean energy factors in mind when making investment decisions, Craig Metrick, Principal and US Head of Responsible Investment for Mercer, told aiCIO last year. But, while there has been a greater recognition globally to reduce emissions, the US is still lagging behind Europe, largely due to the less supportive regulatory environment in the US. According to Metrick, one of the reasons that US institutional investors have not been as aggressive in investing in renewable energy compared to their European counterparts is because of a lack of legislation. “In Europe, there are certain regimes for reducing carbon emissions, fostering a better legislative environment, whereas the debate on climate change and renewable energy has been very politicized in the US,” he said. Nevertheless, Metrick acknowledged that the consulting firm’s clients are generally investing more heavily in renewable energy and clean tech through private equity funds.