Globally, clean technology has become a bad word among institutional and retail investors in recent years, according to Ron aMahabir, co-founder and managing director at Asia Cleantech Capital. “The sector has been affected by a reduction in government funding, incredibly low natural gas prices, the European and Global Financial Crisis, the rise in cleantech-related bankruptcies due to overcapacity, the inability to reach commercialisation, technology failure, lack of financing and other reasons. The volatility in the public markets has not helped things either.”
However, with cuts in government incentives in Europe and North America, institutional investors are starting to make a beeline to Asia for companies that harness the sun and wind to generate power. Moreover, the region’s governments have also been giving more attention towards sustainability and the use of renewable energy resources. “Over the last 24 months, we have seen new funds launched in the region targeting the sector, either purely focused on cleantech or generalist funds and corporate investors with strong interest in cleantech.
“In particular, clean energy generation, such as solar, wind, bioenergy and small‐hydro project development is hot right now in the Asia Pacific.”
Asia in particular is an interesting market as it is often the production base for cleantech products, but increasingly it is also the largest end-market for such products, says Andrew Musters, Global Head of Private Equity for Robeco and SAM Sustainable Asset Management. Technology transfer from the West to Asia continues to be an important theme. “There is a large opportunity in growth equity and a large environmental infrastructure build-out is unfolding in Asia, with private equity increasingly funding development and construction. We see interesting opportunities in water and waste water sectors, waste to energy and certain renewable energy markets.”
Cleantech private equity is also attracting more attention as the long term drivers for the industry remain intact, Musters says. “Urbanisation, a growing middle class, environmental degradation and the need to use finite resources in a smarter way are all very current themes that offer attractive investment opportunities.”
The major markets for cleantech are China and India, which are predominantly growth equity markets. Since 2007, 15% of all PE investments (cleantech only) were done in China and India. That’s 60% of all transactions outside Europe and the US, Musters says. Japan is also an interesting market for renewable energy projects, especially after its recently announced renewable energy policy, he adds. With continued strong economic growth and improving governance, ASEAN too is attracting more interest and Singapore is becoming a hub for Southeast Asian cleantech funds. “Many family-owned businesses are seeing generational change and there is often room for private equity to play a role.”
Still, investing in cleantech companies and even infrastructure projects requires specialised knowledge. “We had a lot of generalist funds investing in cleantech companies because it was the next big thing and we all saw what happened,” Mahabir says. “We are looking at very new technologies and markets, and booms and busts are expected.”
The key to investment returns in the sector is to find businesses with proven technology that can scale on a capital efficient basis, not rely too heavily on government support and offer measureable environmental impact, Mahabir says. “Those investors who understand the underlying technologies and markets and have a medium‐range perspective in our view will do exceptionally well.”
And there is a broad spectrum of parties investing in cleantech PE - pension funds seeking infrastructure exposure and financial institutions rethinking their PE portfolios because of new regulations, adds Musters. Central banks, sovereign wealth funds, pension funds and multilaterals are probably the most active. “We also see a lot of corporates such as the venture arms of large utilities and industrial companies as well as smaller investors such as family offices, endowments and high net-worth individuals.”
Cleantech is a specialised asset class, and a combination of people from investment, engineering and structuring backgrounds will provide the best way to capitalise on investment opportunities in the market, Musters says. Aside from sector expertise, cleantech markets in the region are largely a local game - requiring local contacts and operating knowledge to get projects done, Mahabir adds. “As this is generally a new process for everyone, this requires stubbing your toes multiple times, but those that persevere only get more efficient.
“With over 7 billion people on the planet, there is no doubt that sustainable production and consumption of food, water and energy will only grow. While governments are more interested in jobs than the environment, we are at a breaking point in many areas.”
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