WholesaleInvestor

05 May 2010

Clean technology funds - an important and growing category for investment

By Angus Dennis, AMP Capital Investors Senior Investment Specialist Sustainable Alpha and RIL

These funds provide specialist access to companies involved with technology which is benefitting from strong environmental growth drivers linked to government, corporate and household initiatives in the space.

Major areas of focus include renewable power, energy efficiency and environmental services.

In terms of current activity, government stimulus packages across the globe have specifically targeted funding towards clean tech initiatives, which is adding further investment opportunity. At the same time government policy is trending in its support for these initiatives, but formalisation of more carbon markets beyond Europe, in the wake of Copenhagen, will certainly assist some proposed business models.

The focus on clean technology is also increasingly topical with institutional investors. This has been supported by a growing pool of funds (particularly in listed shares) with a track record of taking environmental, social and governance issues into account, together with many funds signing up to the United Nations Principles for Responsible Investment.

To date, and particularly in listed markets, the clean technology theme is still most evident in global markets. While there are some larger leading Australian companies in select industry sectors (eg waste and recycling), we are still yet to establish a broad clean tech industry with significant investment depth.

Trends in the emergence of new funds

Investment in the clean technology space differs across key investment strategies and financing type, as illustrated below.

Private equity represents a relatively small component of all investment in the clean technology space, and pure clean technology private equity funds investments an even smaller allocation. As it stands private equity makes up less than 20 per cent of capital allocated to clean tech theme, with over 70 per cent of capital going towards renewable power infrastructure.

Then within the private equity space the investment may be via a range of entities, with only a proportion by specialist clean tech private equity vehicles. Increasingly generalist private equity firms are involved in the space, with clean technology investment growing from under 1 per cent to 15 per cent of global venture capital in the last decade to 2008. Traditional venture capital firms are simply finding there are not enough software companies to prop up their traditional model.

Data recently released for 2009 is supportive of this thesis with about a quarter of all global venture investment capital invested in clean technology in 2009, more than any other category - including software and biotech.

Furthermore, while the absolute level of clean technology investment (at $5.6 billion) declined in 2009, it only retraced to 2007 levels. In contrast the broader private equity market fell to 2003 levels.

It should be said though that skill set for clean technology can involve a differing domain of expertise in power/utilities/resources/operations which is distinct from traditional IT of life science background. And this specific expertise is providing a pathway for specialist providers. It has also meant a need to extend the skills of traditional venture firms.

Themes within clean technology

Within the clean technology market it is useful to consider the types of themes which are being tapped into by managers and which are providing competitive returns.

Sectors can be broadly defined as follows:

These themes fit with the categories of funds emerging, with private equity focused on distributed power and storage, energy efficiency and environmental. At the same time infrastructure related raisings focus on renewable power generation.

Without doubt the majority of raisings have been on a global platform.

In the global context major renewable power infrastructure raisings have included Hudson Clean Energy, USRG and Carlyle Riverstone.

While the specialist private equity providers undertaking raisings include RockPort, Angeleno Group and Element. These funds have often found that growth equity is the most attractive segment, with the themes of energy efficiency, water, electric cars and solar featuring prominently.

From an Australian context, there has been a lack of specialist private equity providers in the clean tech space locally, in part of reflecting the smaller market size for energy efficiency, environmental and distributed power and storage products. And as at 31 December 2009 in Australia’s S&P/ASX 200 there are only three companies that fit within the clean technology theme.

The renewable power infrastructure offerings in Australia have also been small in number.

There are though a couple of areas in the Australian market which are having some success and have attracted global capital via venture capital and interest: residential solar, sustainable forestry strategies, waste/recycling and environmental property initiatives. These strategies fit well with the government mandated support for solar, and Australia’s global leadership on sustainable property as recognised in many international ratings studies.

AMP Capital Investors, Senior Investment Specialist, Sustainable Alpha and RIL Angus is responsible for AMP Capital’s Sustainable & Responsible Investment product. In this role he profiles AMP Capital’s sustainable capability to the marketplace, as well as contributing to the ongoing management of the Responsible Investment Leaders (RIL) range. (The RIL Balanced Fund recently made an allocation to clean tech private equity.) Angus has over 16 years experience in investment management.