Sector focus: Is the sun setting on renewable energy?

According to unquote" data, 2012 saw 35 European deals worth a total of €753.21m in alternative electricity, alternative fuels and renewable energy equipment companies. The bulk of transactions were completed in the first six months, which accounted for 23 deals totalling €681.46m.

The biggest deals were made in solar energy, the showpiece within the renewables sector. These notably included AXA Private Equity's €330m investment in Enovos in May 2012, a Luxembourg-based electricity distributor that uses alternative energy.

But the sun seems to be setting on renewables as the sector has seen a sharp slowdown in investments in the first half of 2013, with only nine deals worth a total of €77.75m across the whole of Europe.

A sharp slowdown in recent deal activity is affecting the once much-hyped sector

Jos Peeters, managing partner at Capricorn Venture Partners, which invests in clean technology, says: "Quite a number of players in venture capital or private equity misjudged renewable energy and clean-tech investments in general. The clean-tech or renewable sector is very different from the ICT industry. But too many people came to this industry thinking it was similar to making ICT investments. That illusion is gone now. Investments in clean-tech take longer and need more capital."

Across Europe, several solar panel companies have been forced into administration, suffering from the low prices offered from within Asia. In the first half of 2013, MIT Manager, alongside Oxford University, was the only player to invest in solar, injecting €2.33m in UK-based company Oxford Photovoltaics. In the first half of 2012, investments in solar companies alone numbered just 10.

Decreasing enthusiasm may be the result of numerous economic pressures making it increasingly difficult for renewable businesses to make profits. IBB Beteiligungsgesellschaft invested in Soltecture in 2002, which received €100m in equity plus debt over several funding rounds from a number of backers. Like many other solar companies, Soltecture fell into administration in 2012. It could not withstand the low-price pressures coming from Asian markets.

"You have to divide renewables investments in to two different sectors: one is asset investments, for example wind or solar parks, which often depend on government support such as the German Renewable Energy Act. But returns here are rather low," IBB senior investment manager Stephan Schulze says. "The other sector is in venture capital, which sees investments in the technology behind renewables such as manufacturers of solar technology. The returns are much higher if successful."

Precarious policies
Scottish Equity Partners (SEP) partner Gary le Seuer says: "We think the clean energy sector generally remains of great interest to private equity – but clean energy is a broad area covering many different interests and disciplines – inevitably some of which are impacted by current economic pressures and, of course, changes in government policies." SEP recently teamed up with SEE to start a secondary investment fund focusing solely on clean-tech companies: the £95m Environmental Energies Fund (EEF). "This may lead to some sub-sectors of the clean energy market becoming more or less buoyant over certain periods of time but, the general direction of travel in this sector is forward, and that is recognised by most firms operating within it."

Is it too early to wave renewables goodbye? Glennmont's technical director Peter Dickson certainly thinks so. The BNP Paribas spinout held a €200m first close for its second fund last week. According to Dickinson, investors were eager. "There will still be a good level of opportunity to invest," he says. The sector is still attractive for investors who seek the security of asset investment.

Furthermore, as European governments seek to become independent from overseas counterparts in producing renewable energy, private equity can lend a helping hand. "Institutional investors are keen to invest in renewable energy, which cannot be funded by governments alone," Dickson says.

SEP's le Seuer, who leads the EEF fund, believes there is life left in renewables: "We are generally attracted to areas where the technologies are proven and established, and where companies' capital requirements are reasonable. We consider there to be good opportunities in certain areas of energy efficiency, improved heating, low power and lighting and water-saving technologies. "

Clean-tech goes hi-tech
European governments have encouraged investments by offering subsidies for renewable energy to reduce costs of production and distribution through fixed feed-in tariffs (FIT). However, more recently, many governments have pulled out of subsidiaries and FITs, claiming the sector is too expensive and not competitive enough. For example, in 2011, private equity investors tried to sue the Spanish government over proposed changes to FITs, which threatened to cause significant losses. And the Czech government recently proposed to end all renewable support by 2014. Even German politicians were publicly considering capping subsidies for the alternative energy sector at the beginning of this year.

Schulze agrees that asset investments such as those in wind or solar parks are decreasing because states across Europe are slowly pulling out of the funding and support programmes for renewable energy. This has also resulted in less venture capital deals on the equipment production side of alternative energy as fewer new-builds require less equipment.

Peeters, however, thinks renewables will survive without state help: "Government subsidies are very helpful to launch an industry and to reach sufficient critical mass. But particularly in the wind and the photovoltaic energy sector this point has already been reached. These industries will flourish without government subsidies."

Furthermore, the large ticket sizes needed for investments such as Glennmont's are not to the taste of every private equity house. Those seeking quick returns with smaller investments would be better placed to focus on the technology behind the alternative energy sector. For example, IBB invested in German start-up ubitricity in May this year, which develops charging infrastructure for electric cars that can be plugged into street lamps. In March 2012, IBB, eCapital and private investors injected €4m into Geo-En Energy Technologies, a geothermal company that develops and builds geothermal systems for heating and cooling buildings. "The technology in renewables still has a lot of potential. But the size of the investments is a lot smaller due to limited funds available," Schulze says.

Despite decreasing government investment and reduced hype around the sector, renewable energy still offers interesting investment opportunities. Average investment periods of five to six years can often not be realised as investments in this space demand more time to be cash-generative. Moreover, global economic pressure is making life harder for alternative energy firms to survive. However, despite carrying a higher risk profile, investment in start-up companies focusing on new technologies for renewable energy offers excellent possibilities for those willing to take the gamble.

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