Green thumbs up

The success story of cleantech has so far owed much to private capital, most notably the whopping 27x money Apax Partners made on Q-Cells AG in early 2006. Triumphs such as these caused a slew of "me-too" investors to jump on the cleantech band wagon and benefit from the cleantech buzz. In recent years, private equity firms have piled into the space, drenching the segment with capital.

"It was quite surprising who suddenly had cleantech ambitions without the necessary track record," recalls Dr Helmut Vorndran, chairman of Ventizz Capital Partners. "In 2003-2004, it was appealing to invest in that space, while 2006-2008 was much less attractive, since there was just too much money in the sector. Even in 2008, at the height of the financial crisis, solar investments grew by 130%."

Until the collapse of Lehman, everybody wanted to invest in the space, often criticised for throwing caution to the wind. This flurry of investment distorted the market prompting more cautious players to hold on to their capital. Bruno Derungs, partner at cleantech investor Climate Change Capital Private Equity, which is currently investing a EUR200m fund in cleantech, explains: "There were many players and investors that entered the cleantech market between 2005 and 2007, investing in a rush as they wanted to prove themselves. This inevitably had an impact on valuations. However, this type of money has vacated the market now."

Now that the so-called "silly money" is out of the picture, the surviving cleantech investors report strong dealflow. "We see a lot of companies in the venture space and a large amount of companies seeking growth capital," says Derungs. "One important investment case for cleantech in the mature segments is what we call an 'asset roll-out'. Cleantech is not only about the newest generation technology. The technology very often is there and will improve continuously, but the challenge is to finance large numbers of projects and get as many products and projects out as fast as possible to reduce carbon emissions effectively and sustainably. Therefore, private money/bank finance is important."

Untapped potential

While solar and wind are the obvious (and highest profile) segments in the rather nebulous cleantech space, there are other opportunities that receive far less attention. "We see a lot of opportunity even in the traditional solar space; around 50% of the capacity is still being installed in Germany, not exactly the sunniest of the European countries," Derungs points out. "Of course there have been exaggerations, such as in Spain, where a real panic has set in, leading to a collapse in the solar market, but people are aware that still a lot needs to be done, and the framework for cleantech investments is constantly improving."

New and attractive segments run the gamut. "I believe energy from waste is a hot topic in the UK; in southern Europe, bio-energy lags behind central and northern Europe, and overall, storing energy will be a major issue. One particularly interesting segment is smart grids," explains Derungs. "They are an absolute prerequisite to cope with the challenges of matching the energy demands with a less correlated supply." In accordance, Climate Change has invested in Power Plus Communications, a Mannheim-based broadband power line communications business.

Some investors claim that smart grids are the next big thing, as they enable consumers to defer up to 50% of energy use to a later point in time, when energy is cheaper. This area could prove a hot one for investors, especially in Germany, where many energy providers are currently putting their networks on the block: an interesting play could be made by acquiring the grids and upgrading them with new technology to make energy usage more efficient.

"We have made several investments in the solar and wind space; now we're looking towards the less developed segments. Water is a hot topic for us, with industries such as filtration and recycling, but that industry is still dominated by large industry players, and very few assets are held privately," says Vorndran. "Another very interesting industry is energy efficiency, and geothermals. The problem with the latter, though, is that the companies in that space are simply not good enough. When we looked in the last few months, we could not identify one company that presented a good investment case." With recent news coverage about the catastrophic effects of geothermal drilling, for example in Wiesbaden, geothermals on the whole might suffer a backlash in public opinion.

But public opinion is not the only challenge; recently, larger deals have been hampered by a lack of financing. However, there are indications that the worst might be over: "We noted a slight improvement in the last three to four months. It is possible to get financing for around EUR100m. Banks want infrastructure-type assets that generate steady cashflows and are then willing to provide leverage. The margins are justified at the moment," says Vorndran.

The malaise of many of Germany's traditionally strong sectors makes the cleantech case even more compelling. This is despite the fact that nuclear power and even next-generation coal and gas power plants could make a comeback in Germany after the country elected a centre-right government at the end of September, which prompted a jump in nuclear stocks.

"The case for cleantech is really quite simple. Everybody can see that cleantech is likely to see higher growth rates than, say, steel, industrials or food," says Vorndran.

Sustaining cleanliness

Much of the sector has been bolstered by generous state subsidies. But now, in Germany, there is a fierce public debate about how sustainable these are. There is now increasing talk of reducing subsidies to reflect the fall in prices: Solar module costs have come down by 30% and the costs per generated watt are inching closer to grid parity as conventional energy prices have risen for years.

Any reduction will have a clear impact on private equity investors, who have long been looking at the space. But - perhaps surprisingly - the industry agrees in principle that a reduction is justified: "There is some teeth gnashing in the solar space, but the industry has been an enormous success story in the last few years, so this is somewhat self-indulgent," says Vorndran.

Some highlight that the real issue isn't the reduction in subsidies so much as planning security, especially for LPs. "The market will be able to accept a successive 2-5% reduction of the feed-in-tariff year-on-year, as long as there is guaranteed support and no government uncertainty," says Derungs. "The main issue is clarity and certainty in terms of planning and a stable framework so investors can minimise regulatory risks and generate reasonable returns. Financing certainty is absolutely vital since the fight against global warming needs to be financed with private money seeking returns."

Reducing subsidies may increase the threat of foreign competition. In the solar power segment, western manufacturers have had the advantage of cheap access to silicon over the last four to five years. However, China in particular has been making strong inroads into the solar market, putting many German manufacturers under enormous pricing pressure. Is the German solar industry fighting a losing battle against its cheaper-producing rivals from the east? "The main question is, how does the long-term cost competitiveness look? Solar module manufacturing is a highly automated, technological process. In terms of technology, the German solar industry is definitely up to the challenge," believes Vorndran.

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