Q&A: Environmental sector opportunities and challenges

What makes the environmental sector attractive for private equity?
First of all, it is worth pointing out that Ambienta focuses exclusively on the environmental segment as a whole, with a particular focus on the production of energy from renewable sources, energy efficiency and the implementation of pollution reduction. These three areas have important applications in a number of key industries, such as electricity production, transportation and construction, which in turn opens up a wide range of attractive opportunities in many sub -sectors. 

From a more general point of view, the sector is especially interesting for a number of reasons. From a natural resource point of view, world energy demand is expected to increase by 45% between now and 2030, with 80-85% of these energy needs to be met by fossil fuels and the use of coal to grow the most.

Set against these figures are on-going climate change concerns, which clearly add to the attractiveness of the sector from environmental infrastructure (energy generation) perspective.  Also, in our view, the current economic crisis has also served to underline investment opportunities in the environmental sector.

In terms of the funds focusing on the sector, most have a quite narrow focus.  Of the 125 or so pure cleantech funds around the world, around 50% invest in venture only, 36% have clear sector specialisms (renewables, water, timber, etc.), while 9% focus on infrastructure.  Only about 5% of these vehicles invest, as we do, with a broad, segment-wide private equity approach.

The environmental sector has seen an important emphasis on renewable energy generation. But the sector comprises many other sub-sectors.  Which do you perceived as most interesting?
Indeed, renewable energy generation (environmental infrastructure) has proven to be quite interesting to investors. But there are also other private equity opportunities. We believe that energy efficiency and pollution control are the key areas holding the most attractive investment opportunities for non-infrastructure private equity investments.

Increased energy consumption and high reliance on fossil fuels are bound to place a strain on the supply and demand dynamic. As far as economic and environmental drivers are concerned, energy efficiency related technologies/services, which include storage, grid efficiency, batteries, heat recovery, insulation materials, water management, and recycling, all become viable investment opportunities. A similar logic apply to pollution control related technologies/services.

 
Against what backdrop are environmental investments to take place in the near future?
The investment environment has improved significantly and companies can now assess the impact the last couple of years have had on their business. Add to this the economic and environmental factors we mentioned earlier and the monetisation opportunities for the environmental sector become clearly apparent.

I believe one of the major challenges we face as investors is reaching out to potential targets. Many companies don't realise that they have the environmental angle. Equally important and difficult to find is the right management - not so much from a technical perspective but from the entrepreneurial side.

So what is your investment strategy in the current environment?
We aim at providing our investors with the opportunity to invest in high-growth sectors, through targeting mainly medium-sized companies in need of growth capital. Our target portfolio consists of about 10-15 companies focusing on business segments able to generate returns upwards of 20%, with an average investment size ranging from € 10 m to € 30 m.

Our fund is only 15% invested, and given that we only look at companies with EBITDAs in the double digit zone, which we then only leverage to a maximum of 2x EBITDA, we are not finding debt financing particularly difficult to secure.

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