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By Dr. Gurminder Singh
Co-Founder & President, Transformative Capital 


Opportunities and Uncertainties in Private Equity: "Green and Clean Technologies in the U.S."

"We need to make sure new industrial policies that will drive our economies this century are the right ones focused on future industries. Those societies that marshal their resources behind this best are going to benefit the most, those who do not will be left behind."

Given the political shifts happening in Washington and Congress, private equity investments in green and clean technologies will be severely impacted and exacerbated by the slow economic growth over the next two years.  Funding gaps mean companies are scouring the world for capital.

The iffy state of fund raising for hedge funds and private equity firms as of late, for private equity firms on the deal-making side, is facing more uncertainty as well. Earlier this year, the industry was downright giddy about the prospects for more exits and more deals. But it's not really happening. The IPO market has been disappointing, which has muted the once high-flying expectations. The sorry state of private equity deal-making, the industry is sitting on half a trillion dollars in funds seeking deals. At the current pace of deals, it will take about 6 years to put all this cash to work. The deal environment has improved somewhat, but we have yet to see a spike in transactions.

Uncertainty does not mean the end of private equity opportunities in green and clean technologies. Private equity will focus more on late stage investments while diversification of risk through multistage portfolio investment vehicles in these areas will be crucial to the success of start-ups and earlier stage companies with corporations playing critical roles through strategic investments and/or consolidation opportunities.

In this climate, corporations will play a critical role in shaping the industry’s next stage of development. The world’s largest corporations are hastening their adoption of cleantech products and services to create a competitive advantage through resource efficiency and sustainable growth. Their investments are targeting cost efficiencies, new revenue streams and internal objectives for sustainability and climate change. For investors and entrepreneurs, the increasing interest and activity of multibillion-dollar companies around the globe underscore the growing market opportunities in cleantech.

Making good on those opportunities will likely depend on identifying new partnership models that enable corporations and emerging cleantech companies to meet their own objectives while facilitating the arrival of a low-carbon and resource-efficient economy. Cleantech has become a corporation-wide initiative championed by senior management, and 85 percent reported significantly or moderately accelerating the pace of their company’s strategic response to climate change compared with two years ago.

Not surprisingly, the largest corporations have led this wave of activity by employing cleantech solutions or partnering with or acquiring cleantech companies. Consumer products and other industries with high energy consumption — as well as high consumption of water and other natural resources — are setting the pace in establishing cleantech action plans as part of their overall resource-efficiency and sustainable-growth agendas. The economic downturn has done little to blunt corporations’ appetites for clean technologies. Corporations’ growing participation in the cleantech space is stoking interest in technology collaborations, laying the foundation for what is promising to be an active period for cleantech mergers and acquisitions and other partnership opportunities.

Making the business case

In recent years, the business case for corporate cleantech investments has evolved from a singular focus on the climate change agenda to a more comprehensive view of how cleantech can boost the income statement, whether through new revenues or resource efficiencies. Thus, the global financial crisis of the last two years has not only highlighted and driven the need to employ clean technologies as important tools for operational efficiency and cost reduction, it has also quickened their adoption.

Further, the rising demand for finite natural resources, spurred by growth in population and in the numbers of middle-class consumers in emerging-market countries, is driving the need for corporations to establish a resource-efficiency agenda to ensure sustainable long-term growth and competitive advantage.
The end result is that cleantech investments are guided more and more by efforts to heighten operational efficiency and cultivate new revenue streams. Underpinning these efforts is a greater awareness that cleantech delivers financial returns right away.

Evidence is growing that the world’s largest corporations are hastening their adoption of cleantech products and services to create a competitive advantage through resource efficiency and sustainable growth. Their investments are targeting cost efficiencies, new revenue streams and internal objectives for sustainability and climate change.

For investors and entrepreneurs, the increasing interest and activity of multibillion-dollar companies around the globe underscore the growing market opportunities in cleantech. Making good on those opportunities will likely depend on identifying new partnership models that enable corporations and emerging cleantech companies to meet their own objectives while facilitating the arrival of a low-carbon and resource-efficient economy.

Despite tumultuous global financial market conditions, private equity investments in the clean technology space showed resilience last year. Investors are reconsidering their overall exposures. Signs of hope have begun to emerge for the clean-tech sector.

Even with the volatile economic climate, there continues to be action in this sector. Seventy-eight cleantech funds are in the market seeking investment, and Prequin reports that 2009 could be a record year (for funds "commencing investment in the cleantech sector"). The number of firms managing cleantech investments reached 357 by the end of April, from seven in 2003. This year alone, 86 funds have either become involved or expressed interest in cleantech.

For the investor community, that trend is even further along. Close to half of clean technology investors (48 percent) are from Europe, with only 34 percent now coming from the United States and 18 percent from the rest of the world.

"The growth in the private equity cleantech market ties in with the increasing consumer and investor awareness of climate change and environmental issues, growing levels of regulations and incentives provided by national governments and the ever-increasing global demand for energy and improvements in technologies within the cleantech sector," says Preqin's Tim Friedman, Editor, 2009 Preqin Private Equity Cleantech Review. "These factors have assisted in improving the potential profitability of the market," he continues, "with increasing numbers of private equity and venture capital fund managers seeing suitable opportunities opening up for investment, and a high proportion of investors in private equity now seeking to gain exposure."

Policy mechanisms for continued growth of Cleantech

Policy mechanisms have to be tailored in the national, state and local context. “As a result of the continued financing gap, there is an urgent need for policy-makers around the world to implement measures at the regional, national and sub-national level, which will encourage investment in clean energy technology and projects. The mechanisms can be chosen based on stage of technological development – R&D/proof of concept, demonstration and scale-up, commercial roll-out, diffusion and maturity – and also on stage of economic development.”

Despite failure of climate bill

While the collapse of climate legislation in Congress was a setback for some green businesses, many others are moving ahead with projects to develop renewable energy. One major reason: The clean-tech sector is rapidly growing worldwide, and U.S. companies don’t want to be left behind.

That didn’t happen under a Congress controlled by Democrats, and now that the Republican Party has taken control of the House of Representatives, it appears to be a virtual impossibility. There’s widespread agreement in Washington that climate legislation is completely off the table until at least the 2012 election, “Without a price on carbon, these projects will cost hundreds of millions of dollars and no one will do them.”
“The lack of legislation is important, but companies are probably not changing the direction they’re headed in; we are not pausing on our growth opportunities.” The opportunities aren’t as great as they would have been with a bill, of course. For utilities, the lack of a sure price on carbon emissions is slowing plans to build big solar arrays and nuclear power plants, and is accelerating a race to natural gas, as some coal plants are being shut due to coming, stricter pollution rules. ‘People are bullish, and the lack of a carbon price looks like just another barrier to leap over,’ says one entrepreneur.

The final reason is that the business world generally believes that limits on carbon, or other policies to promote energy efficiency and renewable power, are inevitable. The EPA is moving ahead with plans to regulate carbon dioxide emissions under the Clean Air Act, for instance.

Cleantech executives say that the longer the U.S. dithers, the farther it will fall behind. But even as companies remain bullish on clean-tech, there’s a powerful sense of regret among environmentally-oriented companies over the additional progress that could have been made if only Washington had passed a climate bill. What’s really needed is a transformation of the economy, a complete change in how we produce and use energy. EPA regulations might make a dent in carbon emissions but they won’t stimulate the innovation needed for such a transformation. So while clean-tech isn’t going to wither away because of inaction in Washington, a huge opportunity to stimulate more innovation and growth is being lost.

Can renewable energy's lifeline survive in the new Washington?

The Treasury Grant program preserved renewables through 2009 and 2010—but will it be there in 2011?  Vitally important to renewables developers, the Treasury Grant program was included in the 2009 Recovery Act to make financing available despite the scarcity of bank credit due to the economic crisis. Referred to as 1603, its section number, the grant allows developers to accept cash from the Treasury Department for projects started before December 31, 2010, in exchange for tax credits useless during the downturn.

The economy is, however, healing more slowly than anticipated. Lenders and investors remain reluctant. Developers of utility scale solar, wind, geothermal and biofuels projects need an extension of the 1603 provision.

Renewable Energy Project Finance in the U.S., a report from Mintz, Levin and GTM Research, reported that through October 6, 2010, $5.4 billion was paid in cash grants to renewables projects, supporting over $18 billion in total investment. If the cash grant is not extended, $4.1 billion in 2011 and $6.6 billion in 2012 will have to come from tax equity, debt, or direct investment, capital sources that are improving but not expected to return to pre-financial crisis levels for “several years.” U.S. renewables advocates argue that federal investment has already grown significant domestic capacity, but that only more federal investment can grow domestic markets and achieve the economies of scale necessary to make the U.S. independent of imported energy.

Both proposals will be under consideration in both houses of Congress in the lame duck session with Democrats continuing to hold significant but not omnipotent majorities. Both proposals could also be considered in 2011 by the new and different 112th Congress in which Democrats will retain a vulnerable majority in the Senate and Republicans will take control in the House.

Despite the economic downturn, the outlook for the cleantech industry’s continuing development is very positive. Corporate demand for clean technologies will likely provide a critical impetus as emerging companies seek access to commercial markets. Multibillion-dollar organizations are actively seeking cleantech innovation and are open to technology partnerships so long as they can meet internal ROI guidelines. For investors, entrepreneurs and other leaders in the cleantech sector, this should be welcome news. Cleantech’s evolution will continue to produce its fair share of fits and starts, but the prospect of escalating corporate purchases, acquisitions and partnerships, as suggested by our survey, points to robust growth and plenty of opportunity in the months and years to come.

Moving forward, the conversation will need to focus on energy and national security, job creation, environmental protection, and global economic competitiveness. Yes, we’ll still need a price on carbon to signal markets – but that can now come by viewing carbon for what it is – a source of pollution (which is backed up in the U.S. by a Supreme Court ruling). By changing the frame, and focusing on different drivers and outcomes, the growth of clean tech may be better served than focusing solely on something as nebulous and divisive as climate.

About the Author

Dr. Gurminder Singh

Dr. Gurminder Singh
Co-Founder & President, Transformative Capital

Gurminder Singh is noted authority on finance, enterprise, business and technology development. Gurminder Singh brings unique insights, creativity to business design and capital formation activities based on over 20 years of broad experience including mergers and acquisitions, technology and bond underwriting, alternative investments, securities and derivatives trading, consulting and international business development. For over 20 years, he has been involved as a entrepreneur, has started several consulting and technology-related companies. He is presently focused on green, clean, environmental, water, digital media and internet technologies for companies seeking combine to develop unique strategies, solutions and services.  He has also developed a unique structured financing product for monetizing mid to long term contracts for the industries he serves.

As Founder & Chairman of the International Green Technology Institute, formerly an initiative of the Tom Bradley Legacy Foundation at UCLA and presently a free-standing 501c3 non-profit organized in the State of California. Dr. Singh has created various programs such a s the Green Technology Leadership Lecture Series, the Green Technology Entrepreneurial Forum, the Green Technology Global Expo and Conference. He is also Chairman of the Global Council For Social, Economic, Environmental & Educational Relations, a think-and-do organization developing new quality-of-life metrics, indices and associated tools.

He is Co-Founder, President and CTO of Transformative Capital, a strategic, technology and financial advisory firm providing consulting and capital formation services. Presently assisting various alternative energy production companies on Permitting, Power Purchase Agreements, Project Financing and Private Equity Placements. Presently advising various hedge and private equity funds on divesting $40 Billion in green investments due to the ongoing illiquidity in capital markets inclusive of and not limited to solar, wind, CNG, hydrogen, hydrokinetics, geothermal, biomass and other new forms of energy production.