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Few sectors have enjoyed the same strong growth in te
rms of revenue and r
eturns as the clean-tech sector. This growth has been driven both by the global support to fight climate change and the investment opportunities, says THOMAS SKOVBJERG
, CFA.
hen defining the clean-tech sector most investment professionals include the following sub-sectors: clean power – renewable energy and cleaner fossil fuels; clean transport – biofuels and transport efficiency; energy efficiency – grid efficiency, energy storage and smart buildings; waste recovery – energy from waste and recycling of waste; water – clean and energy-efficient water technologies.The common feature of clean-tech companies is that they are all commercialising products, services or assets which use new energy technologies for power applications or existing energy sources more efficiently, and thereby helping reduce the emission of greenhouse gases into the atmosphere and fight climate change.
The clean-tech sector has established itself as a sector with sufficient investment opportunities to attract the attention and interest of both general and specialised investment funds only in recent years. The result of this emerging interest has been unparalleled growth for the sector and fantastic returns for investors.
A HIGH GROWTH SECTOR
The growth in investment activity for the clean-tech sector has been driven initially by venture capital and private equity funds. In fact, the amount of venture capital and private equity money going into the clean-tech sector has surged from about billion in 2001 to an expected billion for 2007. Industry experts are predicting that this figure will reach billion by 2013, providing a compound average growth rate for 2001 to 2013 of 36%. This figure also translates into more than 0 billion of venture capital and private equity investments in the clean-tech sector between now and 2013.
The sector is the third largest within venture capital investments in the US, surpassed only by bio-tech and IT software in terms of investment amount. Public market investment volumes in the sector, such as IPOs, secondary offerings and convertible issues for listed companies, have been catching up with venture capital and private equity investment activity in the past couple of years. However, this catch-up is fast under way with investment activity in public markets also growing strongly. The volume of public market investments in the clean-tech sector during 2007 is expected to surpass billion, up from only billion in 2004.
BACKGROUND FOR INTEREST IN THE CLEAN TECH SECTOR
The reasons for the interest in the sector are many. Although it is new compared with most industries, the majority of clean-tech companies are selling into the three biggest industries in the world based on revenues: oil and gas, utilities and water. Clean-tech companies are e xposed to some of the biggest investment and capital spending budgets.
Some of the investments made in the clean-tech sector in the late 1990s and the first part of this century have resulted in commercialisation of new technologies and business models by clean-tech companies, and thereby justifying the emergence of the sector. One example is the wind turbine sector which has been transformed from a niche sector providing idealist end-users and utilities forced by legislation with wind turbines 10 years ago to being a global sector dominated by companies such as General Electric and Siemens estimated to total billion in revenues in 2007.
The clean-tech sector has been among the most active in the past five years in terms of IPOs. A total of 111 clean-tech companies have floated since the start of 2001, providing investors with significantly more investment opportunities and the opportunity for constructing a portfolio of clean-tech companies with a suitable risk profile.
Finally, as demonstrated by the graph below, the clean-tech sector has outperformed most other stock indices in recent years. This has attracted more investment funds to the sector which again has provided for additional support to the returns of the sector in the form of significant capital in-flows. As an example, investors who participated in each of the 104 transactions (IPOs, secondary offerings and convertible issues) executed by clean-tech companies on London’s Alternative Investment Market (AIM) since December 2001 would have seen an annualised return of 38.4%.The factors described above have helped the clean-tech sector emerge as an investment category used by investment funds as an edge to equity portfolios as opposed to being just a sector for specialised funds, as was the case a couple of years ago.
FUTURE OPPORTUNITIES WITHIN THE CLEAN TECH SECTOR
The strong performance of the cleantech sector in recent years beggars the question whether the short- and medium-term potential of the sector has been exhausted. We firmly believe that the answer to this question is no. Here are a couple of ideas:
Opportunities in private equity:
A significant part of the technology and business model developments in the clean-tech sector are still being pursued by private companies needing private equity money. Many private clean-tech companies are also opting to continue as private companies as it has become possible to conduct sizeable funding rounds with private equity investors, and thereby postpone the challenges of being a publicly listed company. These factors continue to provide attractive investment opportunities for private equity investors.
Opportunities along the value chain:
It is not only the actual producers of wind turbines, solar cells and other new energy technologies who are benefiting from the roll-out of more climateefficient power-generation equipment. Many of the suppliers and subcontractors to the clean-tech sector are traditional capital-equipment companies that in recent years have found themselves exposed to a sector demonstrating tremendous growth. So, the growth in the clean-tech sector and the capital-investment requirements facing the sector are providing benefits to companies along the value chain and additional investment
opportunities for investors looking for exposure to the sector.Opportunities in China:
China will soon overtake the US as the biggest energy consumer in the world. The Chinese government has adopted an approach to energy consumption that is more climate friendly than the approach of the US government which has resulted in considerable activity. On some fronts China is even commanding a global leadership position. One example is the development of ethanol production based on non-edible feedstock, also called second-generation ethanol, where enormous efforts in the US and Europe are dedicated to the development of commercial production processes. No company in the US or Europe has yet been able to commission a commercial plant for the production of second-generation ethanol, while the Chinese are already operating a plant producing 35,000 tonnes per year from cotton residue. China is also emerging as the leading global producer of low-cost silicon for the production of solar cells. The focus in China on the clean-tech sector will provide investors with attractive investment opportunities in the years to come.
Opportunities within energy efficiency:
The benefit of a reduction in the emissions of greenhouse gases from the use of more climate-efficient powergeneration equipment is important, but is not the only method of preventing climate change. Energy efficiency, such as optimisation of the electricity distribution grid, improved energy storage and construction of energyefficient buildings, is expected to become an even more prevailing theme in the coming years as a significant benefit to climate change is believed to be achievable through adaptation of energy efficiency. This should also provide for interesting investment opportunities.
WEALTH WORTH HAVING
The clean-tech sector has provided investors with an attractive growth profile and fantastic investment returns. We firmly believe that it will continue to provide highly attractive investment opportunities as more investors turn their attention to the sector. We also believe that investors should focus on the clean-tech sector for the right reason: the potential for attractive investment returns and not the benefits that the companies operating within the sector may provide the fight against climate change. That said, it does make sense to consider investment returns generated by the clean-tech sector as wealth worth having.