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Are PE Firms Deserting Cleantech?

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February 26, 2014

As the global population becomes more aware of the environment and climate change, many of us are adapting how we live to be more responsible. This has proven true in terms of business as well as individually. While businesses have generally adapted their working practices to become greener, in terms of the finance industry we have seen private equity (PE) firms chasing opportunities involving cleantech for years.

 

Although cleantech encompasses many different sectors of eco-development, renewable energy has been the one in the news and subject to investment more than most. A Financial Times article reports that many PE firms are pulling back from renewable energy investments following a swathe of poor returns. Preqin have provided data to the newspaper that suggests renewable energy sector investments have delivered returns 87% lower than the average.

 

Reyno Norval, of Altius Associates, told the FT, “They [PE houses] cannot make the returns their strategy demanded and they have not done another fund. “Just 22 per cent of funds have an IRR [internal rate of return] over 3 per cent. To me 3 per cent is losing money because you have a cost of capital. Just looking at the numbers, it does not really stack up in the private equity world.

 

“From my experience, you would look at many projects and only a few of them would be economically viable.” Alex Barr of Aberdeen Private Equity also admitted, “From a private equity perspective, making money out of clean-tech is bloody difficult. It is effectively early to mid-stage venture capital, where one in ten investments will be a home run. There is a huge amount of luck. It is a difficult area. We tend to shy away.”

The general feeling coming from the PE industry is that cleantech is a “fad investment” that is going to be less popular from here on out. Cleantech businesses will still be actively seeking investments from the PE marketplace, but are likely to need a strong business proposition and demonstrate an ability to drive better returns than what have been coming from the sector in recent times.

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