Global investment in sustainable and cleantech businesses has softened during the last couple of years, and there are multiple reasons for the trend. In the US, an investment banker says, one of the key reasons is that government subsidies are scaring away capital. But the banker has detected a growth area that could become a significant driver for clean-tech and sustainability deals.
Most of the major investment banks don’t have stand-alone sustainability practices. But there’s a fair number of middle-market banking firms focused on clean tech and sustainability.
Middle-market industries are those with a “traditional” focus on manufacturing, distribution, and consumer products – but aren’t viewed as growth industries and usually don’t have technology differentiation built into their business models.
One of the middle-market investment banking firms with cleantech and sustainability practices is Seattle-based Cascadia Capital, whose web site provides data indicating that the investment activity in the cleantech and sustainability spaces is currently flat, at best.
Cleantech Investment Way Down
According to Cascadia, which has a focus on early-stage deals across all of its practice areas, global asset-financing for utility-scale renewable energy projects totaled $24.2 billion in the first quarter of 2012 – 13% less than the Q1 total for 2011 and 30% below the fourth-quarter tally for ’11.
Cascadia also says that, during Q1 of 2012, the global infusion of venture capital and private equity investments in clean energy totaled $1.8 billion – a sum representing 185 deals and a 31% decline below the total for Q1 of ’11.
Meanwhile, global M&A’s in the clean-tech sector totaled $15.1 billion in the first quarter of 2012 (with the actual total being higher because financial data was available for only 18 of the 77 deals). However, with the exception of Q4 in 2011, this year’s Q1 total tracks the M&A totals during the three other quarters of the previous year.
Michael Butler, Cascadia’s chairman and CEO, says the global, economic downturn is a principal reason for flat or declining investments in sustainability and cleantech. However, observing that “the deals in that sector have been pretty few and far between,” Butler also told Breaking Energy that “investors won’t touch a company that has any dependency on government subsidies, and they use the wind industry as one of the prime examples of why they’re so frightened of subsidies.
“They’re saying,” Butler continued, “‘Look at all the money that the government has poured into wind for years and years and it’s still an industry that can’t stand on its own.’ They’re looking at biofuels and, to a lesser extent, wind, and saying, “I don’t want to invest in an industry that’s subject to the whims of government.’ So, the investors are looking for companies that have value and economically sensible propositions that are completely independent of government subsidies.”
Asked why European investors are apparently much more willing to partner with their governments in wind-farm investments, Butler said, “I would definitely agree that Europe’s [private sector] support for wind is substantially more robust than it is here, but those investors have a greater level of confidence that their governments will stand behind their commitments to that industry. In the United States, we seem to have concerns about our public commitments every year.”
Conversely, Butler added, “I think the area where we see opportunities growing under the radar is in corporate acquisitions of companies with mature technologies. We’re finding corporations that you wouldn’t expect to see in renewable energy buying companies or investing in them.”
In fact, Butler pointed out, Cascadia is about to announce a deal in which the firm brokered the acquisition of a fuel cell company by an OEM engine manufacturer. “We were very surprised by the engine company’s interest, but they said they had the distribution network and customer relationships to spur [fuel cell] sales. The deal suggests to me that corporate America is thinking about cleantech and sustainability differently than the perception, out there, because they’re finding ways to profit from those investments. It’s encouraging.”
Corporations, Butler pointed out, don’t need investment banks to finance the acquisitions. “But they need help,” he added, “finding the companies [to acquire] because a lot of them are off the beaten path.”
And which technologies will attract the interest of acquisitive corporations? “I think solar will continue to be a good area because its costs are coming down,” Butler said. “Technologies to make buildings more energy efficient is a very exciting area, and a third area that will eventually be very popular is energy storage, although the technology isn’t there, yet.”
I think the area where we see opportunities growing under the radar is in corporate acquisitions of companies with mature technologies.”
Butler identified his investment-bank competitors for deals in the sustainability space as, among others, GCA Savvian, Piper Jaffray, and Greentech Capital Advisors; in the cleantech space, Cascadia competes with the preceding three along with Montgomery & Co.; and, in its middle-market business, the firm is competing with William Blair, Harris Williams, and Houlihan Lokey.
Butler says the major investment banks have been eliminating their stand-alone sustainability and cleantech groups and folding that expertise into other industry groups. But one of the majors – Morgan Stanley – still has a stand-alone sustainability practice, Butler says, pointing out that, “Of all the majors, Morgan has the most robust sustainability practice.”
According to the 2011 Sustainability Report from Morgan Stanley, the bank has “helped clean technology companies raise nearly $35 billion in capital.” Last year alone, the report adds, “our clean technology investment banking team intermediated more than $4 billion in securities in this sector through initial public offerings and other financial transactions.”
Read additional Breaking Energy coverage of cleantech investment trends here.
The report notes that some of Morgan’s 2011 sustainable and clean-tech activities include the following: financing for 50- and 40-megawatt wind farms in Texas and Nebraska, respectively, “through Third Planet Windpower, a Morgan-Stanley-owned developer and operator”; the Rim Rock, MT, 189-MW wind farm, for which Morgan provided a $320 million construction loan; a $227 million IPO for Solazyme, which produces “high value oils” from microalgae; and a $852 million IPO for Huaneng Renewables Corp., which is the wind-power subsidiary of China Huaneng Group.
But the projects don’t quite indicate the breadth of Morgan’s activity in non-traditional banking spaces. As the company’s president and CEO, James P. Gorman, says in his preface to the report, “We support businesses that tackle pressing problems in energy, health, water, agriculture, and access to capital for the billions who live largely outside the mainstream economy.”