The private equity cleantech market is set to buck the downward trend over the next year as the number of funds focused solely on the sector quadrupled from nine in 2004 to 39 in 2008. Despite the slowdown in the global economy, there are 78 cleantech funds in the market, according to the latest data from Preqin.
Two thousand and eight was a stellar year for cleantech, which not only saw the number of funds with an exclusive focus on cleantech increase, but also witnessed the number of funds that included a focus on cleantech soar from 30 in 2004 to 117 in 2008. “In the past four years people have seen that climate change is an area worth investing,” explains Nigel Meir, fund manager at Ludgate.
Increasing consumer and investor awareness of climate change and environmental issues have improved the level of interest from the private equity industry. Governments have also sweetened the deal by increasing the number of regulatory incentives for managers investing in the area. “There is a climate of regulatory and government incentives that are attracting people to this area,” says Nigel Aitchison, partner at Foresight Group.
And with these perks, funds are certainly entering the space, with big plans in mind this year. Most recently, HSBC Special Investments, the infrastructure and real estate arm of HSBC held the first closing of its HSBC Environment Infrastructure Fund on €117m. It aims to raise €500m in total. In February, Index Ventures closed its fifth fund on £350m which will partly be used to invest in cleantechnology. Frog Capital, previously Foursome Investments, also increased its cleantech allocation this year from £60-100m.
But while it is clear that the number of funds moving into the sector is increasing, Preqin’s data does not indicate that the increased volume of funds will increase the volume of capital in the sector.
According to the Cleantech Group, the first quarter of 2009 saw average round size shrunk from US$20m in Q3 2008 to US$12.3m in Q1 2009. Large scale infrastructure deals, which make up the bulk of big deals in the sector, were nowhere to be seen in Q1 2009 as the debt market dried up.
“Completing infrastructure deals in the first quarter of 2009 was extremely difficult because the debt market had dried up. As the year goes on it will get much easier,” says Bernard Fairman, managing partner of Foresight Group.
For funds currently raising capital, most is being sought by North American-focused firms, which are looking to raise an aggregate of US$9bn. Not far behind, Europe is looking to raise US$7.2bn. Funds focusing on Europe are predominantly infrastructure funds which make up US$4.1bn of the US$7.2bn target.