In 1972, the report ‘The Limits to Growth,’ or Meadows Report, by three renowned scientists from the Massachusetts Institute of Technology shocked the world. The authors basically stated that mankind was on an unsustainable course and in a number of decades the world would run out of many of its key resources and ‘the limits of growth’ would be reached.
More than 30 years later, some of the more dramatic predictions of the report did not come true, i.e., the end of oil in the 1990s. However, apart from the timing, most of the Meadows Report predictions were right: we now live in a world with rapidly growing demand for natural resources and as a result they have an increasing rate of depletion. Prices of these resources, especially fossil fuels and precious metals, are rising and the first signs of shortages are occurring. Concurrently, the available alternative energy sources, such as coal, are limited due to climate change concerns. Thus, the global struggle for scarce resources has begun. Pollution is increasing and more ecosystems are becoming endangered. The rapid economic growth of recent years and the continued growth of the population, especially in developing countries such as China, India and Brazil, has brought the world closer to its limits.
Now and in the future there is a clear need for technologies that will allow us to produce energy, materials, products and services in a more efficient way. Thereby using less natural resources and creating less pollution and waste, while securing (uninterrupted) energy supply and stable water quality. These technologies are called clean tech, which is derived from clean technology, and are defined as technologies designed to increase the productive use of natural resources, while eliminating or reducing waste, and adding economic value. Clean tech spans many industry verticals and is defined by the following eleven segments: Energy Generation, Energy Storage, Energy Infrastructure, Energy Efficiency, Transportation, Water & Wastewater, Air & Environment, Materials, Manufacturing/Industrial, Agriculture and Recycling & Waste.
The clean tech investment market
As with previous waves of innovation, such as in biotech or IT, venture capital and private equity investors have been quick to recognize the financial opportunities offered by the development of clean tech. More and more investors are injecting money into clean tech companies thereby further fuelling the growth of the sector and capitalizing on this trend. As a result, private equity investors and venture capitalists are early movers in this field and thereby in the best position to profit from the value created within emerging clean tech companies, long before public investors have this opportunity.
Over the past four years, Robeco Private Equity has built up a comprehensive and proprietary database containing detailed information on over 250 private equity funds that are dedicated to invest in clean tech and other sustainability-related developments. This universe consists of a wide range of different funds, including clean tech private equity funds, renewable energy or clean tech project equity funds, carbon funds, timber investment funds and social venture capital funds. About half of the funds can be classified as dedicated, commercially-oriented, professional clean tech private equity funds. These funds raised a total of USD 7.4 billion from 1994-2007 to invest in clean tech, with about half of the funds focused on investments into North America, a quarter focused on Europe and the remainder focused on the Rest of the World or with a global focus. The vast majority (>80%) of the funds can be categorized as venture capital funds (from early to mid- and later stage venture deals). Development capital and small/ mid-sized buyout funds are much less common in the clean tech investment segment, but it is an emerging area.
The first funds raised capital for clean tech in 1994-1997, followed by a small surge in new funds in 2000 and 2001. But, it was only from 2005 onwards that the number and amount of clean tech funds raised increased rapidly. This was very apparent in 2007 where a large number of funds were successful in raising money for clean tech, including a number of funds that did their final closing after having been in fund raising mode between 2004 and 2007. For the coming years, we expect overall funds raised per vintage year by clean tech funds to stabilize at between USD 2-3 billion a year.
Investing in clean tech
Robeco was one of the early leaders in this field. We began offering our investors the opportunity to invest in the clean tech sector from 2004 onwards. At present, a total of more than USD 500 million has been invested by Robeco in clean tech private equity and we aim to increase this to USD 1 billion in the near future. Our investment approach is through fund-of-funds, whereby Robeco selects the most prominent clean tech private equity funds in the world. To enhance returns, Robeco also invests in the most attractive direct co-investment opportunities through these clean tech private equity funds. Thus, investments are diversified across clean technology private equity funds (70-80%) and direct (co-)investments (20-30%). Investments are further diversified across private equity investment stage, geography, sector, technology and time. With respect to technology and sector, diversification is achieved across various sectors, including renewable energy (solar, biofuels, wind, wave, and thermo), energy efficiency, waste-to-energy, advanced metering, material recycling and biomaterials, water technology and air treatment technology.
Advantages of the fund of funds approach in clean tech
Investing in clean tech through a fund-of-funds is a relatively novel approach. We see two distinct advantages of investing in fund-of-funds compared to investing directly into funds: 1) risk diversification and 2) making use of best-in-class manager selection capabilities.
1) Risk diversification is without doubt, a main advantage of any fund-of-funds. There are a number of dimensions that a clean tech fund-of-funds portfolio can diversify across:
• Sector or Segment: energy, water, materials, carbon. Different clean tech funds have different strengths and expertise areas. Investing in multiple funds means tapping into the best managers for all these different areas.
• Geography: North-America, Europe, Asia, Emerging Markets. Only a few of the clean tech funds have a global scope, most of them have a regional focus. Investing in the best funds per region will fully capture the benefits of regional diversification.
• Investment Stage: seed capital, early and later stage venture capital, expansion capital, buyouts. We see clean tech funds specializing in different stages of the capital value chain, although many focus on venture capital. By spreading investments over multiple investment stages, the sensitivity to specific developments in each of these is lessened.
• Time: multiple vintage years. By spreading investments over funds with different starting and end dates, money outflows and inflows can be more evenly distributed.
• Manager. Finally, by diversifying across a number of investment managers, with different views, ideas and capabilities, thereby adding a layer of downside risk protection.
Moreover, a fund-of-funds makes a much larger degree of diversification attainable for smaller institutional investors. For most private equity funds, the minimum investment size for a limited partner is usually USD 5 million This means that an investor wanting to invest in clean tech and seeking diversification across a large number of funds needs to invest a substantial (> USD 100 million) sum in private equity. When the desired allocation to private equity is smaller (as it normally is for a specific area such as clean tech investments), a fund-of-funds, with a minimum investment limit of for example USD 5 million, is a good alternative.
2) Making use of best-in-class manager selection capabilities is the second main advantage of fund of funds investing. In order to select, manage and monitor private equity fund relationships, specific expertise and capabilities are required. These skills are what a fund-of-fund manager can provide as added value to its investors. The manager must identify private equity fund managers with the unique skill set to manage and exit private company investments. And the payoff of good selection is large because the differential between the worst and best performing private equity funds is significant. Thus, manager selection is important to maximize the return on investing in private equity in general and is even more so for clean tech.
Since clean tech is a relatively new area, there is relatively little public available data about clean tech segments and companies. Clean tech expertise of a fund-of-funds manager is therefore extremely important to select the best managers. We feel this requires the skills of private equity professionals as well as experts in the field of clean tech who can both asses the technology and the markets. Robeco has the required in-house expertise for selecting the best clean tech funds worldwide through a team of five dedicated and experienced clean tech professionals.
In the last few years, Robeco has successfully built up a portfolio of clean tech private equity investments and proprietary knowledge in this sector. Investing in a clean tech private equity fund-of-funds is in our view is a recommended strategy to build up exposure to this sector. We expect the success of clean tech to continue and we are determined to play a trend-setting role in this.
THIS ARTICLE IS PREPARED BY ROBECO INSTITUTIONAL ASSET MANAGEMENT B.V. (“ROBECO”) TRADING AS ROBECO ALTERNATIVE INVESTMENTS. ROBECO IS REGISTERED WITH THE NETHERLANDS AUTHORITY FOR THE FINANCIAL MARKETS (AUTORITEIT FINANCIËLE MARKTEN) IN AMSTERDAM.
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This article has been carefully prepared and is presented by Robeco. The content of this article is based upon sources of information believed to be reliable, but no warranty or declaration, either explicit or implicit, is given as to their accuracy or completeness.
This article is solely intended to supply the reader with information and reference on Robeco’s specific capabilities and does not constitute an offer, an invitation to subscribe for or investment advice in connection with any (private equity) funds or other securities. Investment decisions should be solely based on the prospectuses of such funds or securities.