Could the crisis become a vintage era for clean tech private equity deals?

Attractively priced deals and long-term ‘green’ stimulus make market look attractive despite the doldrums.

The clean tech private equity sector has been hit by the financial crisis just as other sectors have been. What started mainly as a liquidity crisis, whereby much less or no capital is available to finance operations or future growth, has, as a result of the liquidity crunch, rapidly turned into an economic crisis with many countries having fallen into recession at the end of 2008. In order to more closely examine the impacts on the clean tech private equity sector, we believe it is vital to distinguish between the more short-term oriented effects of the liquidity crisis and the more mid-term effects of the economic crisis.
For the shorter-term, the lack of capital means that clean tech companies will be hindered in their growth. Many are in need of either equity to further expand operations or debt to start and roll out projects through which their technologies are applied. Clean tech companies with an urgent need for capital could see their existence endangered. For others, it means they will have to take a critical look at the available amount of capital and their own cost structure. Already we see clean tech companies down- or right-sizing (e.g. Tesla, OptiSolar, SunTech).One of the first companies in the clean tech sector to really hit trouble is Norwegian electric car manufacturer Th!nk, which suspended vehicle production and laid off 50% of its employees in December 2008.
The fact that many clean tech companies have already raised substantial amounts of capital in the last two years helps. Furthermore, many clean tech private equity fund managers have raised a large amount of capital through new funds. Examples include Element Partners, RockPort Capital, Kleiner Perkins and VantagePoint. This means that there is still a large pool of capital available. The fact that this pool will be used more prudently and to only (re) finance the real clean tech stars, could in our opinion be beneficial to the long-term returns of clean tech investments. It is important to note that most clean tech private equity investments are venture or growth capital investments rather than buyout transactions. This implies that the amount of leverage used is usually zero or minimal. Only very few clean tech private equity funds use leverage to purchase companies. This means that the increased cost of debt financing or the difficulties regarding refinancing or recapitalizations do not play

an important role in the clean tech private equity sector. We expect exits and realizations for 2009 to be low. Starting in 2008, we saw a limited number of trade sales or IPOs and we expect this trend to continue at least into 2009. Stock markets are currently not receptive to any kind of IPO and the general expectation is that markets should first calm down substantially before the first new entrants can emerge. Trade sales have become rare, although a few large corporates are expected to have large pools of cash available for takeovers as opportunities arise. For the mid- and longer-term, the resulting economic downturn or recession that is now hitting most countries will impact the growth potential for clean tech companies. Although the underlying fundamentals for the clean tech sector (e.g. climate change, energy supply security, depletion of resources) are still strong, the reality is that in these situations the economy has priority over environmental concerns. Spending by companies and consumers will decline, which will to some extent negatively affect clean tech markets. Nevertheless, according to research firm Clean Edge, many clean tech markets have grown in the last 5 years with high double-digit figures per year. Less growth would still mean attractive growth, especially in comparison to other (contracting) sectors. In the long run, we believe the attractiveness of clean tech will not be affected by this crisis. A trend related to the economic recession has been the rapid drop of oil prices. From its height of $147 in June 2008, oil is now hovering between $40-50 per barrel. This presents an additional challenge for clean tech companies, especially those active in renewable energy and energy efficiency. Compared to last summer, clean technologies now havea much steeper objective to meet in order to become cost-competitive with traditional technologies. We strongly believe this is a temporary issue: when economies emerge from recession and start to grow again the issues surrounding peak oil will resurface and push oil prices to new heights. Another relevant factor in assessing the mid-term effects of the crisis is governmental policy and regulation. As part of the $700bn bailout bill, the long-awaited extension of the Production (PTC) and Investment Tax Credits (ITC) for renewable energy in the US was finally passed and signed into law by former President Bush. Moreover, President Obama’s new economic stimulus package of $825bn dedicates at least $78bn in order to double renewable energy production within three years, improve US energy efficiency and enable smart grid applications. These are important steps forward for the clean tech sector. Many clean tech businesses will profit from these subsidies and incentive programs for all kinds of renewable energy and energy efficiency technologies. As a result, the dark clouds over the economic system have a silver lining for clean tech.
All of the factors above mean that valuations for clean tech companies now raising money have come down and thus present a buying opportunity for clean tech investors. As mentioned by some experienced private equity professionals, the years of a crisis are often the best vintage years in terms of private equity fund performance. This is mainly due to attractively priced deals available in these times. We believe this is true for investing in clean tech private equity funds as well and 2009 could very well prove to be one of the best vintage years in terms of clean tech investment returns so far!
Stefan den Doelder is senior investment manager at Robeco Private Equity