How to clean up with clean technology

If private equity ever needed an investment theme to improve its image it need look no further than investment into clean technology or ‘clean tech’.

Clean tech is the technological response to issues like global warming and the depletion of natural resources. It is also, its proponents suggest, the perfect paradigm for the three Ps - people planet and profits. All three benefit from its application.

Clean tech is not new. Environmental technology was around in the 1980s and 1990s. However this technology tended to be focused on pollution control and hazardous waste management - ‘end-of-pipe’ techniques which dealt with the problem after rather than before it has been created.

Clean tech is more focused on pollution prevention and cleaner production - making products and services in such a way that fewer resources are needed or less waste is created As the market for clean tech has grown, so has institutional investor interest. The two largest pension funds in The Netherlands, ABP and PGGM, recently mandated their joint investment fund Alpinvest to put €500m into non-listed innovative clean technology companies in Europe and the US.

The simplest way in which pension funds can invest in clean tech is through a fund of private equity firms that invest in clean tech companies. One of the leaders in this area is Robeco Private Equity, which launched a fund of clean tech funds last year.

Rotterdam-based Robeco set up its private equity operation in 2000 with the help of a team of four drawn from ABP and PGGM. Within a year it had launched its first product, Global Private Equity and its European equivalent, Robeco European Private Equity.

Robeco had already taken a lead in the area of sustainable investment with the launch of its first sustainable product in 1995. In 1999 it became the first Dutch mainstream asset manager to launch a sustainable equity fund. Robeco Private Equity became involved in sustainable development in 2003.

Andrew Musters, partner of Robeco Private Equity, responsible for clean tech investments globally, explains: “By 2003 we basically sawtwo trends in private equity. One was ‘responsible entrepreneurship’, to do with corporate governance, SRI and transparency. The other was what is now called clean technology - mainly private equity investment into companies in the energy sector and waste industry.”

The private equity team were able to draw on the environmental know-how of Rabobank which has built a reputation for expertise in areas such as renewable energy and CO2 emissions. “It was really a marriage between our private equity team and the clean tech exports at Rabobank,” says Musters.

The partnership led to the launch of Robeco Sustainable Private Equity in 2004, the first sustainable private equity fund of funds in the world. “The fund had a dual investment strategy,” says Musters. “One was to invest in a pure dedicated clean technology opportunities. The other was to invest in mainstream private equity funds, but with a sustainable edge to it.”

This edge is maintained by the use of Robeco’s ‘responsible entrepreneurship’ guidelines, which private equity funds are legally bound to observe, he says. “When we designed and launched the fund we really wanted to put some meat on the bone, to give it substance. And the only way to give its substance is to have a legal contract. These funds really have to work with us to improve the responsible entrepreneur profile of the companies they invest in.”

The fund last year closed at its target of $200m (€145m). Investors include blue chip European pension funds. Rabobank and Robeco are also strong cornerstone investors in the fund.

By 2004 the growth of the clean tech market, and the growth of investor interest in this market, persuaded Musters and his colleagues that there was room for a dedicated private equity fund of funds that focused purely on clean tech companies. “The market had grown so deep that we could really build a customised fund of funds with co-investment opportunities in clean tech,” he says.

Late last year it launched the Robeco Clean Tech Private Equity II fund. This was aimed initially only at institutional investors but through a certificate listed on Euronext Amsterdam now also at individual investors. It has a target capitalisation of $500m (€363m).

Between 60% and 100% will be allocated to clean tech private equity funds. Stefan den Doelder, investment manager at Robeco Private Equity, says the aim is to invest in between 15 and 25 of the most prominent clean tech private equity funds in the world

“Investments will be spread over the globe, reflecting the normal venture capital spread, with more funds available in the US than in Europe and the rest of the world. So we expect 40% to 50% in the US 35% to 45% in Europe and 10% to 20% in the emerging markets.”

The investment approach will combine a top down view on the clean tech private equity market with a stringent bottom up investment selection process, with inputs at both ends from both Rabobank and Robeco, he says.

Investments will be diversified over the stage of investment by spreading the portfolio across venture capital, development capital and buyouts. “Funds are likely to be more of a venture capital or development capital type, than buyout funds or mid market growth capital, because you don’t see much in the clean tech area,” says den Doelder.

Diversification is important, since clean tech is not a sector in which there are any clear winners, says Musters. “We don’t think there will be one winning idea or winning technology. In clean tech the winning technology depends on the type of customer. For one customer it can be solar energy, for another it can be wind power, for another fossil fuel. Ultimately, there will be a wide range of winning technologies, and that is why we need to diversify investment.”

Co-investment is seen as a follow-up to the main thrust of the fund, and up to 40% of investment could be allocated to direct co-ownerships.

The private equity funds will act as a deal flow accelerator, enabling the fund to select from the most attractive direct co-investment opportunities .

“Typically what happens is that of 20 clean tech companies five will do extremely well, 10 will do okay and five will do less well. The five that are doing the best they will probably need the most financing,” says Musters.

Robeco plans to step in to maintain the funding momentum of successful businesses, he says. “Many dedicated clean tech funds are relatively small, with between $200m (€145m) and $300m, so for these funds it is quite difficult to take their most successful companies through the whole growth phase.

“We see a funding gap in the later stage, larger deals, and that’s where we will actively step in to become active co-investment partners with a relatively low risk and act as a source of capital,” says Musters.

The Robeco Clean Tech Private Equity II fund made its first investments during the first quarter of 2007 - three new clean tech private equity fund investments, and its first co-investment in a clean tech company, Imperium Renewables Inc. a bio-diesel refinery business based in the US.

So why should pension funds invest in clean tech? For ethical or for financial reasons? Musters has no doubts. “The ultimate goal of clean tech investing is not to be more ethical than anybody else but to minimise risks arising from things like environmental pollution and take the opportunities which are derived from social and environmental trends.”