Cleantech investment continues to boom

Early stage investment is continuing to pour into cleantech, with a record $4 billion invested globally in the first half of 2010 alone. The UK was the biggest European recipient of venture capital with nearly 20 companies receiving over $100 million, according to Cleantech Group.

Companies working in solar power received the most venture capital funding, followed by those dedicated to biofuels. Next came those companies working on the development of a comprehensive smart grid to monitor and better manage energy distribution. Businesses dedicated to improving energy efficiency were the fourth most popular targets among early stage investors.

Availability of funding

Laurence Whitehead, Corporate Finance Principal at MacIntyre Hudson, comments: "Now is clearly a good time to be working in, or advising, up and coming cleantech companies. There appears to be plenty of money available from venture capitalists. Research from Prequin indicates that dedicated cleantech venture capital houses have $12 billion to invest worldwide, of which some $3 billion is earmarked for the UK. These firms are also currently in the process of raising a further £$26 billion, of which $3.5 billion is set to be invested in the UK. Even before we consider generalist venture capital investment funds, who are also expected to invest heavily in the sector, this means over $6 billion of funding is available for cleantech investment in the UK alone!"

Not only is funding available, but the number of viable businesses in which to invest appears to have soared, a trend which is likely to continue. The volume and quality of companies seeking to raise cleantech funding is increasing rapidly as entrepreneurs and managers seek to tap the huge potential growth potential of the industry rather than going into IT.

Not all is a bed of roses however. Although there is a huge level of funding available via specialist and generalist venture capital houses, business owners will find that cash will inevitably become more difficult to source as competition for those funds begins to intensify - especially for those businesses in the very early stage of development with little or no track record.

Laurence adds: "Although it would appear to be a buyer's market, investors are more likely to play it safe at the moment by putting money into businesses with proven revenue streams rather than those just starting out. However, investment in early stage cleantech is certainly far more buoyant overall than early stage investment into other sectors of the economy."

M&A activity

The current climate in the larger M&A market for cleantech deals is far less positive and activity remains low. In 2010 there were about 25 'alternative energy and co-generation' deals involving a UK party. These deals were worth approximately $1.6 billion. Compared to recent years this is nothing exceptional and, indeed, is lower than the levels of deal activity achieved during 2006 to 2008.

Laurence says: "Large conglomerates are positioning their businesses towards a wide variety of projects in such areas as energy efficiency, healthcare and wind. In most cases they are either buying early stage companies or they are developing projects in-house using their own internal expertise."

Many investors still feel that the trough in cleantech M&A activity is largely due to banks' continuing reluctance to lend and caution amongst venture capital and private equity houses due to conflicting, and often weak, economic data. The stated aim of many governments to embark on major cost cutting exercises does not help sentiment either. As a result, there is a more cautious view developing amongst investors and a lot of the hype created around cleanteach in recent years ago appears to be relenting.

Laurence concludes: "There is currently not much M&A activity in the sector - it still appears to be too early for that given the early stage development of many businesses. However, it is bound to pick up again as the economy improves and funders loosen the purse strings a little."

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