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Cleaning up with cleantech

Cleantech has been hailed the saving grace in the financial Armageddon of late. Once synonymous with visions of melting polar caps, today this sector is generating a buzz for all the right reasons, writes Fiona Bond.

By late 2009, global venture investments totalled $5.6 billion, according to Deloitte, and accounted for nearly a quarter of all venture capital invested during the course of the year – more than any other category - propelled along by a strong political headwind.

The growing need for energy independence from governments and corporations, coupled with a thirst for innovation and opportunity, has put cleantech firmly on investors' map.

However, given that the financial markets were shaken to their very core during the recession, there remains an understandable concern that the relative immaturity of the sector – compared with more traditional sectors such as IT – could pose a threat to their returns.

Brad Miller, of US-based Peninsular Family Office, warns that investors need to remain wary of the media hype surrounding this sector. While he concedes that wind and solar pose interesting areas, the former-investment banker says the sheer amount of technology risk still associated with the area can be off-putting.

Miller, who heads up the multifamily office for wealthy individuals and families based in San Francisco, said: "When it comes to private equity investment into biofuels and the like, I believe it is too early. For certain clients there might be a fit with an ETF within this sector as it broadens their chances, but my focus remains on investor returns and other more important asset classes."

However, Constantin Salameh of Abu Dhabi-based Emirates International Investment Company believes the tide is turning for cleantech. Salameh, who heads up the investment firm for the family of Sheikh Zayed, believes interest in the field is definitely on the up in the Middle East.

"In this part of the world, there is a strong interest in renewable energy and that form of interest extends beyond family offices to family businesses and private offices," he explains.

Salameh says the sector offers both the option of investing directly through setting up businesses and ventures or making indirect investments through a green fund, but says his business has more interest in setting up ventures with foreign companies because it provides an element of control and has a greater public impact.

EIIC is currently in talks with Swiss firm Swiss Indo about setting up a joint venture to promote the company's green products across the UAE.

"You have a lot of companies looking for funds and a local partner who will be able to help them promote their products in certain parts of the world," Salameh says.

While he admits that cleantech still accounts for less than 2% of the business' allocation, he said this will undoubtedly change over the next two to three years. The introduction of MASDAR, which will build a city fuelled entirely on renewable energy, has set the stage for family offices in the region to diversify their portfolios.

The same upturn in interest can be witnessed across European family offices. Private investment firm Stanhope Capital, originally formed around a group of prominent European families, reported an increase in the number of enquiries from its clients and while to date it has only allocated to clients who have asked for specific exposure, the rise in enquiries has led it to interview a number of managers in the sector.

At present, energy investments account for very little of Stanhope Capital's entire portfolio, but the company expects this to increase to 5% in the not-too-distant future.

Mike Reid of Engelhorn family-backed Frog Capital believes that while returns play an important role, cleantech feeds into the philanthropic nature of family offices that most other sectors miss, and says that the decision to invest is equally divided between financial and emotional gain.

While cleantech really came to the fore with the arrival of the Obama Administration and the introduction of government stimulus packages in what remains one of the world's top oil consuming nations, Europe had already forged a deep affinity with the clean energy movement, in part lead by Germany. Emerging market giant China has also been quick to follow suit, with a pledge to plough $220 billion into renewable energy.

The credit crunch and lack of bank lending has arguably pushed private investment to the fore at a faster rate than anticipated, as emerging companies clamour for specialist support and financing. Guy Paterson, chief executive of the London Family Investment Office of Unigestion, believes investors are growing in confidence as we emerge from recession.

"Given what has happened over the past two years, many families regard anything they can't sell tomorrow as a risk. However, families who have been well advised and avoided blow ups are now seeing value in the illiquid markets and there is an upturn in interest for this sector."

Steve Mahon of close-ended investment company Low Carbon Accelerator echoes these thoughts and argues that cleantech is emerging as a bonafide investment option for the private sector: "Now is a good time for the more conservative investor to enter the cleantech market, as it emerges out of its embryonic phase and there is no doubt that the trend is happening faster than people envisaged."

There is agreement that the sheer size of government and corporate involvement has made cleantech much more of a business and political risk than a technology play and helped to cement its growth.

However, family offices are warned not to enter cleantech lackadaisically. Reid has noticed a boom in fund of fund investments recently and said the nature of family offices make them less inclined to make direct investments into a company.

Investors who hope to gain from the strong regulatory policies, as the introduction of government-backed subsidies provide revenues with a quasi-governmental credit profile, should focus their attentions on countries which have adopted multi-year subsidy programmes.

Europe in particular fosters cleantech growth with an array of government incentives which can pose an attractive opportunity for those willing to take a minimum five-year view. In the UK, wind remains a popular choice among investors due to the environmental characteristics, while solar infrastructure is setting the pace in Spain.

With such a broad spectrum on offer, the desire to invest, however, runs the risk of being marred by confusion, and Mahon recommends family offices opt for a specialist manager due to the complexity attached to the sector.

"The regulatory environment continues to be complicated so it remains a specialist managers' domain at the moment," he says.

Paul Newsome, of private equity investment for research for Unigestion, said family offices would benefit from investing through a cleantech-focused fund of funds in order to gain exposure to a broad assortment of opportunities, due to the sheer diversity of sub-sectors and geographies on offer.

However, Newsome says that while renewable energy in Europe is already relatively mature in local markets, US and China are becoming increasingly important geographies to
consider. China is deploying alternative energies at a faster rate than anywhere in the world and has become the second biggest wind end-market and the largest manufacturer of solar panels in the world in a matter of years, although Newsome says investors should remain "wary of the different regulatory risks."

While the more traditional sub-sectors such as wind and solar are deemed to have their merits, areas such as carbon trading, which centre on multi-lateral agreements, should be addressed with a note of caution, due to the difficulty and complexity to implement such investments, the majority of family offices warn.

There also remains a certain degree of wariness for public listed companies which lack the quality of some of the private enterprises, omitting the vast majority of sub-sectors and severely limiting scope for investment.

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