Some very, very large check-writers have been getting bigger and more interested in private equity investments. Sovereign wealth funds and large pension funds don't get a lot of attention, but they're huge players in the investment world. And as I've been speaking with several members of that community, two points have come through fairly clearly: 1) many (especially those outside the U.S.) are interested in doing direct investments in the cleantech space, broadly defined; and 2) they feel stymied in trying to do so.
They are interested in investing in cleantech markets for the same reason you are, Gentle Reader: because the macro trends are too obvious on a global scale to not eventually result in massive market shifts and the emergence of significant new profit pools.
But when it comes to cleantech venture investments, they're largely sitting on the sidelines. Why?
First, check size. Talking with these investors, even in their direct investments, they need to write really large checks compared to what most VCs are used to. A $50M check can be perceived as too small of a bet to bother with. And so that significantly limits the universe of types of "venture" deals they can invest in.
In other sectors, however, they can dabble in very-late-stage deals where the exit path is obvious and near-term (the so-called "venture rounds" into companies like Facebook at super-high valuations, for example). But of course, in the cleantech sector we haven't seen any of these. Sure, there have been some IPOs, but no obvious blockbusters. So their direct venture investments are flowing into sectors other than cleantech right now.
These large investors also have a hard time getting involved in cleantech venture capital as LPs for largely the same reason. You'd think venture firms would love a $50M allocation from an LP, but many of these LPs have restrictions about being more than 10% to 20% of a fund, as well as about participating in the first close of a fund. Which means, therefore, that they need to be targeting funds that will be several hundred million dollars in size and get to a sizeable first close without them. But that's hard to find among cleantech specialist VCs right now. And as well, it's not like the existing returns from cleantech GPs have been very impressive to date. So rather than desperately finding ways to squeeze an allocation into a cleantech specialist VC's newest, smallish fund, interested SWFs and large pension funds are instead settling for the cleantech activities of the generalist VCs (those with really big brand names) they've backed.
One other path would be for these funds to get into project finance investments. Some are, but that's also not easy. First of all, it's likely a different team and different mandate within that investor's organization. Second, there aren't a lot of large-scale cleantech-specialist project finance firms out there, either. So the same problem with cleantech venture capital presents itself: back lesser-branded developers' projects, or go with the traditional energy project finance firms that aren't making renewables central to their activities? And third and perhaps most important, the types of cleantech sectors they can get into through these activities are very limited, usually consisting only of large-scale powergen and production facilities. There remain very few large-scale ways to play energy efficiency project finance, or green agriculture project finance, or even water-related project finance.
What all this means is that, as frustrating as it might be for entrepreneurs and specialist VCs, there are some really deep pools of capital that are interested in playing the cleantech investment thesis, but that are currently sitting on the sidelines. Which says there will be a threshold effect. We started to see what this might mean in the 2007-2008 timeframe when some of the higher-profile cleantech sectors got frothy and started getting some of these dollars. The cycle's down right now, but it will come back. And when that threshold gets breached, the capital inflows into this sector will explode.
It's not an 'if' -- but the 'when' remains very much unknown.