Private Capital and Clean Energy - Taylor Wessing · Private capital and clean energy power...
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Private Capital and Clean Energy Exploring a growing relationship
Transcript of Private Capital and Clean Energy - Taylor Wessing · Private capital and clean energy power...
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About the research ......................................................................................................04
Foreword ..........................................................................................................................05
Executive summary ...................................................................................................... 07
> Private capital investors ready to plug widening funding gap
> Family offices lead the way
> Individual investors are unlikely to make an impact
> What is driving appetite?
> Certain sectors make more sense
> A direct and diversified investment strategy
The quest for an alternative funding source intensifies .................................09
> ...but here come the private capital investors
> Why are private capital investors attracted to the sector?
> Building on strong foundations
Private capital and clean energy power generation assets ...........................14
> What private capital can’t do
> It’s all about family offices
> Family offices prefer different sectors
> Different investment motives prevail
> The solar anomaly
> Pre-construction projects are also acceptable
> Direct investing will not always be in vogue
> Not all sectors or assets will feel their impact
> The sector trailblazers
> Unfortunately private individuals are being discouraged
> Retail bonds are no substitute
How private capital will impact the clean energy supply chain ....................21
> Synergies dictate investment strategy
> More capital means more structure
> Energy efficiency: the sector’s darling
> Solar still shines
> Offshore wind offers much promise
> Where angels like to tread
> But angels have their limitations
Contents
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The survey and report were written in collaboration with Clean Energy pipeline, a specialist provider of clean energy news, data and research. Transaction data has been extracted directly from Clean Energy pipeline’s deal databases.
The survey was conducted in February 2012 and was completed by four types of respondents: private capital investors (family offices, high net worth individuals, angel networks, private wealth managers), venture capital funds, private equity funds and corporates. To supplement the survey, interviews were conducted with the following individuals:
� Max Aitken, Director of Estover Energy, a developer of biomass combined heat and power plants in Scotland and England.
� Ron Ramage, CEO of Flexitricity, a developer of advanced demand-response smart grid technology.
� Jürgen Habichler, Founding Partner of Mountain Cleantech, an investor in cleantech companies based in German-speaking and Nordic regions.
� Jerry Biggs, Director of Ashberg and CEO of NAREC Capital, a provider of consultancy, corporate finance, insurance, asset management and technology testing services to corporates and investors in the clean energy sector.
� Paul Latham, Managing Director of Octopus Investments, an investment company offering a wide range of investment products including Venture Capital Trusts, Enterprise Investment Schemes and Inheritance Tax solutions.
� Daniel Colbert, Venture Partner at Wermuth Asset Management, an asset management company focused on Russian and Russia-related assets.
� Ben Goldsmith, Founding Partner at WHEB Partners, a dedicated clean energy investor managing two funds with £130 million of assets under management.
� Euan Cameron, CEO of Wind Prospect Group, a wind energy project developer and provider of infrastructure engineering and operations services.
About the research
This report analyses the potential for private capital to plug funding gaps in the European clean energy sector. Throughout the report, private capital investors are defined as private individuals or organisations investing on behalf of private individuals. Private capital investors include angel investors, high net worth individuals, family offices and private wealth managers. Venture capital, private equity and other institutional investors are not classified as private capital investors. The findings of this report are based on a survey of 120 senior business executives across Europe.
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There have been links between the high net worth community and the clean energy sector for some time. However, much of the information that is in the public domain has been associated with a relatively small number of private investors. Recently, we perceived that private capital was becoming more prominent in the sector and wanted to examine whether clean energy was still seen at the extreme of the alternative investment class or whether it has become more mainstream. Until now, so far as we are aware, no-one has carried out a detailed analysis of the level and type of private capital investment in the sector, or of the extent to which private money might plug the growing institutional funding shortfall.
This report sets out to put that right. For the first time we have asked private capital investors not just about their intentions for the sector, but about their investment motives and what sort of returns they are looking for. The findings make interesting reading. We believe that this publication is particularly timely, with reported investment in the sector from institutions and banks declining against a backdrop of diminishing government subsidies and ongoing initiatives to develop new breakthrough technologies.
By its very nature the world of private capital is discreet and it can be difficult to find investment data. We were therefore particularly pleased to receive the level of response we did from the survey, representing the views of many family offices, private wealth managers and high net worth individuals. We were also encouraged to learn that our perception of private capital’s involvement in the sector was confirmed by our survey’s findings.
This report is part of a broader debate about the future of the sector. The Taylor Wessing Future Energy Forum aims to stimulate dialogue around important issues facing the energy sector and those who are dependent on it. Through a combination of events, reports and round-table discussions we are providing an additional resource for those who are active in developing, financing and commercialising these energy sources. This is the third major report we have published looking at sources of finance for the sector, following an extensive analysis of traditional funding sources in Bridging the Funding Gap and a review of the impact of Chinese activity in Europe in the sector in Enter the Dragon. We hope that you too find it interesting.
Foreword
Key Contacts
Dominic FitzPatrickHead of Renewable Energy UK +44 (0)207 300 [email protected]
Carsten BarthollHead of Renewable Energy Germany+ 49 (0)40 3 68 03 [email protected]
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Private capital investors ready to plug widening funding gapThe quest for alternative funding sources for the clean energy sector has never been more acute. Venture capital firms that funded the first wave of European clean energy technology companies are either withdrawing from the sector entirely or moving up the value chain to support less risky, later stage businesses. To put this in context, European clean energy companies only secured $82 million in venture capture capital investment in 1Q12, under half the $210 million raised during the corresponding period in 2011. The funding picture for power generation projects is equally bleak. Only $7.4 billion was allocated to European clean energy projects in 1Q12, 45% below the $13.5 billion recorded during 1Q11.
In contrast, private capital investors are ready to increase their investment in the clean energy sector. Over 40% of surveyed private investors will allocate over 10% of their available funds to the clean energy sector during the next 18 months – a 300% increase on the number of investors that allocated this proportion of their available capital during the previous 18 months.
Family offices lead the wayWithin the private capital investment universe, family offices are poised to make the greatest impact on the clean energy financing landscape. Indeed, surveyed family offices are more interested in increasing their investment allocation in the sector at every financing stage than any other type of private capital investor.
Single and multi-family offices have more capital at their disposal than angel investors or wealth managers. This is the key differentiator among private capital investors, enabling family offices to adopt a more diversified investment approach that encompasses early and growth stage companies alongside more capital intensive renewable energy projects. Whilst private wealth managers have substantial funds at their disposal their current allocation seems much smaller than family offices, restricting their potential to make larger investments.
Individual investors are unlikely to make an impact In the last few years, several developers have raised project financing directly from individuals through retail bonds. Ecotricity was one of the first companies to raise capital this way, securing £20 million through two oversubscribed retail bond issues.
The fact that Ecotricity’s issuances were oversubscribed suggests that there is appetite for green bonds. However, private capital investors do not seem interested – over the next 18 months only 16% plan to allocate some of their portfolio to bonds.
In the UK, retail investors have become accustomed to investing in clean energy through EIS and VCT funds, which combine attractive tax breaks and government subsidies. However, since April 6th 2012 EIS and VCT funds no longer qualify for solar PV projects utilising feed-in tariffs. This will unquestionably reduce investment from private individuals further.
What is driving appetite?A number of factors have aligned, making the clean energy sector highly attractive to private capital investors. For a start, the withdrawal of conventional financing sources has created a funding vacuum – this is creating an opportunity to generate attractive returns for private capital investors. Over 60% of surveyed private capital investors cited the dearth of traditional financing sources as a reason for ramping up their allocation to the sector.
There is also an increasing acceptance that clean energy investments take longer to mature than conventional venture capital plays, which matches the longer term investment horizons of private capital investors (over five years).
Above all, private capital investors are motivated by extracting synergies from their investments in the clean energy sector. Investments in power projects enable private capital investors to monetise large tracts of land that would otherwise be sitting idle. In the clean energy
Executive Summary
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supply chain the focus is on identifying game-changing new technologies that might be integrated into other industrial and manufacturing companies within their business empire.
Lastly, private capital investors are more likely to introduce ethical and sustainability considerations into their investment decision-making process than institutional investors. That is not to say that private capital investors will back clean energy assets without undertaking serious due diligence, but that non-financial considerations may also play a role in their investment decision-making process.
Certain sectors make more senseEnergy efficiency is set to be the greatest beneficiary of private capital investors’ growing interest in the clean energy sector. The majority of private capital investor respondents intend to allocate at least some of their available funds to this particular sub-sector over the next 18 months, marginally ahead of recycling & waste and solar technology companies.
With its limited capital requirement, energy efficiency is a particularly appropriate sub-sector for angel investors and high-net worth individuals. Over two thirds of survey respondents agreed that the establishment of energy efficiency subsidies, such as the UK’s Green Deal, is an added incentive.
On the generation side, biomass and solar power projects are the most favoured sub-sectors according to 48% and 45% of surveyed family offices respectively. This is in stark contrast with institutional investors’ sector preferences. The interest in solar might seem surprising given the substantial tariff cuts, but even at reduced tariff rates some private capital investors with lower return requirements than investment funds still view a fixed term (often index linked) return on capital coupled with low maintenance requirements as attractive. For others, private capital investment in solar power projects may be focused on emerging markets where subsidy mechanisms are only just being established, such as in Central and Eastern Europe.
A direct and diversified investment strategyPrivate capital investors intend to adopt a more diversified investment strategy than institutional investors, which specifically includes backing high-risk early-stage businesses and projects, exactly the type of clean energy assets that are being sidelined by institutional investors.
Over 60% of surveyed private capital investors plan to invest in revenue-generating clean energy companies that are pre-cash flow positive. A similar proportion also intends to support pre-revenue companies. By investing directly in clean energy assets or companies at an early stage, private capital investors can exploit the potential synergies of an investment, which as outlined above is one of their primary investment drivers.
This also explains why private capital investors currently favour investing directly rather than through a fund. Over 60% of surveyed private capital investors plan to invest directly in the clean energy supply chain during the next 18 months. Anecdotal evidence suggests that private capital investors will migrate towards indirect investments and working more closely with institutional funds. However, for the moment they prefer to be masters of their own destiny.
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The European clean energy sector has long suffered from an acute funding gap. In the absence of a dynamic US-style venture capital industry, pre-revenue cleantech companies struggle to attract financing. On the generation side of the sector, project developers typically only secure project debt financing for proven technologies such as wind and solar. Other sectors with potential, like biomass, struggle to raise finance. Since 2009 the funding gap has continued to widen.
Transaction data underlines the true extent of the funding gap. In 1Q12 VC funds allocated $81 million to European clean energy companies, less than 40% of the $210 million invested in 1Q11. Early-stage venture capital declined most significantly, with only $71 million allocated to companies raising Series A-C finance in 1Q12. This is the lowest quarterly level recorded during the past two years. Private equity funds are also avoiding the sector. Excluding buyouts, private equity funds invested
$316 million in European clean energy companies in the last two quarters, 66% below the previous two two-quarter period.
“There has been a retrenchment of sorts amongst VCs in the cleantech space,” confirms Daniel Colbert, Lead Fund Partner at Wermuth Asset Management, which recently closed a €100 million fund dedicated to late-stage clean energy investments predominantly in Russia, Germany and the UK. “People who were investing strongly in this space have gotten out or are now doing less. The number of really significant dedicated venture investors in cleantech has shrunk.”
“More and more people are moving away from early-stage cleantech investing,” adds Juergen Habichler, Founding Partner of Mountain Cleantech, which has backed numerous clean energy companies in the German-speaking and Nordic region since 2007. “There is definitely a
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vacuum. There are a few players remaining – entities like High-Tech Gründerfonds and KFW in Germany. There are also a few corporate VCs that are still focusing on early-stage investing. That is the reason why we only focus on growth capital investing.”
The funding environment for clean energy power generation projects is equally challenging. Only $7.4 billion was invested in European clean energy projects in 1Q12, less than 55% of the $13.5 billion recorded during the corresponding period last year. In fact in 4Q11 European clean energy project financing reached its lowest level during the past two years.
“I think leveraged finance is decreasing,” explains Juergen Habichler. “Traditionally the German banks were very strong in providing leveraged finance for projects. I used to know about ten banks where you could go with good renewable energy projects
and get 70%-80% leverage for your project. Since 2008 their appetite for leverage has decreased.”
“There are still a few players but it is much more difficult now. You have to have a great track record and then if you are lucky you might get a maximum of 60% leverage. The world has changed. It is much more difficult to put capital together now, both from a private equity and project financing perspective.”
...but here come the private capital investorsFortunately, private capital, which includes family offices, private wealth managers, high net worth individuals and angel networks, looks set to at least partially bridge the funding gap. Over 40% of surveyed private capital investors will allocate in excess of 10% of their available funds to the clean energy sector in the next 18 months. This is almost
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Private capital investors
Venture capital fund not substantially funded by a family / family o�ces
Private equity fund not substantially funded by a family / family o�ces
0% Over 75% 50% - 75% 25% - 50% 10% - 25% Up to 10%
What percentage of your available funds do you expect to invest in clean energy in the next 18 months?
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
0% Over 75% 50% - 75% 25% - 50% 10% - 25% Up to 10%
How does this compare with your allocation in the last 18 months?
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Private capital investors
Venture capital fund not substantially funded by a family / family o�ces
Private equity fund not substantially funded by a family / family o�ces
three times the proportion that invested over 10% of their capital during the previous 18 months.
In contrast, venture capital and private equity funds remain cautious. The same proportion of venture capital firms (43%) plan to allocate over a quarter of their available funds to clean energy investments in the next 18 months as they did last year, while fewer private equity firms plan to allocate over a quarter of their allocation to the sector.
Why are private capital investors attracted to the sector?One of the primary reasons is the lack of conventional financing sources. Over 60% of private capital investors that intend to increase their exposure to the sector cited the dearth of more traditional investors in the sector as a critical or influencing factor in their decision.
“We have been surprised by the growth in interest in this area from families and high net worth investors,” said Jerry Biggs, Director of Ashberg Family Office and CEO of NAREC Capital. “At the
moment bank lending is almost non-existent and VC/PE funds are either reluctant or unable to invest in early-stage technologies within the clean energy sector. This is providing an opportunity for private investors to take up the slack and lock in early-stage value.”
Another critical point is the differing attitude amongst private capital and institutional investors with regard to the investment time horizon. A constant gripe amongst venture capital funds that have invested in the sector is that their portfolio companies have taken much longer to mature than they expected. Private capital investors are much more patient.
The investment philosophy of private capital investors is also very different. For example, ethical and sustainability considerations are genuinely important. Private capital investors are prepared to invest in a clean energy company or project even if they can generate a higher return elsewhere. In contrast, institutional investors are motivated purely by absolute returns. Non-financial factors rarely matter.
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As Daniel Colbert, Lead Fund Partner at Wermuth Asset Management notes: “What you will find in certain family offices, particularly those where the family founders have significant influence, is that they want to invest more in those areas that are aligned with their passions or interests. That’s not to say that family offices are not sophisticated, it’s just that their investment philosophy can be personal, and this can sometimes affect decisions.”
Whilst a more personal or strategic investment philosophy and a lack of institutional investors are two of the primary factors dictating the increase in investment in the clean energy sector by private capital investors, the most frequently cited factor (43% of surveyed private capital investors) was high oil prices. Government subsidies and good investment performance were the joint second most frequently cited major factors.
Building on strong foundationsIt is actually misleading to treat private capital as a new investor in the clean energy sector. Many venture capital funds that have invested in the sector over the last decade count family offices amongst their LPs. For example WHEB Partners, one of the most prolific European clean energy
investors in recent years with £130 million of capital under management, is funded through multiple family offices for its second cleantech fund including the Bamfords, which own JCB plc, the Goldsmiths and Simon Robertson, Chairman of Rolls Royce plc.
In fact, private capital’s significant contribution to the sector has been overlooked by many industry observers. This is largely due to the discreet investment approach of many family offices and wealth managers. Smaller early-stage investments also frequently attract less attention.
With a detailed understanding of subsidies, regulation, tax structures, and not to mention the clean energy sector itself, private capital investors are perfectly poised to make an even bigger impact on the sector.
The following two sections analyse the potential impact of private capital investors on the clean energy landscape, the sectors that will benefit and what underpins their investment rationale.
Sustained high oil prices are making the sector more attractive
Returns on investments have met our expectations in recent years
Subsidies / tari�s for the sector are still attractive
The dearth of more traditional investors in the sector is creating opportunities
We are con�dent that governments will continue to support the sector
Follow on funding for the sector has become more available
We are particularly attracted by energy e�ciency companies in the current economic climate
Cleantech is still a relatively early-stage sector which matches our investment strategy
Tax incentives have increased
We are increasing investment across all sectors due to the stage of our fund
Tari�s for renewable energy projects typically targeted by tax-based funds have increased
Major factor Slight factor Not a factor
Why is your capital allocation in the clean energy sector increasing? (Private capital investors)
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
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Direct investment in operational projects
Direct investment in construction-stage projects
Direct investment in pre construction-stage projects
Direct investment in project developers
Acquisition of a project or portfolio of projects
Investment through tax-based funds
Investment in fund-of-funds
Investment in private equity funds
Investment in infrastructure funds
Investment in bonds issued by project developers
Larger allocation No change Smaller allocation
How has your renewable energy generation investment strategy changed compared with the past 18 months? (Family o�ces)
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
What private capital can’t doMost private capital investors lack the funds to invest in clean energy power generation assets given the significant capital required to bring projects to fruition. Angel investors focus their resources on early-stage technology companies whilst private wealth managers typically target less risky fixed income assets. Even if a syndicate of private individuals could finance a renewable energy project, it is unlikely that a bank would be willing to provide debt funding without a recognisable equity sponsor.
“I don’t think securing private capital financing for projects is possible for us,” explains Max Aitken, Director of Estover Energy, which is seeking to develop a series of biomass combined heat and power facilities across Scotland and England. “Our build costs are in the region of £50-£60 million where the equity component is probably £20-£30 million. It’s a lot for private investors. Also, we intend to raise non-recourse project finance and the banks want to see strong counterparties. A syndicate of private individuals, even if they could raise that amount, is unlikely to provide banks with the comfort that should something go wrong, they could write an extra cheque.”
Private capital and clean energy power generation assets
It’s all about family officesFamily offices, which have already allocated significant capital to clean energy power generation assets during the last decade, are the one class of private capital investor that can make an impact. Indeed, many family offices are now seeking to increase their exposure – almost a third of surveyed family offices plan to increase their allocation to operational and construction-stage projects over the next 18 months, while over 60% plan to allocate at least some of their available funds to pre-construction stage projects.
Family offices prefer different sectorsSurvey data reveals that family offices are prepared to accept a greater degree of risk compared to conventional investors when investing in renewable energy power generation assets, both in terms of sectors and investment stage.
For example biomass, which has systematically been overlooked by institutional investors in recent years due to technology and feedstock supply risk, is the preferred sector for family offices (selected by almost half of surveyed family offices). This is great news for European biomass project developers who have struggled
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Solar projects/project developers
Hydro
Marine (wave & tidal)
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In which clean energy sub-sectors are you planning to invest in power generation assets over the next 18 months? (Family o�ces)
Signi�cant allocation Some allocation No allocation
to attract investment in recent years. Only 11% of the $54.8 billion project financing allocated to European renewable energy projects in 2011 was allocated to biomass plants, underlining its limited appeal compared with other clean energy sub-sectors.
Two recent deals confirm that biomass represents an attractive investment opportunity for family offices and high net worth individuals. In late 2011 Helius Energy, one of the UK’s leading biomass project development companies, secured investment from wealthy individuals Alastair Salvesen and Ann Gloag as part of its £6.6 million fundraising – both are members of families that have a wide range of business interests. Similarly UK-based waste-to-energy project developer Tamar Energy Ltd, secured investment from Lord Rothschild’s family interests as part of a £65 million capital raise in February 2012.
Family offices are also more willing to invest in the wave and tidal energy sectors. Both sectors are simply “too risky” for traditional investors. Over 35% of surveyed family offices plan to allocate capital to the wave and tidal sector during the next 18 months, almost twice the proportion of surveyed venture capital and private equity funds.
Different investment motives prevailSurveyed respondents suggest that family offices invest in renewable energy power projects that
deploy less mature technologies in part because they do not have to compete with traditional financing sources.
Most banks and investors require visibility on the operational performance of renewable energy assets before they commit capital. As a result projects that deploy less mature clean energy technologies struggle to secure funding, which creates an opportunity for family offices to lock in highly attractive returns.
This explains why family offices are not attracted by wind power projects, since a financing market for this technology already exists. Only a quarter of surveyed family office respondents plan to allocate at least some of their portfolio to wind power assets, making it their least attractive sector.
The solar anomalyAlthough it is relatively mature, the solar power generation sector is also highly attractive to family offices – 45% of surveyed family offices intend to allocate at least some of their available funds to solar power projects or project developers during the next 18 months, making it the second most attractive sector behind biomass.
The attraction of solar can partly be explained by the fact that there are many small-scale solar PV projects in need of investment that are often
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overlooked by banks or project equity investors. The flight of conventional funding sources from the sector as high-profile bankruptcies have proliferated has also played a part.
Solar also has an added advantage over wind in that equipment costs have fallen heavily in the last two years, making a material impact on overall development costs. Indeed 60% of survey respondents have increased their appetite to invest in solar projects and project developers in the last 18 months as a direct result of plummeting costs across the entire supply chain.
This reduction in costs goes some way to explain why private capital investors are not completely sidelining investments in solar power assets in light of widespread tariff cuts – over 40% of surveyed private capital investors are not reducing their exposure to the sector in response to tariff cuts.
Pre-construction projects are also acceptableIn addition to assuming technology risk, project developers will be delighted to hear that family offices are prepared to invest in pre-construction stage projects. In fact, surveyed family office respondents indicated a similar appetite to invest
in construction stage projects (68%) as pre-construction and operational projects (63%).
Family offices’ willingness to accept a higher risk profile when backing renewable energy power projects is driven by two factors. Firstly, family offices invest their own capital, which enables them to invest in projects that are potentially unsuitable for institutional investors.
Secondly, and perhaps more importantly, many family offices invest in the clean energy sector for strategic reasons, be that in the form of backing a project located on their own land or with the objective of winning equipment and/or services orders for other companies within their wider business empire.
Direct investing will not always be in vogueAt present family offices are more inclined to invest in renewable energy generation projects directly than through a private equity or infrastructure fund. Two thirds of surveyed family offices intend to allocate at least some of their available funding to power projects directly. Only 5% prefer to invest indirectly through a private equity or infrastructure fund – investing through a fund essentially eliminates any synergies that are derived from a direct investment.
Direct investment in construction-stage projects
Direct investment in pre construction-stage projects
Direct investment in operational projects
Direct investment in project developers
Acquisition of a project or portfolio of projects
Investment through tax-based funds
Investment in private equity funds
Investment in infrastructure funds
Investment in fund-of-funds
Investment in bonds issued by project developers
Signi�cant allocation Some allocation No allocation
How do you plan to invest in the renewable energy power generation sector over the next 18 months? (Family o�ces)
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
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However, certain industry observers expect the current preference for direct investments to change, particularly among family offices interested in the clean energy sector but without other strategic motivations.
“In renewable energy generation it’s more of a mix between investing directly in projects and investing in funds,” explained Ben Goldsmith, Founding Partner at WHEB Partners. “There are lots of families out there that own a solar, wind or biomass plant. The real early families came to this because they had property and wanted to develop projects on their own land. Those are the real trailblazers. Now more and more family offices are looking at private equity funds as an asset class.”
Not all sectors or assets will feel their impactWhilst survey data indicates that family offices will become increasingly active in solar PV and biomass projects over the next 18 months, other sectors will remain almost untouched.
Family offices are also likely to focus on small-scale projects, leaving the financing of assets over 50 MW to utilities and institutional investors. This is actually good news for the sector, as it is the smaller projects that are most frequently ignored by large institutional investors. It also clarifies exactly where family offices will make their greatest impact.
“In Europe the vast bulk of the renewable energy capacity that will be built out will be small-scale solar and wind projects of 3 to 30 MW that need €5-50 million in capital,” explained Ben Goldsmith. “These are way beneath the radar of the traditional investors in renewable energy such as the BlackRocks, the Blackstones and the Riverstones of this world as well as the big banks and the utilities. They won’t really get out of bed for a project that requires anything less than €100 million.”
“So for the smaller projects you are essentially talking about a new asset class. Thousands of local real estate developers, construction companies and landowners throughout Europe have permitted projects that require money to commence construction. They don’t know where to find it.”
Family offices also tend to be more domestic in their investment focus. For example, only UK-based surveyed family offices plan to allocate a ‘significant’ proportion of their funds within the UK over the next 18 months.
The sector trailblazersAs important as providing funding is, the most significant role family offices have played and continue to play is in proving the investment credentials of renewable energy projects.
For Europe to meet its 2020 and 2030 renewable energy targets large institutional investors such as pension funds and life insurance companies need to re-finance operational assets so developers can recycle capital into new projects. This is not yet happening on a regular basis. By financing the first wave of small-scale renewable energy projects, family offices have demonstrated that these assets are capable of generating long-term predictable returns.
“It’s all very well sitting down with a pension fund manager and saying ‘these kind of assets will give you an 8% yield without any leverage at all for 25 years index linked’, but they won’t believe it until others have gone out and proven it,” confirms Goldsmith. “That is where family offices come in. Family offices tend to be ahead of the curve and slightly more entrepreneurial. However, we are nowhere near the point where a pension fund manager considers it normal to allocate 5% of his assets to renewable energy infrastructure. We will get there but the asset class is not yet institutionally credible.”
Unfortunately private individuals are being discouragedAside from family offices, private individuals have been increasingly active in recent years, investing equity in clean energy projects through tax-efficient vehicles that offer lucrative tax breaks in addition to any potential capital gain. The minimum investment requirement in these tax-based funds is relatively low, which has made them highly accessible to individual investors.
Tax-driven investment has been especially popular in certain countries and sectors, most notably in unlocking individual investment in UK solar PV projects. Indeed, in late 2010 a large number of fund managers including Octopus
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Investments, Matrix Group, Goldfield Partners and Future Capital Partners, all began raising EIS (Enterprise Investment Scheme) and VCT (Venture Capital Trust) funds specifically to invest in solar PV projects subsidised under the feed-in tariff programme. When UK solar PV feed-in tariffs for 50KW-5MW projects were cut by up to 70% in early 2011, these ended up being the only funds that could still justify investing in these assets.
“In the early days, going back to the early part of 2011, we were competing with normal commercial investment funds, essentially funds making direct investments into solar projects,” explained Paul Latham, Managing Director of Octopus Investments, which is one of the largest managers of renewable energy VCT and EIS funds in the UK. “With the feed-in tariff reductions, investors that do not enjoy tax breaks are no longer interested. There are still people that are doing it for non-commercial reasons, green organisations such as the National Trust and corporates like Toyota for PR purposes even if the economics don’t necessarily stack up, but most have gone away.”
This funding source vanished from 6 April 2012 due to the UK government’s decision to prevent EIS and VCT funds from investing in solar PV projects subsidised by a feed-in tariff. Our survey data confirms that private capital investors will reduce their investment in the renewable energy power generation sector via tax-based funds as soon as the new legislation is implemented. Only 24% of surveyed private capital respondents plan to invest some of their portfolio in the clean energy sector through tax-efficient vehicles over the next 18 months. This is almost 50% below the percentage of respondents that plan to allocate capital to direct investments in construction-stage and operational projects.
“After April there will be no funds raised via VCT and EIS vehicles for solar PV projects benefiting from the FiT subsidy since it is no longer allowed under HMRC rules,” confirms Latham. “There are lots of different options available to us but we certainly won’t be investing in feed-in tariff based solar PV projects. We may do anaerobic digestion or wind projects still leveraging the feed-in tariff, or projects leveraging other subsidies such as ROCs or the renewable heat incentive, or maybe solar projects in markets where there is already
grid parity such as in the Caribbean. In fact, we may not invest in renewable energy at all.”
“The volume of financing allocated to the renewable energy sector through tax efficient funds in the UK will definitely decline after April 6th. The rules regarding feed-in tariffs also encompass Germany so we couldn’t go to Germany next year and invest there through VCT and EIS either. It’s pretty wide-ranging.”
Retail bonds are no substituteAnother way to finance the construction of clean energy power projects is to issue retail bonds. Essentially the idea is that project developers issue bonds in small denominations to individuals at a fixed rate of return over a relatively short time period. As soon as construction is complete, the assets are refinanced at a more favourable rate with a bank.
In December 2010, this structure generated tremendous hype after UK renewable energy project developer Ecotricity raised £10 million through an oversubscribed retail bond. This was followed by a second £10 million issue in December 2011. Ecotricity’s most recent bond offered subscribers an annual fixed rate return of 6.5% for its customers and 6% for non-customers over an initial four-year term. The minimum subscription of £500 meant that the bonds were accessible to small individual investors with limited savings.
Raising capital this way is attractive because it effectively eliminates banks. The bond is priced at a similar level to funding that Ecotricity might have secured from a commercial bank but it offers individuals a much higher interest rate than they would find anywhere else. Retail bonds also appeal because they enable investors to invest in something “green”.
Ben Goldsmith, Founding Partner at WHEB Partners is optimistic about their impact. “I think we will see a burgeoning market amongst retail investors for green bonds that are diversified across a number of projects and are available in small denominations. If you have a £50,000-£100,000 savings account and a financial advisor, you could imagine Ecotricity-type bonds finding their way into the fixed income segment of that portfolio. I think that’s a way to address the mass market.”
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Others are less sanguine about their impact and, based on our survey data, the majority of private capital investors do not seem particularly interested in this type of asset. Indeed, only 16% of private capital investors intend to invest some of their available funds in bonds over the next 18 months and none plan to allocate a significant proportion. This makes bonds the least attractive vehicle for private capital investors to invest in renewable energy power projects.
In defence of retail bonds, the survey data is largely explained by the dearth of retail bonds on the market. However, it is worth noting that other developers have found retail bonds far less user-friendly than Ecotricity. As an example, in 2011 UK wind energy EPC group Wind Prospect only raised £2.3 million out of a targeted £10 million bond to finance the construction of a series of wind farms. Wind Prospect used a similar bond structure to Ecotricity.
“To be honest we saw Ecotricity succeed and thought why shouldn’t we?” explained Wind Prospect CEO Euan Cameron. “We weren’t nearly as successful though and the reason we weren’t is that we didn’t have the mailing list that Dale Vince (Ecotricity CEO) has through the green energy supply side of his business. The difficulty we had was getting the attention of private wealth managers and family offices and people like that.”
“The challenge for us was essentially getting hold of the right people. I would certainly only do it again if I had the mechanism for getting in touch with people, and there really isn’t one at the moment. Family offices are the obvious people to go after but it was difficult to get their attention.”
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Synergies dictate investment strategyPrivate capital investors exhibit a similar appetite for risk irrespective of whether they are assessing an investment in the clean energy supply chain or a power generating asset. Over 60% of surveyed respondents intend to invest in revenue-generating companies that are not yet cash flow positive, whilst a majority are interested in investing in companies that are still pre-revenue.
The clear preference among private capital investors is to make these investments directly rather than through a fund - over 60% of family offices plan to allocate at least some of their portfolio to the clean energy supply chain via direct investments over the next 18 months. Less than 25% of family offices plan to invest through venture capital, private equity, tax-based funds or funds of funds.
Similar to their power generation investment strategy, the motivation for private capital investors to make direct investments in early-stage clean energy supply chain companies stems from their desire to support companies
that offer synergies with their existing business interests. This is especially true for family offices, who regard investments in the clean energy supply chain as an ideal opportunity to gain a proper understanding of technologies and processes that might be implemented across their wider business.
“On the private equity side, lots of the families investing in clean energy have operational businesses themselves and therefore see teams of engineers within their own businesses looking at ways to improve the efficiency in which they use commodities,” explained Ben Goldsmith, Founding Partner at WHEB Partners. “Whether that’s more efficient vehicles or more efficient refrigerators in supermarkets or more efficient hydraulics in large manufacturing businesses, they can see the green industrial revolution occurring in their own business. They have got excited about this and see it as an emerging investment theme. Most of the families that I have come across that have invested in this area have operational businesses and are not just financial investors.”
High net worth individuals are equally enthralled by investments in clean energy supply chain
Direct investment in private revenue generating companies that are pre-cash �ow positive
Direct investment in private companies that are cash-�ow positive
Direct investment in private pre-revenue companies
Investment in shares of publicly traded companies
Investment in private equity funds
Investment in tax-based funds
Investment in fund-of-funds
Investment in hedge funds
Investment in venture capital funds
Investment in bonds issued by public companies
Investment in bonds issued by private companies
Signi�cant allocation Some allocation No allocation
How do you plan to invest in the clean energy supply chain over the next 18 months? (Private capital investors)
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
How private capital will impact the clean energy supply chain
22 |
0 10 20 30 40 50 60 70 80 90 100
Energy e�ciency
Recycling/waste management
Solar technology/equipment manufacturers
Water/waste water treatment
Wind technology/equipment manufacturers
Energy storage
Green transportation
Advanced materials
In which clean energy sub-sectors are you planning to invest over the next 18 months? (Private capital investors)
Signi�cant allocation Some allocation No allocation
companies that offer synergies with their wider business activities. Jerry Biggs, Director of Ashberg and CEO of NAREC Capital comments: “High net worths like to own the value chain and not just invest for the sake of financial returns. So if you are a shipping magnate and you want to move into offshore wind, you invest in or acquire companies that fulfil your business ambitions.”
More capital means more structureAs the appetite of family offices to invest substantial capital in the clean energy supply chain grows, they are likely to become reliant on investment funds to improve their deal flow and access greater industry expertise. This may not be their preferred method of investing, and strategically it has certain disadvantages, but it is a natural evolution of private capital as an asset class.
“Family offices are thinking more long term,” explained Juergen Habichler, Founding Partner of Mountain Cleantech. “They often have an entrepreneurial background and run their own businesses, so they want to invest equity in companies. The problem is that family offices don’t have the deal flow or the expertise in cleantech to invest directly. So what we are seeing is family offices increasingly investing
alongside us in fundraising transactions in addition to investing in our funds.”
Energy efficiency: the sector’s darlingThe energy efficiency sector is poised to benefit most from increasing private capital investment in the clean energy supply chain, with 51% of private capital survey respondents expecting to allocate at least some of their available resources to the sub-sector over the next 18 months. Energy efficiency is preferred marginally ahead of recycling & waste and solar technology & equipment companies (47%). In contrast, the green transportation sector only appeals to 23% of surveyed respondents.
For angel investors, the lure of energy efficiency is entirely logical given that it is significantly less capital intensive than mainstay sectors such as solar and wind.
As Ron Ramage, CEO of electricity demand response software developer Flexitricity explains: “In this sector you don’t need a significant amount of money to start a business or to establish a product. Angel finance is an excellent way to do that. It’s not as if we need to go and build a big manufacturing plant where you would have to bring in a head of manufacturing and require significant venture capital. You can start a business and build a product on a lot less and
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that is really where the sweet spot is for angel investors.”
It is not only the low capital intensity of energy efficiency that the private capital investor community finds compelling. It is also subsidies such as the UK’s Green Deal – a view supported by 67% of surveyed respondents.
Solar still shinesPerhaps surprisingly, the solar supply chain also looks poised to benefit from an influx of private capital investment (even if interest in the sector is not as strong as it has been in prior years).
During the past year, many leading European solar equipment manufacturers have become
financially insolvent due to a damaging combination of heightened competition from low-cost Chinese products and feed-in tariff cuts in some of Europe’s largest solar markets.
These developments have not gone unnoticed by private capital investors – 78% have reduced their appetite to invest in the solar supply chain during the next 18 months due to price attrition, while 61% have been dissuaded by the large number of high-profile bankruptcies.
Despite this, solar still shines. Almost 50% of surveyed private capital investors plan to allocate at least some of their available funds to the solar equipment supply chain during the next 18 months, making it the third most attractive
Attractive in the current economic climate
Attractive as incentives for renewable energy generation projects are reduced
Attractive due to incentives such as the UK’s Green Deal
Attractive as venture capital interest in the sector is increasing
Harder for private capital investors to analyse than renewable energy plays due to their reliance
on complex software and/or technologies
Strongly agree Agree Disagree Strongly disagree
To what extent do you agree with the following statements regarding private capital investment in energy e�ciency? (Private capital investors)
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Energy e�ciency investment opportunities are becoming increasingly:
The solar supply chain has matured to such an extent that opportunities for us to invest
in early-stage private companies are limited
Solar feed-in tari� cuts across Europe’s major markets have reduced our appetite to invest in the sector
Plummeting solar wafer/cell/module prices have increased our appetite to invest in projects/project developers
Plummeting solar wafer/cell/module prices have reduced our appetite to invest in the supply chain
There are still opportunities for early-stage solar technology companies to compete with established players
High pro�le bankruptcies in the solar supply chain have reduced our appetite to invest in the sector
Strongly agree Agree Disagree Strongly disagree
To what extent do you agree with the following statements regarding private capital investment in solar? (Private capital investors)
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
24 |
clean energy sub-sector. However, unlike in other sectors they are focused solely on later-stage companies. The reality, confirmed by 75% of surveyed private capital investors, is that the solar supply chain has matured to such an extent that opportunities for private capital investors to invest at an early stage are very limited.
Offshore wind offers much promiseFor similar reasons private capital investors agree that there are few opportunities for them to invest in early-stage companies active in the wind supply chain.
Opinion is divided on whether private capital investors can play a role in the mass build-out of offshore wind capacity in Europe over the next decade – just over 50% of surveyed capital investors are planning to invest in the offshore wind sector during the next 18 months. On the one hand, it is highly unlikely that private capital investors will have the financial clout to finance projects themselves. However, family offices ought to be able to identify opportunities in the supply chain, particularly in areas around turbine installation and maintenance.
Where angels like to treadGrowing interest from angel and high net worth individuals is welcomed with open arms by early-stage technology companies, not just because they represent an alternative funding source, but also because they typically adopt a more long-term investment strategy. Over two
thirds of survey respondents believe that private capital investors’ longer holding period and less exit-driven strategy are advantageous to clean energy companies.
Max Aitken, Director of Estover Energy, which has raised significant capital from individuals and family offices, notes: “Firstly there are very few venture capital funds who invest at the seed stage, if any at all. And secondly the time horizon for venture capital firms is limited by the lifetime of their fund, even though renewable investments can be by their nature very long term. We want to build a company over the longer term and we want to make sure that we are aligned with our investors. We were concerned about the short timeframe of certain funds.”
These are not the only advantages for clean energy companies sourcing capital from private capital investors. Over 70% of survey respondents consider private capital investors’ willingness to add value to portfolio companies from an operational perspective advantageous.
But angels have their limitationsSadly angel investors cannot do everything. They can bridge some of the funding gap created by the flight of venture capital funds, but they lack the financial muscle to support companies seeking development or growth capital. Angel investors also tend to be cautious, often only willing to commit very small investments at a time. This means that their investee companies
The wind supply chain has matured to such an extent that opportunities for us to invest
in early-stage private companies are now limited
There are many opportunities for us to invest in European o�shore wind projects, o�shore
project developers and/or the o�shore supply chain
The tari� regime in the wind sector seems less volatile, which makes it our preferred clean energy sector
Bonds issued by wind project developers are attractive investment opportunities for us
There are still opportunities for early-stage wind technology companies to compete with established players
Strongly agree Agree Disagree Strongly disagree
To what extent do you agree with the following statements regarding private capital investment in wind? (Private capital investors)
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
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constantly need to engage with their investors, which is time consuming and potentially costly to a business.
“One of the problems that you often get (with angel investment) is that small companies can get diverted from actually growing the business as their focus is constantly on revisiting this funding cycle,” explained Ron Ramage, CEO of Flexitricity Ltd, which has financed its early-stage activities through investment from the angel group Archangel Informal Investments. “It takes time to raise financing properly. You have
to keep all shareholders informed and go through all the due diligence. There is also lots of legal work required. This soaks up a lot of time and resources. It does impact your growth rate, there is no question of that. It’s a question of timing when to take a big slug of growth financing and cut the umbilical cord with angel investment.”
Angel investors are also incapable of investing in capital-intensive clean energy sectors such as wind and solar, which require significant funding even at an early stage of development.
Private investors are more likely and willing to add value to the business from an operational perspective
Private investors adopt a more hands on approach to their portfolio companies
Private investors have a longer investment horizon
Private investors are less motivated by an exit
Private investors know the industry better as they typically invest in sectors they understand well
Private investors are less demanding in terms of due diligence meaning �nancing can be raised more quickly
Private investors are better connected with other �nancing sources
Private investors are less demanding in terms of valuation and shareholder rights
Major advantage Signi�cant advantage Slight advantage Untrue
What are the main advantages of sourcing capital from private investors compared with institutional investors for clean energy companies?
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
26 |
Taylor Wessing has been advising on legal issues relating to climate change in key areas such as clean technologies, renewable energy, environment and planning, and emissions trading for many years. We have also consistently worked to minimise the impact our own business has on the environment. We have implemented an Environmental Management System and are the first law firm to be awarded the internationally accepted standard, ISO 14001, by the BSI.
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Our Energy and Environment Group brings together a team of lawyers with specialist expertise from across our international offices. We provide expert legal advice in a number of key areas such as clean technologies, renewable energy, environmental planning and emissions trading. Our clients in the cleantech and renewable energy sectors include early-stage companies, developers, utilities, investors and financiers.
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