Ethical Investor, Page: 10
Wednesday, 21 June 2006
An amalgam of industries that have at their core an ability to generate sustainable business outcomes, new environmental technologies or 'cleantech' is an area of increasing interest for ethical and mainstream investors alike. As the Australian cleantech sector continues to emerge it looks set to attract the all important 'big money' from institutional investors just as it is starting to do overseas. Last year's first study entitled The Australian Cleantech Map: 2005 Benchmark Report defined cleantech as 'a theme for investments' across a range of sectors including: alternative and renewable energy, new materials, green buildings, water purification and conservation, recycling and waste management technologies. The study identified 71 companies listed on the Australian Stock Exchange with a business model that is related to cleantech, the majority of which are considered small companies or 'microcaps'.
In total they only accounted for 0.8% of the ASX stockmarket capitalisation. While there are more companies in the private sector, both large and small, and while they are also developing (or proving) an impressive array of new technologies, it is still too early to consider this range of investments as an industry in its own right. How to classify in portfolio investment terms. According to Peter Lunt, Manager of Sustainable Investments with the large superannuation fund VicSuper, the cleantech industry still has to be considered as a segment of private equity.
While specialist fund managers may consider the environmental or sustainable benefits involved with businesses in the sector, this is a rarity, he says. It has, however, progressed beyond the infant or purely venture capital phase in its development. 'You are starting to see secondary and bigger market transactions in the area that are typical of the management by-out, or middle market phase, ' he says. The fundamentals of the sector are encouraging and there is no doubt it will continue to develop.
Lunt says, 'It will provide a lot of growth in private equity over the next few years. 'Mainstream Australian funds manager Portfolio Partners' Manager of Sustainability, Amanda Me Cluskey says that cleantech is certainly gaining the attention of mainstream investors despite its private equity status. Relatively new investment funds that concentrate on cleantechs, such as Babcock and Brown's environmental and specialist wind energy funds and those of Starfish Ventures, are generating broad market interest, she says. But in terms of mainstream large company share investors, a typical cleantech company is just too small to be considered a viable investment at this stage.
Some of the small companies' funds are starting to build positions in cleantech companies particularly in the alternative fuels segment. McClusky says the Portfolio Partners' Long Short Sustainability Trust favourably views Australian Renewable Fuels, Australian Ethanol and CDS Technologies for example. 'We take a positive view on companies operating in the cleantech space because we recognise energy and water issues will be priced into share values in the future," she says. Following an overseas lead, in the United States the star of the cleantech sector is also on the rise.
Neal Dikeman, a partner with US-based investment bank Jane Capital Partners says the market is certainly 'getting there' when it comes to treating cleantech investments as a uniquely identifiable class of investment. Clear evidence of this maturity was the launch earlier this year of two stock market based indices based on cleantech industries: the New Energy Global Innovation Index (NEX) and the Cleantech Index. Each allows investors to monitor how a basket of business in the sector performs. 'This is the next step along the curve in terms of[cleantech] becoming an asset class,' Dikeman said.
The market is also starting to get a better idea of what exactly is included in the cleantech sector. The use of the umbrella term encompassing a range of industries is also probably helping low profile areas gain early recognition and acknowledgement from the mainstream investment community. By being considered part of the cleantech sector they are absorbing some of the credibility of high profile and successful sectors such renewable energy, he says. In the United States and Europe, solar and wind energy companies have experienced strong growth which has allowed venture capitalists to get in, make their money and then on-sell to institutional investors.
Dikeman points out that this positive experience sees venture capitalists look more positively at other businesses in the cleantech sector. But the really big money associated with mainstream institutional investors isn't there just yet, he says. As in Australia, although on a different scale, projects are still too small and can't get to t h e investment threshold that many of the institutions require for them to invest. When cleantechs get to this scale on a regular basis then the investment 'flood gates will open,' he says.
Institutions also look to diversify across a range of investment options particularly in new areas such as cleantech. When the industry is deep enough to be able to offer a range of fund investment options (a development which is currently under way) it will be another sign that it has matured and developed. It will also bring bigger institutional investment flows, says Dikeman. Overseas these processes are helped along by the fact that banks and other industry analysts are providing broader research on the cleantech industry.
As this picks up, so too more investors will be drawn to recognise the industry. The market in the US is also in the slipstream of the investment activity in England and mainland Europe. In particular, Dikeman nominates the Alternative Investment Market (AIM) operating out of London to be one of the first stock markets to truly give cleantech its due. The AIM draws companies operating in the US and Australia to list and raise funds in preference to home markets.
At least 2 Australian cleantech companies: Novera Energy and Ceramic Fuel Cells have taken advantage of this positive environment and completed AIM listings in the last year. 'For new public floats of cleantech companies the AIM has beaten out the NASDAQ. It puts the wind into the sails of the sector across the world,' Dikeman says. Dikeman says the success of AIM and new cleantechs is because it has the all important support of the European institutional investors: 'It makes the world sit up and notice.
' Another factor emphasising this process is the development of the new carbon economy in Europe. 'There are billions of dollars being pumped into the sector and it's all going through European asset managers and exchanges,' he says. 'In Australia and America they're talking but not really putting the money in yet. 'One US-based institutional investor that is getting behind cleantech is well known investment pioneer, Californian-based Calpers (California Public Employees' Retirement System) and CalSTERS (California StateTeachers' Retirement System).
The funds have earmarked US$1.5 billion in their Green Wave initiative to invest in clean technologies with at least US$200m going to venture capital sized firms. Winston Hickox, Portfolio Manager - Environmental Initiatives with Calpers, says, 'We don't see this sector as fleeting or marginal in anyway. Over time our exposure to the sector will just increase.
The investment is derived from a fundamental belief that the global economy will change over time as climate change and the increasing scarcity of fossil fuels make their impact. We need to find alternatives if we are going to continue to grow the economy, not in the next 100 years, not in 10, but now! 'Hickox's vision goes beyond renewable energy, citing water-focused technologies as another exciting area from an investment perspective. Water conservation and treatment techniques as well as new and efficient ways of handling sewerage will increasingly become important, he says, adding that China and other emerging nations will also be regions where these types of technologies can more easily prove themselves from an investment perspective. He also stresses that the various government subsidies and other development programs supporting the cleantech industry around the world must be sustainable in their own right, otherwise they are simply destabilising and counter-productive.
'Whatever governments do to stimulate cleantech industries it must not be taken away for some arbitrary reason, that is the worst thing they could do, ' he says. None of this is to say that the Australian cleantech sector isn't profitable as it is maturing. Long established local venture capital firm CVC, manages the CVC Sustainable Investments Fund, a pooled development fund dedicated to sustainable investments, and Sandy Beard says the business 'has no issues finding investment dollars or getting returns. We pioneered this [sector] 5 years ago [when the fund was launched as the Eco Fund] and there is certainly a growing appetite for it,' he says.
But as a specialist in the area Beard does admit that this prognosis is somewhat biased. 'It is still early days in Australia and pure play direct investments in environmentally friendly companies are not that common. Being a specialist we have greater access to opportunities and see deal flow from established networks,' he says. But it is not just the vitality at the small end of the market that shows that it is coming of age.
When industrial giants like GE start up whole divisions dedicated to cleantech technologies, and they have just generated US$10 billion, then you know it is an 'exceptionally healthy area,' he says.
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