Cleantech: A Viable Option for Hedge Funds and Investors?

By Bart Mallon (www.colefrieman.com)

100 Women in Hedge Funds Hosts Panel of Cleantech Industry Professionals to Discuss the Future of Cleantech Investments

On March 24, 2010, 100 Women in Hedge Funds, a global association of investment management professionals, presented “Is the Grass Really Greener? The Case for Investing in Cleantech”, a networking and educational event focused on the clean technology (“cleantech”) movement and the push for venture capitalists and hedge funds to invest in cleantech technologies. The event, which took place at the Pillsbury Winthrop Shaw Pittman law offices in San Francisco, was host to 100 or so investment management and cleantech professionals from the San Francisco Bay Area who were all noticeably enthusiastic about the evening’s topic.

Kim Tomsen Budinger (of KTB Counsel), who is part of the 100 Women’s Northern California Steering Committee and who co-organized the event with Marianne O (of Lumen Advisors, LLC), introduced the moderator Scott Jacobs, a consultant at McKinsey & Company, and welcomed the following panelists:

  • Richard Bookbinder, Founder of New York-based hedge fund TerraVerde Capital Management LLC
  • Thomas Toy, Co-Founder and Managing Director of Menlo Park-based venture capital firm PacRim Venture Partners
  • Garvin Jabusch, Co-Founder and CIO of Boulder- and Silicon Valley-based investment advisors Green Alpha Advisors, LLC

What is Cleantech?

The discussion started with each of the panelists providing their own definition of cleantech – while each stated that the term is hard to define, it was noted that sectors like water, agriculture, and clean energy fall into the category of cleantech. The panelists also noted that varying definitions of “cleantech” can lead to investor confusion so managers will tend to define “cleantech” through examples of individual companies for instance.* [This confusion actually led to the creation of indicies focused on the sector.]

Despite the challenges of coming to an agreement on a definition, the panelists did express strong optimism about the potential financial growth – cleantech is expected to have revenues of approximately $3 trillion by 2030.  The panelists also discussed cleantech becoming its own sector and reference was made to a November 2009 report by Bank of America/Merrill Lynch entitled “A Stock Analyst’s View of Renewable Energy Technologies”.  The report says that cleantech will be the “sixth technology revolution” (i.e Industrial Revolution, Age of Information and Telecommunications), meaning that the next type of technology the world will operate on will be clean technology from natural resources.

* Cleantech Group LLC, an organization that advises investors and corporations interested in cleantech investing, provides a good overview of cleantech here.

Cleantech Hedge Funds

At a few points during the panel, the discussion went to cleantech hedge funds even though the panelists admitted there are not many cleantech focused hedge funds. Out of a potential universe of say 15,000 global hedge funds, the panelists had only identified around 120 funds focusing on the space. Many of these funds are part of larger hedge fund structures.  For instance, a manager may have a multi-billion dollar flagship fund and then create smaller funds focused on separate strategies or sectors such as cleantech. For many of these managers there is either a personal commitment to renewable energy or demand from mission-based investors (mostly on the high net worth side) for these products.

Of the funds that do focus on cleantech, most will be smaller ($50MM to $200MM) or very small ($10MM to $50MM).  Most of these funds will be either long/short or long only funds. The panel noted that while the cleantech “asset class” is relatively small right now, it is likely to become a larger part of the investing mandate going forward, so we are likely to see an increase (gradually, for right now) in the amount of funds focused on this space.

Challenges for Cleantech – Capital, Management, Government/Regulation

An overriding theme of the discussion was that, as an infant industry in the U.S., Cleantech faces a number various challenges including high capital requirements, relatively inexperienced management teams, and the lack of strong regulatory support.  Together these challenges help to explain why Cleantech in the U.S. is not as developed in other nations like China and Germany.

Perhaps the most difficult issue that the U.S. cleantech industry faces is an ambivalence from Washington and the states.  While some individual states are creating programs aimed to foster investments into cleantech and other earth friendly initiatives (see cap and trade below), at the federal level there are still massively unequal subsidies which are going to older poluting technologies.  In fact, the moderator asked whether the panelists believed that national legislation is “anti-cleantech” (i.e. subsidies to non-cleantech industries show bias toward legacy technologies), but the panelists disagreed.

Obviously consumers will be a driving force toward the allocation of more resources (tax breaks and tax dollars) to the industry even though it is not currently a high priority legislative issue for most Congressmen.  The fact is, however, that the U.S. is lagging other world leaders in cleantech – at several points in the discussion, the panelists made reference to the progress that China and Germany have made in the cleantech in comparison to the U.S. “We [the U.S.] are not at the top of the list”, one panelist said. “The gap is widening between the U.S. and China and Germany. Capital and technology is moving from the US to other countries.” It was noted that the cleantech industry needs to be concentrated domestically but should still have global outreach.

Cleantech Opportunities

Cleantech and institutional demand

One panelist pointed out that there are a number of attractive opportunities and that investors need to be poised to take advantage of these opportunities. Despite the drop in VC investment in the sector in recent years, cleantech remains the number one sector which VCs are allocating to.  (See page 16 of the Bank of America/Merrill Lynch report which contains statistics on venture capital investments in cleantech: http://ww.nrel.gov/analysis/seminar/pdfs/2009/ea_seminar_nov_12_pres.pdf).

While the panelists were optimistic about the future of cleantech, the uncomfortable issue of risk-reward characteristics of investment in the sector was a predominant theme.  Essentially the sector returns (probably) do not justify investment right now because of the numerous risks, as described briefly above.  While more benchmarks are likely to be produced in the future (to appropriately identify those managers who can generate alpha), that will only be the first in a series of metrics which will need to be developed in order to appropriately quantify whether investment in the sector and certain companies is appropriate for investors.  Once the sector is more developed managers are more likely to be able provide the appropriate risk-return metrics to institutional investos, who themselves have to balance risk-return on a portfolio allocation basis.

For some investors, however, risk-return is not part of the investment equation.  Mission-based investors will make investments in the cleantech space because of their belief in the mission of the companies.  These mission-based investors are the groups which are more likely to be the allocating to cleantech managers and VCs at this point in time.

Carbon/Cap and Trade

The panel spent relatively little time discussing carbon and cap and trade systems.  While different from cleantech, carbon emission reduction through a cap and trade system (or systems) may present possibilities for future economic growth and investing and also present attractive potential opportunities for mission-based investors. However, post Copenhagen, it is clear that the major nations will need more time until any kind of comprehensive multi-national treaty is debated and ratified.  Resistance in the U.S. to a federal cap and trade system is keeping the price of carbon extremely low (in the voluntary systems), however Europe has proven that a mandated cap and trade market can work.  Political complexities, both at the national and international level, are likely to stall the development of a U.S. cap and trade regime.  Voluntary markets like the Regional Greenhouse Gas Initiative (RGGI), the Chicago Climate Exchange, and the Western Climate Initiative show that there continues to be strong interest in the cap and trade system.

Conclusion

While the discussion itself was not confined to the subject areas described above, and while the issues surrounding cleantech seem to make it a risky sector to be investing in, the panel and the audience showed great enthusiasm for the subject and the professionals in attendance seemed to feel that this is a sector which is poised for great growth in the future.

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About Cole-Frieman &  Mallon LLP

Cole-Frieman & Mallon LLP is a San Francisco based law firm focused on the investment management industry. The firm’s services include hedge fund formation, startup services, investment adviser registration, and hedge fund consulting. Additionally, Cole-Frieman & Mallon LLP works with groups in the cleantech and carbon trading space.

Cole-Frieman & Mallon LLP is able to provide the following legal services to both domestic and offshore hedge funds:

  • Offer investment advice to funds interested in the purchase of carbon offsets
  • Provide legal advice to clients in regards to carbon market regulations
  • Assist hedge funds with the creation of investment projects that generate credits and offsets
  • Advise on marketing strategies for those clients interested in selling their carbon offsets or promoting their renewable energy projects
  • Provide networking opportunities with other lawyers engaged in the carbon market field
  • Advise clients on the policies and risks involved with credit trading

For more information, please call Bart Mallon Esq. at 415-868-5345.  Many thanks to Kristina Maalouf for her help with this article.

1 thought on “Cleantech: A Viable Option for Hedge Funds and Investors?

  1. Pingback: Federal Cap and Trade System and RPS Standards on the Horizon — Hedge Fund Law Blog

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