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Venture capital and private equity investment soars in clean energy market

The clean energy sector saw another record year for venture capital and private equity investment in 2006, with USD18.1bn invested in companies and projects, a 67 per cent increase from US

The clean energy sector saw another record year for venture capital and private equity investment in 2006, with USD18.1bn invested in companies and projects, a 67 per cent increase from USD10.8bn in 2005, according to a new report from clean technology analyst New Energy Finance.

New Energy Finance’s annual report of venture capital and private equity investment activity in clean energy technology, companies and projects, Cleaning Up 2007, identifies 1,859 venture capital and private equity investors that have either made investments in 2006 and the first half of 2007 or stated their intention to do so.

The report records 193 funds that invest in clean energy, and analysed 521 venture capital and private equity deals in 2006, totalling USD8.6bn for companies and USD9.5bn for projects. This trend has continued into the first half of this year with a total of USD10.6bn invested.

However, the report says, this growth tells only half the story. During 2006, clean energy venture capitalists invested only 73 per cent of the total money available to them, with USD2bn waiting in funds to be invested – a symptom of a market where demand for deals is higher than supply, driving up company valuations.

All regions experienced significant growth in 2006. The Americas saw investment of USD7.1bn, an increase of 83 per cent from 2005, as mainstream investors woke up to the opportunities in clean energy, especially biofuels.

Funds invested in Europe, Middle East and Africa enjoyed a 62 per cent increase to USD9.2bn, mainly driven by private equity investment in companies and projects. Companies and projects in the Asia and Oceania region received USD1.8bn in investment, up 26 per cent, driven by pre-IPO private equity investments in Chinese solar companies and clean energy activity in countries such as India.

At a sector level wind (USD8.4bn), biofuels (USD4.7bn) and solar (USD2.3bn) attracted 86 per cent of venture capital and private equity investment between them, while mature technologies such as onshore wind and first generation/corn-based ethanol attracted private equity money for expansion and roll-out of production capacity.

Solar raised a significant amount of money via the public markets, but also attracted the highest level of classic venture capital investment (USD428m), typically into thin film and non-crystalline silicon technologies. Venture investment in second-generation biofuels technologies, including cellulosic ethanol, also increased to USD235m.

Of the total venture capital and private equity investment of USD18.1bn, 61 per cent (USD11.1bn) represented new money in the clean energy sector, with the remaining USD7bn used to finance company buy-outs and re-finance and acquire projects.

According to New Energy Finance, the average of venture capital deal size has increased in the past year at almost each development stage. Average series C/third round investment rose 29 per cent to USD14.8m and average series D/fourth round deal size almost doubled to USD20.7m, indicating investor confidence in companies with technologies closer to commercialisation.

The highest concentration of venture capital- and private equity-funded development stage companies is in the solar sector, accounting for almost 20 per cent of the total, followed by wind, demand-side efficiency, biofuels and biomass and waste, five sectors that together accounted for almost 65 per cent of all venture capital- and private equity-funded companies. Of the 67 development-stage companies known to be actively fundraising, 17 are within the solar sector, 13 in biofuels and 10 in demand side efficiency.

Contrary to popular belief that Europe leads the way in clean energy investment, the report says the focus for venture capital- and private equity-funded clean energy companies is the Americas, with 408 companies, 58 more than Europe, Middle East and Africa, while the Asia and Oceania region still has a long way to go to match the other regions.

The fundraising focus for the second half of this year remains on the Americas, with 47 of the 67 companies currently known to be fundraising based largely in North America. In time, the report says, China will provide venture capital opportunities, with the government signalling its support for domestic technological innovation and looking to cultivate home-grown, internationally competitive technologies by implementing preferential policies and channelling investment to promising companies.

New Energy Finance has updated its forecast of venture capital and private equity investment from 2007, estimating that total investment in clean energy will grow at an annual compound rate of approximately 17 per cent up to 2013, encompassing the completion of deals totalling more than USD262bn and absorbing more than USD146bn in equity. The money will go to later stage deals, buy-outs and project financing, although the recent squeeze in the credit markets may slow down growth in some areas.

‘Last year saw a modest amount of technology investment with increasing private equity investment in later stage companies and more asset intensive sectors, such as wind and biofuels,’ says Michael Liebreich, chief executive and founder of New Energy Finance.

‘Overall it was a good year. Although some company valuations are on the high side, a number of interesting companies are attracting investment. Investors’ appetite for clean energy continues to grow.’

New Energy Finance is a specialist provider of analysis to investors in renewable energy, biofuels, low-carbon technologies and the carbon markets. The company’s research staff of 45, based in London, Washington, New York, Beijing, Shanghai, New Delhi, Tel Aviv and Perth, track worldwide deal flow in venture capital, private equity, M&A, public markets and asset finance.

Thee firm covers all sectors of clean energy including renewables such as wind, solar, marine, geothermal and mini-hydro, biomass and biofuels, energy architecture such as supply- and demand-side efficiency, smart distribution, power storage, carbon capture and sequestration, hydrogen and fuel cells, carbon markets and services. Its division New Carbon Finance provides analysis and price forecasting for the European, global and US carbon markets.

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