Cleantech Continues to Warm LP Hearts

Fund-raising has become increasingly difficult for venture firms on both sides of the pond, but limited partners continue to show interest in funds focused on clean technology investments.

A number of venture firms that were early cleantech investors are now launching second or third cleantech funds, each with a strong European focus. Among them are Pacific Corporate Group (PCG), which has launched a Frankfurt-based cleantech fund with veteran asset manager Norbert Enste; London-based WHEB Ventures, which recently closed on a second clean technology fund; and Masdar and Deutsche Bank, which have held a sizable first close for their DB Masdar Clean Tech Fund.

PCG, Enste Join Forces

PCG and Enste recently launched Enste/PCG Asset Management Group (EPCG), which is expected to introduce a number of European funds, including the Cleantech Energy and Technology Fund 2.

Mark Nydam, managing director of PCG Asset Management and head of the Californian investment firm’s cleantech practice, has selected German-speaking Europe as the geographical focus for the fund. “London is already well developed, and we feel there are a good number of small and medium sized institutions in Germany, Austria and Switzerland,” he says.

Enste, who stepped down as head of asset management Bankhaus Metzler late last year, will work out of EPCG’s headquarters in Frankfurt, while Nydam, who is based in La Jolla, Calif., plans to travel to Germany regularly to work on deals.

PCG raised $600 million for its first cleantech in 2006, and now manages some $1 billion in assets. Cleantech 1’s backers include the California Public Employees’ Retirement System and the New York City Employee Retirement System, among others. “We’ve been doing cleantech before cleantech was cool, starting back in 2003-2004,” notes Nydam.

PCG is targeting $600 million for Cleantech 2 and is actively seeking institutional investment partners, such as pension funds and life insurance companies, looking for private equity exposure to European cleantech. With targeted returns of 20% per year, the fund should prove appealing to a number of LPs.

We will not be carried by valuation hype — as with biofuels and solar in the U.S. — and we are not growth-momentum investors. We are value-oriented investors.”

James McNaught-Davis

Cleantech 2 plans deal sizes of $5 million to $30 million, with 25% of its capital going to early stage venture capital deals and 75% to larger private equity deals. The majority of deals will be direct investments. The will have a 12-year lifespan to give some of the private equity investments time to mature.

Nydam sees EPCG as well-placed to direct larger institutional funds into the sector just as capital requirements grow with promising technologies reaching the commercialization phase.

While there aren’t exactly no-go areas, Nydam has a strong point of view on sectors under the cleantech umbrella, and investment decisions will be led by these views. Renewable energy may not be top of the list: “Traditional wind is very mature,” he says.

PCG’s commitment is considerable. Nydam lived in Germany for a while last summer to ink the deal with Enste and plans to have three or four people in the Frankfurt office by the end of the year, coinciding with first investments.

WHEB Toughs out Second Fund

London-based WHEB Ventures recently announced a final close for its second clean technology fund, WHEB Ventures Private Equity Fund 2 LP, with £105.4 million in commitments. LPs include the European Investment Fund, Hermes GPE and a variety of large European and U.S. family offices.

When it held a third close on £90 million in July 2009, WHEB said it was targeting a final close of £150 million by the end of the year. Although the firm came up short of its target, Managing Partner James McNaught-Davis was more than pleased with the result. “Raising over £105 million during the deepest recession since the 1930s is an achievement,” he said in a prepared statement.

Fund 2 has already made at least five investments (in companies focused on energy efficiency, green industrial processes and waste management) since it held a first close in July 2008. The fund’s deal sizes range from £2 million to £5 million, excluding reserves for follow-on rounds, and the investment strategy is balanced between venture and growth. “We are still making venture investments in Series A rounds, but B, C, and D rounds are more challenging,” McNaught-Davis said in an interview with Venture Capital Journal.

We’ve been doing cleantech before cleantech was cool, starting back in 2003-2004.

Mark Nydam

As to the firm’s broad strategy, McNaught-Davis says: “You are better off being agnostic about the stage at which you invest so that at any point in the investment cycle you can become involved.” This approach has allowed WHEB to buy portfolio company Petainer at twice EBITDA and lead the leveraged buy-out of Friedola, the German plastics company.

WHEB has a broad definition of cleantech, well beyond renewable energy generation, and it is specifically interested in energy conservation, clean industrial and agriculture processes, waste and water. Capital-intensive business models are clearly less attractive unless management has access to a lot of cheap debt. “If initiatives like the U.K. government’s Green Investment Bank get off the ground, then that might change our view,” McNaught-Davis notes.

While WHEB’s latest fund has a broad European focus, in practice most investments fall in northern Europe and particularly the United Kingdom, Ireland, Benelux and DAS (Germany, Austria and Switzerland).

WHEB’s first cleantech fund, which McNaught-Davis describes as a “demonstrator fund,” was limited to £24 million and held just eight investments. There are early stage exit discussions for some of these companies.

McNaught-Davis says WHEB Ventures’ investment strategy is governed by the avoidance of two cardinal sins: “We will not be carried by valuation hype—as with biofuels and solar in the U.S.—and we are not growth-momentum investors,” he says. “We are value-oriented investors.”

WHEB’s team members are heavy on operational experience, as opposed to pure financial backgrounds. “We are used to rolling up our sleeves and being active alongside management,” says McNaught-Davis.

He adds that he likes to work with partners who are “like-minded,” have value to add and “do a fair share of the heavy lifting.”

Masdar Goes Back to the Well

In these challenging economic times, the size of this first close and quality of participants demonstrates a profound confidence in climate change investing and in the joint DBCCA and Masdar investment team.”

Kevin Parker

Earlier this year Masdar and Deutsche Bank announced a first close of $265 million for their DB Masdar Clean Tech Fund. The fund is co-managed by Masdar Venture Capital and DB Climate Change Advisors (DBCCA).

It follows the first Masdar fund, which was run by Abu Dhabi Future Energy Co. (aka Masdar), Consensus Business Group, Credit Suisse and Siemens AG. As with all Masdar Initiatives, the fund seeks to invest in companies with technologies capable of commercialization in the United Arab Emirates.

“In these challenging economic times, the size of this first close and quality of participants demonstrates a profound confidence in climate change investing and in the joint DBCCA and Masdar investment team,” Kevin Parker, Global Head of Deutsche Asset Management, said in a prepared statement.

The initial investor group is again led by Siemens. “Our active involvement for the second time in a fund associated with Masdar demonstrates our ongoing commitment to clean technology,” Joachim Kundt, CEO of Siemens in the Lower Gulf, said in the statement.

Other investors include GE, the Japan Bank for International Cooperation, Japan Oil Development Co., which is a wholly owned subsidiary of Inpex Corp., Nippon Oil Corp., and the Development Bank of Japan.

Siemens will continue its role as technology advisor to the fund. The intention is to develop a portfolio of companies with geographic diversity across the United States, Europe and Asia. Earlier funds have allocated 65% of their capital to companies in the United States and 35% to companies based in Europe.

Masdar Clean Tech Fund typically does deals in the range of $5 million to $35 million. Among the companies it has backed so far are sewage sludge energy company Enertech of Atlanta, Ga.; waste treatment company Europlasma of Oudenaarde, Belgium; and thin-film PV maker HelioVolt of Austin, Texas. The fund also teamed up with Virgin Green Fund to do a buyout of DuraTherm, a petroleum and metal recycling business based in Texas City, Texas.