Cleantech Returns May Be Better Than You Think With Early IRRs Above 10%, New Study Finds

The global downturn eventually put the skids on the ability of cleantech firms to raise cash.

General partners found it hard to pitch LPs for new money when they could show little in the way of returns from past funds. Or so goes the prevailing wisdom.

Stop here! Maybe this storyline isn’t as accurate as widely believed. A new study finds promising early signs for cleantech returns.

Yes, cleantech is a relatively new investment area, and few funds are mature enough to offer meaningful projections on long-term returns. One reason for this is the public markets have yet to warm up in broad measure to cleantech IPOs. M&A, too, is tepid, though more advanced.

This is beginning to change. BrightSource Energy is preparing to go out and may provide an inspirational moment for other maturing cleantech startups. Earlier IPO candidates, Gevo, for instance, continue to hold gains above their IPO prices.

The result is that early signals on returns are promising. A number of 2007 and 2008 vintage funds are posting IRRs above 10%, Preqin finds in a report released Wednesday. And funds dating to 2006 and 2007 are showing median returns in the black, with the 2006 vintage sitting on a 1.2x multiple.

With this encouraging performance as a backdrop, Preqin says a December survey of 100 LPs found 31% eager to make new commitments to cleantech funds this year, and only 13% ready to back away from the category (see chart above, source Preqin).

There is no shortage of vehicles from which LPs can choose. Cleantech fundraising is a competitive market place crowded with active firms. Eighty-three cleantech-focused funds are presently on the road seeking to raise $23.5 billion. This should spur growth in investing and startup formation.

Beyond pure-play cleantech funds, as many as 223 broader focused funds, with some cleantech component, hope to raise $80 billion.

Just to remind you, cleantech fundraising did not fall off a cliff in 2009, as did other areas of funding. But 2010 brought the hammer down. That year was a disappointment with new money raised falling back to 2006 levels. Only 18 pure-play cleantech funds collected $2.8 billion in 2010, down from the 19 that closed on $6.9 billion in 2009.

More LP reconnaissance from Preqin: the majority of LPs (88%) are located in Europe and North America, with 39% in North America and 49% in Europe

In case you think cleantech is still an area for niche investing, Preqin says it now tracks 603 private equity firms making investments. About 392 are venture firms, 108, infrastructure firms and 102 do buyouts, secondary transactions and debt related deals.

It is worth repeating that cleantech investing is spreading rapidly from developed economies to Asia and the rest of the world. Asia and the rest of the world now account for 28% of active firms, up from 19% in 2010. Mumbai and Singapore alone each host 15 cleantech firms. (See chart above for additional detail, source Preqin.)

Obviously the long-term challenge facing the sector is securing attractive investment returns. This survey is a first indication that buried treasure may lie ahead.