When David Miller and his three partners founded the Boston-based Clean Energy Venture Group in 2005, the plan for this hands-on coalition of angel investors was to focus on one start-up a year. By April, CEVG was working on its fourth investment of 2016, which will bring the grand total to 29.
“We’re really amazed with our deal flow,” says Miller, who serves as the organization’s executive managing director. “We’re seeing great entrepreneurs coming into the space, whether it’s because they care about climate change or see business opportunities or both. We’re seeing new technologies and new business models being developed, which is creating more and better companies.”
The coalition—made up largely of entrepreneurs and investment professionals, with some capital from family offices—focuses on companies in the Northeast that have the potential to substantially reduce environmental damage from the production or use of energy. Energy efficiency makes up a big portion of CEVG’s realm, the low-hanging fruit as Miller puts it, but the group also invests in a number of clean-energy-enabling technologies. For example, VCharge enables energy storage, Solantro creates semiconductors for renewable power and EnergySage is an online comparison-shopping marketplace for solar PV systems.
Betting that the world’s transition to a low-carbon economy will not only benefit society but also their pocketbooks, a small but growing number of wealthy investors have begun pouring serious money into clean energy. And the opportunities they’re finding go far beyond renewables, encompassing a wide range of enabling businesses and technologies. This new breed of impact investor challenges the conventional wisdom about impact and profit, arguing that the mission and the money go hand in hand—if you’re making concessions on returns, then you won’t actually fix a problem, they say.
“If it’s a company where there’s a tradeoff with returns, then that’s not a company we’re going to invest in,” says Miller. “There’s absolutely a roll for nonprofits and philanthropies to play, but we don’t like the murky area in between, where you’re investing to make money, but the returns are lower because you’re doing greater good.”
Venture capital, which provides the seed money for risky start-ups, is one of the two broad categories of clean-tech investment, along with project finance, which funds the likes of utility-scale wind and solar farms, water-desalination plants and energy-efficiency projects. Additionally, a smaller number of funds and private equity investors include “energy access” in their portfolios, investing in financial services that provide microloans to individuals and small businesses in emerging markets. Like the start-ups CEVG invests in, these companies are enablers.
“We’re looking at how inclusive financial systems can enable the growth of renewable energy in emerging markets,” says Adam Wolfensohn, co-managing partner of New York’s Encourage Capital along with Jason Scott. “Much of the renewables growth in these markets is restrained not by technology but by financial barriers, like credit evaluation and currency.”
The duo formed the money management firm roughly a year ago by merging Wolfensohn’s private equity fund, which specialized in financial services and clean energy in developing countries, with Scott’s Eko Asset Management Partners, which focused on environmental markets such as sustainable fisheries, carbon and water. Encourage manages money for wealthy investors and foundations interested in solving critical environmental and social problems. To do so, Wolfensohn says, scale has to be part of the equation.
“These are massive issues we are dealing with, and from an impact perspective, the only way we actually get to the scale to make a difference is if the investments are commercial” he says. “You can use philanthropy and concessionary capital to get there, but the end goal has got to be commercial”
So what sorts of returns can investors expect?
Because of the risk and illiquidity that goes along with venture capital, Miller says they like to see a potential multiple of 10—you invest $1 million and eventually get $10 million back—something that, of course, won’t happen in every case. A high percentage of early-stage companies of all types fail, and examples litter the annals of clean energy history. But the world and business modes have changed since the infamous failure of Solyndra, the doomed solar panel manufacturer. The cost of energy provided by wind and solar has plummeted, and demand for clean energy, energy efficiency and the technologies that enable them is skyrocketing globally. Moreover, investment in renewables, at least in the U.S., now focuses on developers and their projects rather than manufacturers.
Solar and wind project finance won’t garner venture-like returns, but the risk is much lower and the payoff still quite attractive. In developed markets, funds that own and operate solar or wind projects, generally over a 10- to 20-year period, typically produce 6 percent to 8 percent annual returns. Those that finance project development and construction, more of a five-year capital cycle, generate 10 percent to 20 percent returns.
“With what is a fairly low-risk construction project, you can deploy capital and exit quickly and get a very good rate of return,” says David Richardson, global head of marketing and client service for London-based Impax Asset Management. “Solar and wind project developers benefit from low equipment costs, the ever-growing need for renewable energy globally and an almost insatiable demand for operating projects that generate stable income from selling power without any fuel cost risk.”
In emerging markets, the risk increases, but so does the return, with early-stage project finance easily reaching the mid-20s, observers say. According to recent analysis by Mercatus, a San Francisco-based software company that provides data to energy companies, internal rates of return for renewable energy projects in developing markets are 28 percent higher than those in Europe and North America.
While folks in the impact investment world point to a surge of interest in clean tech by wealthy individuals and families, no one knows exactly how much money they’re sinking into the sector. But we do know that clean energy investing is on the rise globally. Last year a new record was set for global investment in renewable energy at $328.9 billion, up 4 percent from 2014’s revised $315.9 billion and beating the previous record, set in 2011, by 3 percent, according to Bloomberg New Energy Finance.
This sounds impressive, but the International Energy Agency estimates we need to invest $1 trillion—a target known as the “clean trillion”—a year if we are to decarbonize the economy fast enough to mitigate the worst effects of climate change. Family offices and other wealthy investors can’t close that gap alone, but they can help fill it. In total, single-family offices hold an estimated $1.2 trillion in assets and multifamily offices manage another $500 billion, according to the consulting firm Family Wealth Alliance.
One measure of their growing interest in clean tech is the emergence of a nonprofit, called the CREO Syndicate, created to help family offices navigate the clean energy investment universe. Originally two organizations—CREO, which stands for Cleantech, Renewable Energy and Environmental Opportunities, and the Clean Tech Syndicate—a merger last year brought the group to some 100 investors, mainly families but with some foundations and asset managers also in the mix, with $80 billion in investable capital. CREO recently held its semi-annual meeting and a good number of family offices invited by members expressed interest in joining, says Régine Clément, the organization’s CEO. “I expect our numbers will grow over the next one or two years,” she says.
The hope is that as more investors discover the opportunities awaiting them in clean energy, these billionaires will turn out to be the tip of the iceberg.