Looking for an energy booster for your clients' portfolios? Renewable energy-or more broadly clean technology-just might be the answer.
For starters, the clean tech industry-which covers energy efficiency and alternative energy, such as solar and wind power-is growing rapidly today. Clean tech pulled in $1.2 billion in venture capital funding in the second quarter of 2009, up 12% from the first quarter, according to the market-tracking firm Clean Tech Group LLC and accountants Deloitte LLP. And yesterday, prominent venture capitalist Vinod Khosla was set to announce that his firm, Khosla Ventures, has raised $1.1 billion alone in two funds that will invest in green tech and information tech start-ups, according to The New York Times
In addition, as part of its $700-billion stimulus package, the Obama administration is pouring huge amounts of money into many areas of clean tech, particularly in technology relating to electric vehicles, such as battery/energy storage, in green buildings, and the so-called "smart grid." And industry notables, including former vice president Al Gore, author of An Inconvenient Truth, have drawn much attention to this sector. Renewable energy is expected eventually to become a regular part of the much broader energy mix.
If you were a big hedge fund and dipped your toe in the water on the private side, you're less likely to do so now," says Philip J. Deutch, managing partner of NGP Energy Technology Partners, a private equity firm in Washington, D.C., that manages approximately $500 million of capital commitments to energy technology companies. "Capital is extremely scarce and the competition for it has increased. Most of the funding is being done by private equity and venture capital firms."
Deutch, whose firm is affiliated with NGP Energy Capital Management, a $9.3 billion fund of funds, cites several drivers behind the clean tech boom today: concerns about high commodity prices, concerns about carbon emissions and climate change, and the overall desire to reduce U.S. dependence on foreign oil.
James Everett, a partner of Aquillian Investments LLC in San Francisco, an investment advisory firm to private equity companies and other investors in clean tech, says private equity firms are only considering clean tech firms with later-stage, proven technology that is, or potentially is, commercially viable.
"Companies with proven technology are eating the lunch of their competitors with newer, less proven technology," says Everett.
Experts say now may be a good time for advisors and wealth managers to take a hard look in this area, particularly in light of the public awareness, the stimulus money being earmarked, and laws that are changing the way countries think about energy and carbons.
"It's a very exciting time for the experienced and disciplined energy investor," says NGP's Deutch.
"Many of the bills coming out of Washington, such as cap-and-trade, if it passes, will be a huge stimulus to the clean tech energy sector," notes William E. "Wilbur" James, co-founder and managing general partner of Rockport Capital Partners, a venture capital firm based in Boston and Menlo Park, Calif.
"Clearly, renewable energy is on the cusp of a complete transformation globally. We're seeing more deal flows than a year ago," says Nick Sangermano, operations officer of Hudson Clean Energy Partners, a private equity firm in Teaneck, N.J, managed by a group of industry heavyweights.
Members of the Hudson senior team formerly led the U.S. alternative energy investing platform at Goldman Sachs Group Inc.'s special situation group, headed renewable energy investments for General Electric's Energy Financial Services unit, and served in the upper ranks of Credit Suisse's global investment banking business.
US Renewables Group (USRG), a private equity firm in Santa Monica, Calif., invests in firms focused on renewable power, biofuels and clean technology infrastructure. Founded in 2003, it has mobilized approximately $750 million in capital and so far made 17 investments across three funds, according to Lee Bailey, a managing director.
" We're not betting on two guys and an idea," says Bailey. "We boil water a little differently. Rather than using coal, oil, natural gas or nuclear, we boil water using sun, geothermal or wood for biomass. We're not splitting the atom a different way. We'll optimize these procedures and processes. The same thing has been done before."
Kleiner Perkins Caulfield & Byers (KPCB), an influential Silicon Valley venture capital firm, has a long history of backing entrepreneurs in hundreds of ventures, including big names like AOL, Genentech and Google. In May 2008 KPCB launched the Green Growth Fund to invest in growth-stage companies in the green space. Another KPCB fund will back early-stage entrepreneurs.
Gore, who is chairman of London-based Generation Investment Management, is a KPCP partner as is Ben Kortlang, co-manager of the Green Growth Fund. Former Secretary of State Colin Powell is a strategic limited partner.For its part, Rockport Capital, founded in 1998, invests in firms associated with wind and solar energy, insulation and the smart grid, as well as electric vehicles and batteries, according to James.
"We got into this business long before there was Al Gore's 'An Inconvenient Truth," before there was this awareness of carbon, and before all these issues of $140 oil," maintains James.
"In venture, because it's so risky, you have to get in something that's really disruptive, such as Google was or cell phones. Our No. 1 motive is the highest possible return to our investors because venture capital is risky, and investors expect a higher return for the risk they're taking. "
Meanwhile, despite the recession, the industry is attracting new investors regularly and there are signs hedge funds may be giving it another look. In August 2009, for example, Richard Bookbinder, managing member of Bookbinder Capital Management, a New York-based hedge fund of funds, and a founding principal of Sandler, O'Neill & Partners LP, launched TerraVerde Capital Partners LLC, a green hedge fund of funds.
There are several ways of playing clean tech. Advisors and wealth managers can invest directly into funds of the private equity or venture capital firms themselves. Another option is to wait until start-ups go public through an IPO. You can also invest in existing public companies active in the area. But advisors should exercise caution, realizing the risks involved, experts warn.
One planner who has successfully invested in this space is Brent Kessel, co-founder and chief investment officer of Abacus Wealth Partners, based in Pacific Palisades, Calif.
A socially responsible private equity fund of funds Kessel formed in early 2008, gives his high-net-worth clients ($2 million investment minimum) exposure to alternative energy, clean technology, microfinance, and health and wellness companies.
"We've seen valuations come down, so the fund managers we've selected are expecting to earn higher returns than we had originally projected," says Kessel, a yogi practitioner who has studied meditation with world masters.
The effort has paid off. The fund's microfinance investments in Third World banks that make small loans to impoverished entrepreneurs has been the single best performer in clients' overall portfolios thus far, according to Kessel.