Private equity deal activity in the U.S. cleantech industry rose by 57% in 2013. That stands in stark contrast to the contraction in venture capital investments in the industry last year. As we detailed in our VC Cleantech Report in December, venture investments in the industry have plummeted from 2011 levels, dropping 16% in 2012 and a whopping 36% last year.
Of course, VC firms have made far more investments in the sector than buyout firms have. VC firms recorded 288 investments in 2011, which fell to 236 in 2012 and only 152 in 2013. By contrast, private equity only made 69 deals last year, the industry’s most active year and a big jump from the prior year’s 44. Still, that’s a 93 percentage-point spread between PE and VC in only a year. Why the divergence?
One possible explanation is company maturity. Buyout firms are naturally inclined toward bigger, more established companies, and shy away from riskier, unproven startups. But, evidently, PE firms don’t see the entire cleantech sector, even renewable energy, as a money-losing bet. Many of the same emerging technologies VCs have soured on were targeted by PE in 2013, including hydroelectric (Eagle Creek Renewable Energy), wind (Capistrano Wind Partners), geothermal (Gradient Resources) and solar (Level Solar, Mass Solar and several others). Notably, PE firms made 50% more control investments last year than they did in 2012, which included deals for a wind project in Texas (by Starwood Energy Group) and a biomass plant in California (by Denham Capital’s Greenleaf Power).
The trend toward more mature companies is evident on the VC side, as well. Venture firms have been favoring late stage investments recently, according to PitchBook data, and at the expense of early stage rounds, which have fallen from 61% of cleantech financings in 2007 to only 46% in 2013. Moreover, the percentage of first financings for cleantech startups has capsized, dropping from about 51% of all VC cleantech deals in 2007 to about 27% in 2013.
It’s something of a perfect storm for younger startups. Thanks to high-profile debacles like Solyndra and A123 Systems, government incentives have started to wane, according to Bloomberg, which makes startups more dependent on VC capital than they were five years ago. On top of that, publicly traded renewable energy stocks haven’t performed well in recent years. For VC investors, that makes for a big speed bump over one of their important exit ramps. Not seeing solid exit opportunities in the sector, many firms are opting to stay out of it altogether.
Not private equity, though. PE firms completed 65% more deals in the energy-related cleantech sector last year than they did in 2012. In fact, 2013 deal activity in the alternative energy equipment industry matched its output from 2008, a booming year for both PE deals and the cleantech industry overall. PE investment in B2B cleantech companies was 66% higher in 2013, particularly for environmental service providers, which took in 50% more deals last year and now account for 22% of all PE activity in the sector. Overall, of the 322 PE firms that have made investments in cleantech since 2004, 42 have completed a deal in the last six months, and another 98 have been active in the last two years.
For more on how you can search for investments using the PitchBook Platform, click here.