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Public Private Equity Partnerships: Accelerationg the Growth of Climate Related Private Equity Investment

Public Private Equity Partnerships: Accelerationg the Growth of Climate Related Private Equity Investment

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Published by IFC Sustainability
Private Equity/Venture Capital (PE/VC) is uniquely suited to financing climate friendly investments that are risky, innovative, and relatively small. PE/VC funds will certainly not provide more than a fraction of the $4.6 trillion investment needed—but they fill a key niche. This report assesses the potential for private equity in financing climate related investment, describes the barriers restricting the growth of the asset class, and outlines the role that public capital can play to leverage private sector investment to accelerate the development of new climate related private equity funds.
Private Equity/Venture Capital (PE/VC) is uniquely suited to financing climate friendly investments that are risky, innovative, and relatively small. PE/VC funds will certainly not provide more than a fraction of the $4.6 trillion investment needed—but they fill a key niche. This report assesses the potential for private equity in financing climate related investment, describes the barriers restricting the growth of the asset class, and outlines the role that public capital can play to leverage private sector investment to accelerate the development of new climate related private equity funds.

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Published by: IFC Sustainability on Nov 29, 2011
Copyright:Attribution Non-commercial

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06/07/2012

Tere are barriers which afect all climate friendly investing, whether carried out by PE/VCs or not. In addition, there are barriers which
afect all PE/VC investing, whether climate friendly or not. Tis box mentions some of the main barriers in each of these categories.

Barriers to all climate friendly investing

(whether PE/VC or not)

• Lack of carbon payments, or other mechanism to
translate the environmental beneft of greenhouse gas
emissions reductions into fnancial rewards. Tis is a
particular obstacle for many green power infrastructure
and land use projects

• Government actions, which may inadvertently make
economically viable investments unproftable, or simply
impossible. Tree important areas where government
imposes barriers are:

– Ownership: government owns many of the entities
where investment is needed and so private sector
investment can only go ahead if government
establishes a Public Private Partnership

– Taxes and subsidies: these often distort
investments in favor of GHG producing processes.
For example, subsidies of fossil fuels are common.

– Regulation: in many cases government regulatory
regimes can deter investment (for example,
when power prices are held below cost) or fail
to provide the enabling environment needed (for
example, when there is no legal regime to facilitate
commercial forestry).

Barriers to all PE/VC investing

(whether climate friendly or not)

• Inadequate rule of law: PE/VC funds tend to prefer
investing in countries with fast judicial processes and
strong, fair, and efcient enforcement of business law. A
lack of efectively enforced laws governing the rights and
obligations of limited and general partners deter PE/VC
investment

• Tax regimes: Corporate tax levels, and in particular the
treatment of capital gains and the repatriation of profts
by foreign investors, are important for PE/VC funds.
Where countries do not have investor PE/VC friendly
tax regimes, PE/VC investment will be slowed.

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bArrIers to develoPMent oF Pe/vC MArket In ClIMAte FrIendly InvestIng

3.1.1 long-Fund rAIsIng PerIods deter PotentIAl

MAnAgeMent teAMs

Raising a fund takes at least a year, and often several years.
Even after years of efort, success is far from guaranteed.
Understandably, this deters potential fund management teams
from the attempt.

People who are already working in private equity in a more
established area may decide to stay in the area they know.
Te risks are lower, the rewards perhaps as high. When E+Co
worked to raise a PE/VC fund to make climate friendly
investments in South East Asia, it found it very difcult to fnd
qualifed fund managers and those it did fnd were difcult to
recruit because they had more promising options that were less
risky. Te same is true for project developers or consultants
who may stick with what they know. A risky leap into a long
period without earnings, in the hope of eventual private equity
success, can be daunting.

It must be pointed out that creating new fund management
teams is difcult in any area of private equity investing. But
in areas already well-served by fund managers, the time a
new fund manager takes to get established does not impede
the development of an entire market segment, since there are
already enough fund managers with track records operating.

In contrast, in climate-friendly investing in emerging markets,
if managers are not attracted to the sector, the process of
wearing down the other barriers—such as lack of data on sector
returns—cannot begin.

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