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Climate Friendly Investments: Assessing the Opportunities for Private Equity and Venture Capital Investors

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Table of Contents
1. Executive Summary 2. Background and Methodology 3. The Climate Friendly Investment Market 4. Conclusions 5. Appendix 2 3 5 11 12

List of Figures
Figure 1: Figure 2: Figure 3: Figure 4: Figure 5: Methodology for Sizing the Climate Friendly Investment Market Deal History in the Climate Friendly Investment Market, By Year Completed Worldwide Climate Friendly Deals Relative to Other Economic Indicators, 2000-2010 Deal History in the Climate Friendly Investment Market, by Geography (Deal Count) Deal History in the Climate Friendly Investment Market, by Geography (Deal Value) 4 6 6 7 7 8 9 9 10 10 10

Figure 6 : Deal History in the Emerging Markets-Based Climate Friendly Investment Market Figure 7 : Deal History in the Climate Friendly Investment Market, by Primary Industry Figure 8: Figure 9: Deal History in the Climate Friendly Investment Market, by Primary Industry and Region Deal History in the Climate Friendly Investment Market, by Investor Type

Figure 10: Deal History in the Emerging-Markets Based Climate Friendly Investment Market, by Investor Type Figure 11: Deal History in the Climate Friendly Investment, by Location of Investor

Climate Friendly Investments: Assessing the Opportunities for Private Equity and Venture Capital Investors

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1. Executive Summary
The climate friendly investment market - companies that manufacture, distribute or are otherwise involved in the delivery of climate friendly products or services - has received dramatically increased attention in recent years from global investors. Profound concerns about the physical effects of climate change, coupled with increasing levels of generalized environmental stress and the emerging discourse about the economic and strategic benefits of “energy independence” are driving a renewed and broad-based interest in climate friendly companies ranging from advanced battery manufacturers to renewable energy developers and smart grid suppliers. Recognizing that private equity (PE) and venture capital (VC) investors are ideally positioned to benefit from this trend, IFC commissioned this report to better understand the historical involvement of PE and VC investors in the climate friendly investment market. With a better understanding of the marketplace today it will be easier to anticipate the size and potential trajectory of the climate friendly investment market, and in so doing to identify investment opportunities for PE and VC climate friendly investors. Several key findings resulted from this analysis:

The propensity of PE and VC firms to invest in climate friendly companies is heavily influenced by the market prospects for these companies, and demand for the products/services offered by these companies is driven by a complex set of factors. These include:
• • • •

the pressing requirement for the better management of the earth’s resources;1 mounting concerns among governments about the physical impacts of climate change; the policy responses to climate change that are being unveiled in a growing number of both developed and developing countries; the “enabling solution” that climate friendly products/services can play in helping other companies meet increasingly stringent environmental regulations (e.g. GHG reduction targets) or generally reduce the environmental intensity of their operations; and the pursuit of “energy independence” in the US and other countries.

While the resonant and cross-cutting nature of these drivers suggests favourable growth conditions for climate friendly companies going forward, a rapid de-prioritization of environmental or energy policy by governments (particularly the US government), could put downward pressure on the industry’s growth prospects. However, given rapidly growing global energy demand and the predicted physical impacts of climate change, PE and VC activity in the climate friendly space can serve as an important bellwether of the international community’s ability to meet the implied future challenges of climate change.

$104 B worth of climate friendly private equity transactions have taken place over the last two decades. Over half of that has taken place in the last three years. The number of deals completed by PEs and VCs with climate friendly companies grew from 73 in 2000 to 783 in 2010, an increase of nearly 1000%. Nearly half of all deals completed prior to the end of Q4 2010 targeted a climate friendly company based in the US (1,942 out of a total of 4,204 deals), however new frontiers of the market are unfolding in China. Energy generation companies –largely comprised of renewable energy developers—continue to attract the greatest level of investment interest from PE/VC investors, accounting for 45% of all completed deals. The average VC investment in a climate friendly company was $10.4 M, compared to $81.1 M for PE investments.

1. Preqin, The 2010 Preqin Private Equity Cleantech Review.

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Climate Friendly Investments: Assessing the Opportunities for Private Equity and Venture Capital Investors

2. Background and Methodology
The climate friendly investment market - companies that manufacture, distribute or are otherwise involved in the delivery of climate friendly products or services - has received dramatically increased attention in recent years from investors, policymakers, market observers, think tanks and NGOs.2 Understanding the drivers of this market, where deal flow has been concentrated, and which types of climate friendly companies have been targeted is thus an important undertaking as it sets the stage for identifying historical investment patterns and future opportunities for investors. Given the nascent nature of PE/VC investment in climate friendly companies, information on the nature and size of the market is limited. Believing this to be a barrier to the further growth of investment in climate friendly companies, IFC commissioned this report. The objective is to provide a comprehensive analysis of the state of the market by compiling a database of completed transactions. This information can be used by policy makers to inform their decisions on how to further stimulate the deployment of growth equity, by fund managers as they design their investment strategy and by investors as they look to analyse individual investment opportunities. In order to size the climate friendly investment market, ICF3 and The Payne Firm4 developed a customized database to house deal-specific data on the climate friendly investment market. The database, which is among the world’s single largest repositories of climate friendly deal information, is comprised of over 4,200 discrete transactions.

Methodology for SIzIng the ClIMate frIendly InveStMent Market
The methodology used to collect data on the climate friendly investment market included three steps. The first step was to set parameters for raw data collection.5 The parameters are summarized below:

• •

• • •

Climate friendly investments: keyword searches used to select only those deals where the investee (e.g. target company) was based in a climate friendly industry. A broad definition of the phrase “climate friendly” was used; it captures companies in sectors ranging from biofuels to renewable energy, and carbon capture and storage to power grids. The complete list of keywords is provided in the Appendix ;6 Investors: only deals completed by Private Equity (PE) and Venture Capital (VC) investors included; Geography: no constraints applied. The investor could be located in any country, and the investee (e.g. target company) could be located in any country. Location determined by geographic location of entity’s head office; Deal status: only completed deals included; Time: any completed transaction that took place before December 31, 2010; Deal size: no constraints applied; all deal sizes included.

In the second step qualifying deals were filtered for relevance and completeness. This process included eliminating duplicate deals, deals missing critical data points (e.g. date of transaction), and deals where the investment target had only tangential involvement in a climate friendly industry. In the final step, all of the remaining deals were normalized using the three tiered industry classification system used by The Cleantech Group.7

2. The increased interest in “climate friendly” sectors of the economy has been driven by a variety of different factors, including ongoing concerns about climate change, increasing environmental stressors and the role that climate friendly companies can play in meeting some of the implied challenges (i.e. the “enabling solution” that climate friendly companies can provided). These themes are explored more concretely in Chapter 3. 3. ICF is one of the leading environmental services companies and further information can be found at www.icfi.com. 4. The Payne Firm is an environmental consulting firm specializing in investment transactions. Further information can be found at www.paynefirm.com. 5. Raw data was collected from Bureau Van Dijk (BvD), PitchBook and The Cleantech Group. 6. The working definition used throughout this report is substantially broader than that used in other, recently released reports that sought to determine the size of comparable (but fundamentally different) markets. For example, the “Global Trends in Renewable Energy Investment 2011” report, authored by Bloomberg New Energy Finance and the United Nations Environment Program (UNEP), focused on the “renewable energy” investment market, which is a subset of the climate friendly investment market. 7. This step was necessary because the three raw data providers used for this study (BvD, PitchBook and The Cleantech Group) employed a different industry classification system. In most cases, deal records from BvD and PitchBook included detailed information on companies’ primary activities. For these records, we completed a relatively straightforward regrouping exercise. For PitchBook and BvD deal records lacking key industry information, a website review was conducted to gauge the main operating activities of the company in question.

Climate Friendly Investments: Assessing the Opportunities for Private Equity and Venture Capital Investors

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The end result of the normalization process was a robust yet highly workable database covering the full history of investments made by worldwide PE and VC firms in companies based in climate friendly sectors, with deal-specific data on company type, investor type, geographic location, deal year and deal size. While the database can therefore be used to support a wide range of analytical queries,

including layered searches, it is important to note that it is indicative of and not a perfect indicator of actual, on-the-ground activity in the worldwide climate friendly investment market.8 Despite its limitations, the database is a strong proxy for the scale of PE and VC investment activity in climate friendly companies.

Figure 1: Methodology for Sizing the Climate Friendly Investment Market

PARAMETERS

Raw data providers: BvD, PitchBook and The Cleantech Group Parameters: industry definition, investor type, geography, deal status, deal year and deal size

Elimination of irrelevant deals, deals with incomplete information and duplicates

FILTER
Normalization: application of uniform industry classification system

NORMALIzE
Source: The Payne Firm

8. The database contains a history of climate friendly investment transactions up to and including the end of 2010 and is based on available data. Given the project’s focus on PE and VC deals, other types of investments made in climate friendly companies are excluded. These include, but are not limited to, government investments, angel financing, corporate financing, bank loans to private individuals and/or companies involved in climate friendly industries. Moreover, there may be some genuine PE and/or VC climate friendly investments that have been erroneously excluded in our dataset. On the other hand, quality control of the transactions included within the database eliminated the vast majority of irrelevant transactions.

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Climate Friendly Investments: Assessing the Opportunities for Private Equity and Venture Capital Investors

3. The Climate Friendly Investment Market
In order to provide further context to the market sizing data it is instructive to first define the boundaries of what this report considers to be the climate friendly investment market. An oft repeated definition of the market is, “a diverse range of products, services, and processes that harness renewable materials and energy sources, dramatically reduce the use of natural resources, and cut or eliminate emissions and waste.”9 Given the definition’s emphasis on resource use efficiency, companies in a diverse range of industrial sectors can be said to belong to a cross-cutting climate friendly investment sector. Thus, top-ofmind companies, such as renewable energy generators, renewable energy product manufacturers (wind turbines, etc.), green transport manufacturers (e.g. electric/hybrid vehicles, etc.), advanced battery developers and energy efficient lighting manufacturers, share membership in the sector with sustainable fertilizer companies, fleet tracking software developers and water purification firms. Even within the climate friendly investment market a distinction must be drawn between “pure play” companies, such as Vestas,10 and large, multidimensional technology companies whose products include both climate friendly and more traditional offerings. A wellknown example of the latter is General Electric. While there are many different approaches for classifying the constituents of the climate friendly investment market, this report uses the classification system created by The Cleantech Group.11 The Cleantech Group’s approach organizes all climate friendly companies into one of 11 “primary industries”, one of 65 “secondary industries” and one of 210 “tertiary industries.” With this definition in place investment activity was analysed on four dimensions: size, geography, type of investment target and type of investor.

SIze
As expected, there has been very significant investor activity in the climate friendly investment market, with the number of completed deals totalling 4,204, and a total deal value in excess of $104 B. As shown in Figure 2, the earliest instances of PE and/or VC firms making investments in climate friendly companies occurred in the early 1990s, when a generally disparate group of US-based investors began making targeted investments in early stage energy storage companies, located primarily in the US. Tentative forays by the US PE and VC community into climate friendly industries throughout the early and mid 1990s were replaced with a groundswell of investor enthusiasm in the early 2000s. In 2010, 783 climate friendly deals were completed, with an aggregate value of nearly $21 B.12,13 The deal history of the climate friendly investment market as shown in Figure 2 reveals a number of other noteworthy trends. First, the rapid expansion in climate friendly deal flow over the 2000-2010 period is a remarkable growth story. The number of completed deals increased from 73 in 2000 to 783 in 2010, an increase of nearly 1000%. Growth in the number of PE/VC climate friendly deals during the 2000s far outpaced that in the overall PE/VC market.14 Second, the global financial crisis of 2008 appears to have had limited effect on climate friendly deal flow. The number of completed deals increased from 525 in 2007 to 625 in 2008, and to 651 in 2009. Given the clear and deleterious effects of the crisis on (most) other sectors of the economy in 2008-2009, the strength of deal flow in the climate friendly investment market observed over this period points to an enduring set of industry fundamentals.

9. Source: Cleanedge.com 10. Based in Denmark, Vestas is one of the world’s largest wind turbine producers. 11. Source: www.cleantech.com 12. Total deal value in 2010 was significantly impacted by a single transaction – the $4.5 B investment made by Good Energies and Google in a US based wind transmission project. According to the database, this deal was historically unprecedented as it represents the single largest investment ever made by outside investors in a climate friendly company. Note that the transaction is included because at least one of the investors (Good Energies) was a PE or VC firm (Good Energies is a Swiss based PE firm). 13. Using different definitions of the “climate friendly” or “cleantech” or “renewable energy” investment market, other studies have arrived at substantially smaller estimates. For example, the previously mentioned Bloomberg New Energy Finance/UNEP report (“Global Trends in Renewable Energy Investment 2011”) found that global PE and VC investment in “renewable energy” totaled $5.5 B in 2010. Our estimate of $21 B relates to a categorically different market, since the climate friendly investment market includes numerous industrial sectors that are unrelated to renewable energy, such as Agriculture (sustainable forestry companies), Transportation (companies that produce traffic monitoring software) and Waste & Wastewater (companies that manufacture water saving appliances). 14. ICF estimates that in 2000 approximately 3,300 deals were completed by worldwide PE and/or VC firms with companies not based in climate friendly industries. By 2010, this number had grown to approximately 4,700, an increase of about 40%.

Climate Friendly Investments: Assessing the Opportunities for Private Equity and Venture Capital Investors

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Figure 2: Deal History in the Climate Friendly Investment Market, By Year

25,000 20,000 Deal Value (Millions $) 15,000 10,000 5,000 0
Source: ICF

Deal Value Number of Deals

900 800 600 500 400 300 200 100 0 Number of Deals 700

1991 1992 1995 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Finally, it is observed that the two abrupt, year-on-year declines in deal value occurred in 2003 and 2009, which were otherwise spectacular years for global investors.15 While these data confirm that the climate friendly market is not immune to the performance of the global economy, they also suggest that a lag period exists before the effects of a global economic slowdown are felt in the climate friendly market. It is unclear whether this relationship was observed in other sectors whose financing was dominated by PE and VC investors. It is also worth noting that the PE/VC market has actually decoupled from a number of key macro-economic drivers of growth. Figure 3 shows that growth in climate friendly deal flow has decoupled from the behaviour of global oil prices, global economic performance (as measured by GDP) and even the broader health of the global PE/VC industry (as measured by deal flow). The divergence is interesting on a number of levels. First, the collapse of global oil prices in 2008 was not correlated with a slowdown in climate friendly investments. While it is true that the fortunes of many companies in the sector are positively associated with oil prices, the sector as a whole demonstrated remarkable resilience to the sudden change in global energy prices. Second, while the number of completed climate friendly deals is a relatively small contributor to the overall number of completed PE/VC deals, climate friendly deals are growing at a much faster rate than overall PE/VC deals.

Figure 3: Completed Worldwide Climate friendly Deals Relative to Other Economic Indicators, 2000-2010
12 Global GDP Global VC/PE deal flow, ex cleantech 10 Global VC/PE cleantech deal flow Global oil price 8

6

4

2

0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: ICF

15. The MSCI World Index returned 34% in 2003 and 31% in 2009.

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Climate Friendly Investments: Assessing the Opportunities for Private Equity and Venture Capital Investors

Figure 4: Deal History in the Climate Friendly Investment Market, by Geography (Deal Count)

Source: The Payne Firm

Figure 5: Deal History in the Climate Friendly Investment Market, by Geography (Deal Value)

Source: The Payne Firm

geography
While the historical trends in climate friendly deal flow discussed thus far present a compelling growth story, they obfuscate important differences in terms of where investment dollars are flowing on a country by country basis. The distribution of deal flow in climate friendly companies as shown in Figure 4 and Figure 5 reveal a number of interesting trends. First,

the vast majority of deals undertaken to date have targeted US-based climate friendly companies. Of the 4,204 deals to have taken place globally up to and including Q4 2010, fully 1,942 (or 46%) targeted a US-based company. Second, the maps show that PE and VC investors have completed very few deals with climate friendly companies based in large parts of Africa, Central Asia and Latin America.16

16. While it is true that the climate friendly industries in these countries are comparatively small, various companies, ranging from renewable energy generators to waste water treatment firms, are known to operate in these regions. For a generally comprehensive summary of African climate friendly companies, see http:// cleantechafrica.com/

Climate Friendly Investments: Assessing the Opportunities for Private Equity and Venture Capital Investors

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Finally, deal flow within the emerging markets has thus far been heavily skewed towards two countries: China and India. This point is further illustrated in Figure 6, which shifts the unit of analysis to individual countries. According to the dataset, a total of 282 climate friendly deals had been completed up to and including Q4 2010 where the investee company was based in emerging markets. Over 83% of those deals either targeted a climate friendly company in China (138 deals) or India (98 deals). The data suggests that, for whatever reason, climate friendly companies based in emerging markets other than China and India (and to a lesser extent, Brazil and Malaysia), are not receiving significant outside investment from global PE and/or VC investors.17
Figure 6 : Deal History in the Emerging Markets-Based Climate Friendly Investment Market
150 120 Number of Deals 90 60 30 0

type of InveStMent target
By segmenting the history of completed deals by type of company (e.g. the industry in which the investment target operates), it is possible to ascertain the specific preferences of the world’s PE and VC climate friendly investors. Figure 7 shows that 45% of all climate friendly deals completed by PE/VC investors prior to 2011 involved an investment in an energy generation company (1,906 deals out of a total of 4,204). The 1,906 investments made in energy generation companies had a total value of $57 B, or 55% of the total value of all climate friendly deals in our database. The energy generation category is primarily comprised of companies with varying degrees of exposure to the provision of renewable energy (e.g. solar, wind, small hydro, etc.). Of the 1,906 energy generation deals in our database, VCs were responsible for 1,465 (77%) and PE firms for the remainder (441, or 33%). However, as expected, it was noted that PE firms tended to be involved in substantially larger deals than VCs. The 441 PE-led energy generation deals had a total deal value of $38 B, compared to only $19 B for the 1,465 VC-led deals. Many sectors that technically fall under the “climate friendly” umbrella are failing to attract significant capital from PE/VC investors. For example, according to the dataset, only 15 investments have been made by PE/VC investors since the early 1990s in companies based in the “Materials” industry (e.g. companies that produce adhesives, biodegradable products, catalysts, polyethylene, etc.) It is unclear whether this is the result of a genuine absence of Materials companies seeking/requiring outside capital, or the lack of Materials companies with sufficiently attractive growth prospects to merit a PE/VC investment. The industry preferences among PE and VC climate friendly investors holds relatively constant across geography. Figure 8 organizes the universe of completed climate friendly deals by the industry of the investee company and the geographic location of the investee company, using emerging markets and non-emerging markets as two geographic categories. Energy generation companies accounted for approximately 44% of deals outside the emerging markets and 54% of deals within the emerging markets. This implies that energy generation companies maintain a degree of universal appeal. It also illustrates that the fortunes of many of the world’s climate friendly investors are intimately tied to growth in renewable energy.

Malaysia

Czech Republic

Russia

Indonesia

Philippines

Mexico

China

India

Brazil

Poland

Estonia

Ukraine

Source: ICF

17. As previously mentioned, it is possible that the dataset is understating PE and/or VC investments in emerging markets-based climate friendly companies. It should also be noted that emerging markets-based climate friendly companies have alternative sources of financing beyond PE and VC firms. The fact that climate friendly companies in these regions are not receiving large quantities of capital from PE or VC firms does not necessarily mean that they are capital constrained, or are being “passed over” by PE/VC firms.

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Climate Friendly Investments: Assessing the Opportunities for Private Equity and Venture Capital Investors

South Africa

Jordan

Figure 7 : Deal History in the Climate Friendly Investment Market, by Primary Industry
70,000 Deal Value (Millions $) 60,000 50,000 40,000 30,000 20,000 10,000 Energy Infrastructure Transportation Air & Environment Manufacturing /Industrial Water & Wastewater Energy Efficiency Energy Storage Energy Generation Recycling & Waste Agriculture Materials Other 0 500 0 Deal Value Number of Deals 2500 2000 1500 1000

Source: ICF

Figure 8: Deal History in the Climate Friendly Investment Market, by Primary Industry and Region
Global, ex Emerging Markets 6% 0% 2% 12% 2% 3% 17% Agriculture Air & Environment 6% 44% Energy Efficiency Energy Generation Energy Infrastructure Energy Storage Manufacturing/Industrial 12% Materials Other Recycling & Waste Transportation Water & Wastewater 54%

type of InveStor
While briefly discussed above in the context of energy generation deals, the relative contribution of PEs and VCs to the overall universe of climate friendly deals merits further attention. PE and VC firms operate with different strategies, goals, investment preferences and time horizons. PE firms tend to invest in relatively more mature, cash flow positive companies, while most VCs provide capital to early stage, high risk (and thus high potential) companies. The relative contribution of each investor set in the climate friendly investment market can thus be used as an indicator of the relative financial maturity of the industry. Figure 9 segments completed climate friendly deals by investor type. The breakdown shows that VCs have completed 3,334 deals, or 80% of the total number of climate friendly deals in the database. The predominance of VCs suggests that the climate friendly industry as a whole can be characterized as a high risk/high reward market, although one would expect to find considerable variability on a company by company basis. It is also observed that the average size of a climate friendly VC investment was $10.4 M, compared to an average climate friendly PE investment of $81.1 M.18 This discrepancy reflects the differing investment preferences of VC and PE firms, with PEs executing a relatively small number of large transactions.

Emerging Markets 1% 4% 4%1% 0% 6% 1% 5% 8% 4%

Source: ICF

18. PE firms had completed 806 climate friendly deals up to and including Q4 2010, with a total transacted value of $65 B. Note that the 3,334 VC deals plus the 806 PE deals totals 4,140 deals. There was incomplete information for the remaining 64 deals (4,204 – 4140 = 64 deals).

Climate Friendly Investments: Assessing the Opportunities for Private Equity and Venture Capital Investors

Number of Deals

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Figure 9: Deal History in the Climate Friendly Investment Market, by Investor Type
800 700 600 Number of Deals PE VC

Figure 10: Deal History in the Emerging-Markets Based Climate Friendly Investment Market, by Investor Type
80 70 60 Number of Deals 50 40 30 20 10 PE VC

500 400 300 200 100 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Deal Year

0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Deal Year

Source: ICF

Source: ICF

Figure 10 repeats this analysis for emerging markets-based climate friendly deals. It shows a broadly similar pattern, with VCs accounting for 69% of all deals (192 out of 282 deals) but only 34% of total transacted value ($3 B out of $9 B), reflecting an average deal value of $16 M. PEs completed 90 deals, with an average deal value of $66 M. The analysis into investor type has thus far revealed that VCs are more widely invested in the climate friendly investment market than PEs. A second dimension to take into account is the location

of the VC and PE investors that are providing capital to worldwide climate friendly companies. Figure 11 reconstitutes the deals in the database based on the location of the investor.19 The analysis can be used to identify the relative contribution of PE and VC investors in a given country to the worldwide climate friendly investment market. Figure 11 shows that US-based investors are more heavily exposed to climate friendly industries than investors in the rest of the world combined.20 This is perhaps unsurprising given the predominance of the US VC community, but the scale is nonetheless remarkable.

Figure 11: Deal History in the Climate Friendly Investment, by Location of Investor
100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 United States United Kingdom Deal Value Number of Deals 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Canada France Switzerland Australia China Sweden Belgium Netherlands Denmark Spain India Germany Norway Finland Israel Number of Deals

Source: ICF

19. Due to limitations in the way that PE and VC deals are reported, the data in Figure 11 includes double counting. To illustrate, if five investors go in together in a single climate friendly deal valued at $100 M, the individual contribution of each investor is not reported. Rather than arbitrarily redistributing the total deal value to each participating investor, Figure 11 assigns the total deal value to each investor. The advantage of this approach is that the relative contribution of each country can be analyzed. The disadvantage of this approach is that it overstates the size of the climate friendly investment market (e.g. it includes double counting). 20. US-based investors have been involved in 2,975 climate friendly deals compared to 1,443 for investors from the rest of the world.

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Climate Friendly Investments: Assessing the Opportunities for Private Equity and Venture Capital Investors

Deal Value (Millions $)

4. Conclusions
Noted below are some of the key takeaways from the research into the evolution and size of the climate friendly investment market.

• •

Companies operating in climate friendly industries of the economy have received vastly increased attention –both in terms of deal numbers and size of investments—from PE and VC investors in recent years. The number of deals completed by worldwide PEs and VCs with climate friendly companies increased by nearly 1000% from 2000-2010. Nearly half of all deals completed prior to the end of Q4 2010 targeted a climate friendly company based in the US (1,942 out of a total of 4,204 deals). Nearly half of all deals completed prior to the end of Q4 2010 targeted a climate friendly company based in the energy generation industry (1,906 out of a total of 4,204 deals). VCs accounted for over 80% of all deals (3,334 out of a total of 4,204 deals), with PE firms accounting for the remainder. The majority of completed climate friendly deals were led by USbased investors.

Whether PE and VC climate friendly investors continue to invest in US-based companies to such a significant degree depends on many different factors. Recent evidence suggests that climate friendly investors are increasingly looking to opportunities outside the traditional epicentres of the US and Western Europe. Indeed, new frontiers of the climate friendly investment market are already unfolding in China. A 2010 report from Ernst & Young found that China had “leapfrogged” the US as the world’s most attractive destination for investment in renewable energy.21 The climate friendly investment market in the future could therefore be characterized by deals that are relatively uncommon today, such as a European private equity firm investing in a China-based energy infrastructure company. Future contours in the market are likely to be heavily influenced by government environmental and energy policy (particularly in the US and China), the ease of doing business in emerging markets for foreign PE and VC investors, perceived levels of environmental stress in the economy, and the growth prospects for individual industries under the climate friendly umbrella. Yet it is difficult to imagine that PE and VC investors with either a specialized or general focus on climate friendly companies would entirely look past opportunities in the US. The unmatched size of the US (California) VC community coupled with the well-documented ‘home country bias’ of VCs seems to ensure that a degree of funding for local climate friendly companies will continue. Future deal flow in the US will also undoubtedly benefit from the general vibrancy of the US capital markets, the relatively transparent US financial system and the country’s strong institutions and regulatory oversight mechanisms. In short, while the new frontiers for climate friendly investors may be found in China (and other emerging markets) USbased climate friendly companies are likely to continue to benefit from the structural advantages afforded by the US’ economy, financial system and business culture.

Based on this research, the historic prototypical climate friendly transaction would thus consist of a US-based VC firm investing in a US-based energy generation company. Indeed, during the time period covered in our study (all qualifying transactions completed prior to 2011) these were the characteristics of the single most common transaction. While the data collection effort was by nature a backward looking exercise, it is worth considering whether the climate friendly investment market in the future will be characterized by the same prototypical transaction. A range of differing outcomes seem possible.

21. http://www.ey.com/GL/en/Industries/Power---Utilities/RECAI---China

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5. Appendix
keyword SearCh StrIng USed to IdentIfy ClIMate frIendly InveStMentS
• • • • • • • • • • • • • • • • • • • • • • • • • • • • • • Advanced batteries Attenuators BECS (bio-energy with carbon storage) Bio Carbon capture Biochar Biodiesel Bioenergy Biofuels Biogas Biomass Biorefinery Carbon capture Carbon management Carbon sequestration Carbon sinks Carbon-free energy Cellulosic ethanol technologies Clean Tech Industries Climate change Climate Friendly Climate warming Co firing Cogeneration Direct-fired combustion Earth heat Eco Friendly Emission reduction Energy crops Energy efficiency Ethanol production • • • • • • • • • • • • • • • • • • • • • • • • • • • • • Forestation Forestry Fuel cells Gasification Geoengineering Geothermal GHG Emissions Greenhouse gas Heat pump Horizontal axis turbines Hybrid systems Hydrocarbon refrigerants (HC) Hydroelectric turbine Hydrogen economy Hydrogen fuel cell Hydrogen-enriched compressed natural gas (HCNG) Hydropower Impoundment Inverters Lightweight substitutes Marine current technology Micro hydro Ocean wave energy Overtopping Device Photovoltaic array Photovoltaic module Photovoltaic panel Platinum/Catalysts Point absorber • • • • • • • • • • • • • • • • • • • • • • • • • • • • • Power grid efficiency Pumped storage Recycled heat Recycling Reforestation Renewable Renewable energy Run of river Smart metering Solar Solar air Solar cells Solar hot water heaters Solar power Solar thermal Solar water Tidal power Vertical axis turbines Waste management Waste treatment Waste-to-energy Wastewater management Wave buoys Wave Energy Wave farm Wave power Wind Wind turbine Windmills

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Climate Friendly Investments: Assessing the Opportunities for Private Equity and Venture Capital Investors

Prepared for: International Finance Corporation (IFC), A Member of the World Bank Group, www.ifc.org Prepared by: ICF International Written by: Doug Morrow Edited by: Euan Marshall Photocredit: Curt Carnemark Copyright 2011 International Finance Corporation (IFC). All rights reserved. The findings, interpretations, views and conclusions expressed herein are those of the authors and do not necessarily reflect the views of the Executive Directors of the International Finance Corporation or of the International Bank for Reconstruction and Development (the World Bank) or the governments they represent. The material in this publication is copyrighted. IFC encourages dissemination of the content for educational purposes. Content from this publication may be used without prior permission, provided that clear attribution is given to IFC and is not used for commercial purposes.

Contact Information International Finance Corporation (IFC) 2121 Pennsylvania Avenue, NW Washington, DC 20433 USA Tel. 1-202-473-3800 email:sustain-invest@ifc.org www.ifc.org/sustainableinvesting

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