The need for resource savings has placed large industry at the forefront of a green industrial revolution. If mechanisation defined the 19th century, and telecommunications defined the 20th, then efficiency is sure to define the 21st.
There is no other possibility when faced with the metrics of population growth – where we recently passed 7 billion – and dwindling resources.
Against this backdrop, the environmental directives that have also helped spur companies towards efficiency savings are only way-markers on a much longer road.
This is evident not only in corporate research and development (R&D) and venture capital (VC) strategies but also in acquisitions and strategic investments. In the first half of this year there were $22bn of corporate mergers and acquisitions (M&A) that can be broadly termed environmental – ranging from DuPont’s $6.3bn acquisition of Danisco and Toshiba’s $2.3bn deal for smart-meter company Landis & Gyr to General Electric’s (GE’s) $3.2bn stake in Converteam, according to data from investment bank Jefferies.
Big business is also intervening much earlier in the lifecycle of environmental companies – GE recently put $63m into 10 home energy start-ups following a competition. In the intervening growth stages there is also growing activity – ABB’s recently-expanded stake in tidal power company Aquamarine Power and British Gas’s position in smartmeter provider AlertMe are two examples.
As a later-stage clean-tech-focused private equity fund, we welcome this as a highly complementary development – not least because corporate interest is helping validate the sector for still-sceptical financial investors such as pension funds. We are increasingly interacting with corporations across the whole lifecycle of our investments.
In 2009, for example, WHEB acquired Swedish PET (a polyester used principally for containers) recycler Petainer as a spin-out from UK-listed Rexam. Last year, one of our portfolio companies, Exosect, licensed an environmental pest-control solution to Germany’s Bayer. And from next year, we will be looking to trade sales as an exit route for some of our maturing businesses.
This is not only due to a moribund market for flotations but because a multinational is often best placed to accelerate take-up of a new environmental technology in new geographical and industrial markets. Yet such investors by their nature do not possess the deep origination networks needed to identify and develop promising technologies in the first place. Indeed, many of these relationships are created during long weeks on the road in remote places.
What works on paper is, however, not always easy in practice. Large heritage businesses and specialised private equity shops are very different creatures. An obligation not to stray too far from the crown jewels – the core profitable business models into which public investors have bought – can in itself account for hesitancy in a corporate partner, which may seem unaccountable to an eager venture firm.
For the same reason, the fact that we can see a future market on paper is not always sufficient motivation for a corporate spending its shareholders’ money. Many companies will need to see a concrete market, or at least an existential threat to its existing product range, before dispensing money on a stake or acquisition.
The difference in scale can also create a clash of cultures.
There is no sense in expecting a corporate buyer to overturn a company-wide protocol – such as whether or not it expects exclusivity on a new piece of technology – without due consideration. Nor is it reasonable to expect a decision to be taken in an unrealistically short timeframe, or be made by the wrong person, or to contradict a lot of expensive external advice. Many VC partners have corporate backgrounds, but many also forget that reality after a few years working with fewer than a dozen colleagues.
So we try to get the best from both sides. Co-investment and partnership arrangements, which allow corporations to share some of the outstanding market risk with an existing investor, can facilitate things.
Opening up board and advisory board positions to corporate executives and former R&D heads – as some US private equity houses have done – can also allow negotiations to begin from a point of better mutual understanding. Indeed, at its most creative the relationship could result in us listening to what the demands from big business are likely to be five or 10 years down the line and deploying our origination networks and capital accordingly.
In terms of specific sub-sectors, the next investment cycle will result in big returns for private and corporate investors alike in a broad range of areas related to efficiency and resources. These include:
l The treatment of waste water, as companies seek to pre-empt likely legislation in this area.
l Better water management in the municipal, agricultural and industrial spaces.
l Energy storage, as renewable energy sources bring with them the demand for load-levelling.
l Intelligent energy management systems, which allow micro-generating capacity from homes and commercial sites to be pooled and marketed to the grid.
l Clean industrial processes and recycled materials that embed cyclical resource models in place of the mainly linear models of the past century.
l Information technology and telemetry for more granular treatment of not only water and energy, but also waste. And these are all areas where the engineering, production and distribution capabilities of established businesses will be present increasingly in the coming years.